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U.S. Securities and Exchange Commission

SEC Votes to Propose Rules Enhancing Municipal Securities Disclosure


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Chairman Schapiro discusses measures to help investors in municipal bonds:
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Text of Chairman's statement

Washington, D.C., July 15, 2009 — The Securities and Exchange Commission today voted unanimously to propose rule amendments to improve the quality and timeliness of municipal securities disclosure.

The proposed amendments to SEC Rule 15c2-12 would help investors make more knowledgeable investment decisions, effectively manage and monitor their investments, and avoid fraud. The proposed amendments also would assist broker-dealers in carrying out their responsibilities under the securities laws.

“Currently there is a disparity between the level of information available to investors in municipal securities versus information available to investors in corporate securities,” said SEC Chairman Mary Schapiro. “These proposals would help investors make more knowledgeable investment decisions about municipal securities, while at the same time enabling broker-dealers to satisfy their obligations with respect to municipal securities.”

Every year, states and local governments raise funds for schools, roads, hospitals and other needs by issuing municipal bonds. In turn, investors receive principal and interest payments, which are often exempt from federal and state income taxes. Maintaining the health of this key component of the capital markets is important to every resident of the United States in addition to the millions of investors in municipal bonds.

Because municipal securities, such as municipal bonds, are exempt from the disclosure requirements of the federal securities laws, the SEC adopted Rule 15c2-12 in 1989, which was designed to foster greater transparency in the municipal securities market.

Rule 15c2-12 prohibits brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments.

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The Commission voted to propose amendments that would:

Expand the Rule to Cover Additional Municipal Securities

When it was first adopted, the Rule specifically did not apply to certain securities commonly known as variable rate demand obligations or VRDOs. Under the proposed amendment, the Rule would apply to such securities. VRDOs bear interest at a rate that is reset periodically and investors are able to sell them back to the issuer at certain times for their full value.

Improve Disclosure of Tax Risk

The proposed amendment would specifically require disclosure of events that may adversely affect a bond’s tax exemption, including issuance by the IRS of proposed and final decisions about whether the bond can be taxed.

Strengthen and Expand Disclosure of Important Events

Under the existing Rule, an underwriter must have a reasonable belief that the state or local government that issued municipal bonds has agreed to provide ongoing, continuing disclosure of certain important events.

The Rule presently provides that notice of all of the listed events need be made only “if material.” The proposal would eliminate the need for a materiality determination and simply require that the following events be disclosed in a notice: (1) failure to pay principal and interest; (2) unscheduled payments out of debt service reserves reflecting financial difficulties; (3) unscheduled payments by parties backing the bonds, reflecting financial difficulties, or a change in the identity of parties backing the bonds or their failure to perform;(4) defeasances, including situations where the issuer has provided for future payment of all obligations under a bond; and (5) rating changes. A materiality determination would be retained for some events, including, for example, bond calls.

The proposed amendment also would increase the number of events to include: (1) tender offers; (2) bankruptcy, insolvency, receivership or similar proceeding; (3) mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination; and (4) appointment of a successor or additional trustee or the change of the name of a trustee, if material.

Establish a More Specific Filing Deadline

The proposed amendment would require that notices of the events listed in the rule be disclosed no more than 10 business days after the event.

Currently, the Rule simply provides for disclosure “in a timely manner.”

Proposed Additional Guidance

Over the years, the Commission has set forth interpretations under the antifraud provisions of the federal securities laws to require municipal securities underwriters to have a reasonable basis for recommending any municipal securities. And, in fulfilling that obligation, it is their responsibility to review the disclosure documents in a professional manner with respect to the accuracy and completeness of statements made in connection with the offering. The proposing release reaffirms the Commission’s previous interpretations and provides additional guidance with respect to underwriters’ responsibilities under the antifraud provisions of the federal securities laws.

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Public comments on today’s proposed rule amendments must be received by the Commission within 45 days after their publication in the Federal Register.

The full text of the proposed rule amendments will be posted to the SEC Web site as soon as possible.

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Modified: 07/15/2009