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Securities and Exchange Commission OKs 15c2-12 Proposals

WASHINGTON - The Securities and Exchange Commission voted unanimously Wednesday to propose changes to its Rule 15c2-12 on disclosure that would expand the types of events issuers must disclose on a continuing basis as well as eliminate some of the rule's exemptions for variable-rate demand obligations.

Current and Proposed Notice Requirements

Under the proposals, which will be subject to a 45-day public comment period after they are published in the Federal Register, issuers would be required to disclose seven of the material events currently listed in the rule regardless of whether they are material. In addition, four new events would have to be disclosed, two of them whenever they occur.

Arguing that some issuers are late in filing their notices, the SEC would require issuers to file them no later than 10 business days after they occur.

The rule currently contains 11 specific events which must be disclosed only when issuers deem them material, which means something an investor would want to know before purchasing a security. Issuers also are required to submit notices when they fail to file annual audited financial and operating information by their deadline. Some consider this a 12th material event requirement.

During Wednesday's 35-minute meeting, members of the five-member SEC repeatedly said the proposals represent only incremental changes and that more reforms are needed to address the "disparity" between muni and corporate disclosure standards.

"I do want to reiterate that while we are making progress in this area, much more needs to be done," said commissioner Elisse Walter.

SEC chairman Mary Schapiro said she will work with Congress to enhance the commission's authority over the muni market so that "investors in municipal securities have timely access to the full complement of information they deserve to know about their municipal securities investments."

Luis Aguilar was perhaps the most forthright of the commissioners on the need for disclosure changes, arguing that the SEC should "recognize that they represent only incremental progress and do not achieve the fundamental overhaul of municipal securities disclosure requirements that is sorely needed."

Citing various studies, which he did not identify, Aguilar warned about spotty compliance with the existing rule, but said he hopes the development of the Municipal Securities Rulemaking Board's EMMA system, along with Wednesday's proposed amendments to 15c2-12, would lead to "significant improvement" in the amount of disclosures available to investors.

"Nonetheless," he said, "the commission could better serve investors if it had the authority to set and enforce municipal securities disclosure standards, rather than having to indirectly regulate in this area through broker-dealer rules that in turn rely on contractual enforcement of issuers' disclosure obligations."

Aguilar also said he is particularly concerned about two areas of disclosure not addressed by the proposed changes: issuers' exposure to interest rate swaps and the lack of a single set of mandated accounting standards for all issuers.

To address these and other concerns, Aguilar said he supports repealing the so-called Tower Amendment, which restricts the SEC and the MSRB from collecting offering documents from issuers before bond sales, along with other restrictions that prevent the commission from regulating the muni market.

Though issuers are strongly opposed to such statutory changes, analysts have said they are necessary to improve the quality of muni disclosures.

Investment Company Institute president Paul Schott Stevens said the ICI welcomes the proposals and encourages Congress to provide the SEC with the additional authority it will be seeking "to more fundamentally address municipal securities disclosure."

But Frank Hoadley, Wisconsin's capital finance director and chairman of the Government Finance Officers Association's debt committee, said the SEC's proposals are "obviously disturbing." He said he is still trying to absorb all of the details, along with a pair of related proposals released late Monday by the MSRB.

In an op-ed piece in The Bond Buyer earlier this week, Hoadley and other GFOA debt committee members argued it is a myth that municipal market disclosure is subpar and said they oppose new mandatory disclosure standards on governmental issuers.

The SEC's proposals represent the first significant expansion of the types of disclosures issuers must make since the continuing disclosure rules were adopted in 1994. Last year, the SEC altered the rule to designate the MSRB as the sole repository for such disclosures so that it would effectively replace the four nationally recognized repositories on July 1.

The changes the SEC agreed to propose Wednesday would eliminate the need for a materiality determination and simply require that the following existing events be disclosed: failure to pay principal and interest; unscheduled payments out of debt service reserves reflecting financial difficulties; unscheduled payments by parties backing the bonds, reflecting financial difficulties; defeasance, including situations where the issuer has provided for future payment of all obligations under a bond; and rating changes.

The commission also is proposing that issuers disclose events that may adversely affect a bond's tax exemption, including issuance by the Internal Revenue Service of proposed and final decisions about whether bonds are taxable because they have violated tax requirements. Currently, the rule makes no specific reference to IRS notices and only says that issuers are required to file notices in the event of an adverse tax opinion or "events" affecting the security's tax-exempt status. Some issuers contend IRS notices are not material.

Meanwhile, the proposed amendments add four types of events that would need to be disclosed. Two events would need to be disclosed if deemed material: mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination; and the appointment of a successor or additional trustee or the change of the name of a trustee.

The other two new events, which would need to be disclosed whenever they occur, are tender offers and the bankruptcy, insolvency, receivership or similar proceeding of the entity obligated to pay off the bonds.

VRDOs and other securities with put features of nine months or less were excluded from 15c2-12's primary and secondary market disclosure requirements when the rules were adopted in 1989 and 1994, respectively.

But Schapiro said VRDOs have grown in importance, accounting for 38% of the trading volume for all munis in 2008. VRDOs drew concerns from market participants during the financial crisis when they could not easily obtain information about the liquidity facilities backing them. Typically, VRDOs are backed by bank-provided liquidity facilities under which investors can tender the bonds on short notice.

SEC officials proposed extending the rule so that VRDOs would be subject to continuing disclosure requirements, but maintained the debt's exemption from the primary disclosure requirement for issuers to provide offering documents. It is not clear how many issuers disclose offering documents for their VRDOs, though sources said many do to make their bonds more marketable.

Speaking to reporters after the hearing, SEC staff said they may revisit the exemptions to 15c2-12 to cover more types of short-term debt if they grow in size and importance. They are concerned that eliminating more of the exemptions now would be unduly burdensome.

In conjunction with the SEC proposals, the MSRB late Tuesday filed with the commission two rulemaking proposals designed to improve primary and continuing muni disclosure information on its EMMA site.

One proposal, which would give issuers special recognition on EMMA if they voluntarily provide annual financial information within 120 days after the close of their fiscal years, drew concerns from some issuers.

They warned 120 days is not enough time for large issuers that wait months just for auditing firms to review their annual statements. The issuers are hopeful the MSRB proposal would be altered to conform with the 180-day period that GFOA requires filings to be made for them to be eligible for its certificate program.

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