Changes to 15c2-12's Small Issuer Exemption Sparks Some Concerns

Municipal market participants said yesterday that they will need to boost outreach to smaller issuers in light of changes to the Securities and Exchange Commission's disclosure rules, which will require some of them to file annual financial information with the Municipal Securities Rulemaking Board's EMMA system.

The changes to the Rule 15c2-12 on disclosure, which were published by the SEC yesterday, designate EMMA as the sole nationally recognized municipal securities information repository beginning July 1, replacing the four existing NRMSIRs.

The amendments also alter the "small issuer" exemption that currently limits the secondary market disclosures that must be made by issuers with $10 million or less of bonds outstanding.

Under the current rule, these issuers must only file material event notices with the NRMSIRs. If they compile annual financial information, they must make it publicly available and send it to investors upon request, but they are not required to file it with the the depositories.

But under the changes to the rule, small issuers that already compile annual financial information will have to file the documents with EMMA, as part of an effort to maximize the continuing disclosure documents available at the central repository.

Martha Mahan Haines, the SEC's municipal securities chief, said the change will only impact new bond deals sold by small issuers after July 1 and will not apply retroactively to their existing bonds.

"All issuers, including small issuers, must abide by the terms of their current contracts," she said. "The rule amendment does not affect [those agreements]."

Wayne Gerhold, who runs his own bond counsel practice in Pittsburgh and represents about 20% of the small issuers in Western Pennsylvania, said that it will take a concerted educational effort on the part of bond attorneys and the underwriting community to bring small issuers up to speed. He estimated that about one-third of the muni market consists of small issuers, many of whom are not financial savvy, have lots of turnover on their staff, and only tap the municipal market once every several years.

"Continuing disclosure compliance is going to be a problem [for them]," he said. "We're just going to have to spend more time educating those small issuers."

Asked about the MSRB's outreach efforts, Ernesto Lanza, the board's general counsel, said yesterday that the self-regulator is working to reach both large and small issuers through nearly 20 industry groups, including the National Association of Bond Lawyers - whose members have relationships with nearly every issuer - as well as national and state level issuer groups. The MSRB is also creating EMMA-related seminars and printed materials to distribute "as far across the country as we can possibly reach," Lanza said.

During the comment period on the changes to 15c2-12, which were proposed in late July, commentators worried that the change would effectively eliminate the small issuer exemption and lead to undue burdens on these issuers by requiring them to incur increased costs associated with filing such information electronically. Commentators requested the SEC either leave the exemption alone or get rid of it altogether.

But in its adopting release to the 15c2-12 amendments, the commission said that it does not believe it will be a significant burden for a small issuers to file to EMMA documents that they already have and make publicly available.

The commission also reasoned that the proposed amendment was preferable to eliminating the exemption because some small conduit issuers may not customarily prepare financial and operating data for public availability and eliminating the exemption would expose such conduits to burdensome new requirements.

In addition, eliminating the exemption would have required the SEC to repropose the changes to 15c2-12, requiring another comment period that would have delayed the rule changes for several more months.

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