SEC Adopts Amendments to Rule 15c2–12 to Improve Transparency of Municipal Securities Disclosures
Earlier this year, the Securities and Exchange Commission (SEC) amended Rule 15c2–12 (17 C.F.R. § 240.15c2–12). Rule 15c2-12 ensures that underwriters secure an agreement with states, cities, and other governmental entities issuing municipal securities that those entities will disclose information about the issued securities to the Municipal Securities Rulemaking Board (MSRB) on an ongoing basis. This information is intended to inform interested parties on the financial standing or other condition of the state government that may have an effect on the bonds.
Rule 15c2–12 prohibits a “Participating Underwriter”—a broker, dealer, or municipal securities dealer acting as an underwriter—from purchasing a primary offering of municipal securities with an aggregate principal amount of $1 million or more unless certain requirements are met. 17 C.F.R. § 240.15c2–12(a). One such requirement is the existence of the agreement between the securities issuer and the MSRB described above, which further requires the issuer to provide timely notice to the MSRB when any of fourteen listed events occurs. 17 C.F.R. § 240.15c2–12(b)(5)(i)(C)(1)–(14). These events include rating changes, bankruptcy, or material modifications to rights of security holders. The recent SEC amendments increase the total number of events requiring notice to the MSRB from fourteen to sixteen by adding paragraphs (15) and (16) to Section (b)(5)(i)(C) of Rule 15c2-12. The new paragraphs are reproduced here in full:
(15) Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and
(16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.
(SEC, Final Rule). The amendment also includes a definition of “financial obligation.”
The SEC believes the amendments will increase transparency by expanding the amount of information publicly disclosed about municipal securities and better inform investors and other market participants about the financial condition of issuers of municipal securities. (SEC, Press Release).
While these amendments do not dramatically modify the requirements of Rule 15c2–12, issuers, borrowers, and underwriters ought to adopt new policies and procedures to ensure compliance with the additional provisions. (Graham Beck et al., Nixon Peabody LLP). Large issuers and borrowers with multiple departments responsible for debt obligations should be especially cautious. Tracking and reporting may be more complex when multiple departments are involved, and those issuers and borrowers will likely need to update procedures in order to ensure consistent reporting of incurrence or default of financial obligations and their materiality under the new Section (15).