Amendments to Municipal Securities Disclosure
A Small Entity Compliance Guide*
The Securities and Exchange Commission has adopted amendments to Rule 15c2-12 under the Securities Exchange Act of 1934 relating to municipal securities disclosure. The amendments revise certain requirements regarding the information that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities ("Participating Underwriter") must reasonably determine that an issuer of municipal securities or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer's municipal securities, to provide to the Municipal Securities Rulemaking Board ("MSRB"). These amendments will help investors in municipal securities to make more knowledgeable investment decisions, more effectively manage their investments and avoid fraud. The amendments will accomplish this by improving the availability of timely and relevant ongoing information about municipal securities.
Modification of the Exemption for Demand Securities
When Rule 15c2-12 was adopted, it did not apply to demand securities. Under the amendment, the Commission is applying the continuing disclosure provisions in the Rule to a primary offering in demand securities. Small entities that engage in primary offerings of demand securities indirectly would be affected by the amendments to the Rule, subject to the limited grandfather provision discussed below.
Participating Underwriters may not purchase or sell municipal securities covered by the Rule in a primary offering unless the Participating Underwriter has reasonably determined that an issuer or obligated person of municipal securities has undertaken to provide specified information to the MSRB in an electronic format prescribed by the MSRB. The information to be provided consists of: (1) certain annual financial and operating information and audited financial statements; (2) notices of the occurrence of any of 15 specific events ("event notices"); and (3) notices of the failure of an issuer or obligated person to make submission required by a continuing disclosure agreement ("failure to file notices").
The amended Rule does not apply to demand securities outstanding as of November 30, 2010 for so long as they meet specified requirements. They must continuously remain in authorized denominations of $100,000 or more and may, at the option of the holder thereof, be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent ("limited grandfather provision").
Time Frame for Submitting Event Notices under a Continuing Disclosure Agreement
The amended Rule requires a Participating Underwriter to reasonably determine that the issuer or obligated person has agreed to submit event notices to the MSRB "in a timely manner not in excess of ten business days after the occurrence of the event," rather than "in a timely manner" as was previously required. The Commission also has adopted a similar revision to the limited undertaking in paragraph (d)(2)(ii)(B) or the Rule. Rule 15c2-12(d)(2) provides an exemption from the application of paragraph (b)(5) of the Rule with respect to certain primary offerings if, among other things, the issuer or obligated person has agreed to a limited disclosure obligation. The disclosure obligation under this paragraph includes the obligation to provide notice of events specified in paragraph (b)(5)(i)(C) of the Rule. The amended Rule also requires this disclosure to be made to the MSRB "in a timely manner not in excess of ten business days after the occurrence of the event," rather than "in a timely manner" as was previously required.
Materiality Condition for Specified Events
Rule 15c2-12 requires a Participating Underwriter to establish reasonable belief that an issuer of municipal securities has agreed to provide continuing disclosure of certain specified events. The Rule, prior to the amendments, provided that notice of all of the events in the Rule needed to be made only "if material." The amendments delete this general materiality qualification and specify the events for which a materiality determination is still applicable.
Under the amendments, there is no materiality determination for the following six events (which were in the Rule prior to the amendments): 1) principal and interest payment delinquencies with respect to the securities being offered; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) defeasances; and (6) rating changes.
The Rule, however, retains a materiality qualification for other events included in the Rule prior to the amendments: (1) non-payment related defaults; (2) modifications to rights of security holders; (3) bond calls; and (4) the release, substitution, or sale of property securing repayment of the securities.
Changes to Adverse Tax Events
Prior to the amendments, the Rule included the submission of a notice to the MSRB for material "adverse tax opinions or events affecting the tax-exempt status of the security." The amendments revise this language to state that a notice would be submitted with regard to "[a]dverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security." The amendments remove the general materiality condition for these events.
Additional Events to be Disclosed under a Continuing Disclosure Agreement
The amendments add four new events to Rule 15c2-12: (1) tender offers; (2) bankruptcy, insolvency, receivership, or similar proceeding of the obligated person; (3) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (4) appointment of a successor or additional trustee, or the change of name of a trustee, if material. Issuers and obligated persons that submit notices for these new events should note that two of the new events are to be prepared and submitted "if material."
The Adopting Release for these amendments was published in the Federal Register on July 10, 2010, the effective date for these amendments is August 9, 2010, and the compliance date for these amendments is December 1, 2010.
How do the amendments to Rule 15c2-12 affect small entities?
The amendments apply directly to any broker, dealer, or municipal securities dealer that acts as a Participating Underwriter in a primary offering of municipal securities with an aggregate principal amount of $1,000,000 or more and indirectly to issuers of such securities. As discussed in the Adopting Release, based on a review of industry sources, the Commission does not believe that any Participating Underwriters would be small broker-dealers or municipal securities dealers. Small issuers will be affected by the amendments, but many small issuers will continue to be eligible for the limited exemption currently available for small offerings.
The Adopting Release for the amendments can be found on the SEC's Web site at http://www.sec.gov/rules/final/2010/34-62184afr.pdf
Additional materials regarding municipal securities and Rule 15c2-12 generally are available on the SEC's Web site at http://www.sec.gov/answers/
Contacting the SEC
The SEC's Division of Trading and Markets is happy to assist small entities with questions regarding the amendments to Rule 15c2-12. The Division's Office of Interpretation and Guidance answers questions submitted by email and telephone. You can submit a question by email to firstname.lastname@example.org or you can contact the Office of Interpretation and Guidance at (202) 551-5777.
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