Attorneys Wary of SEC Proposal’s Disclosure Burdens on Issuers

INDIAN WELLS, Calif. — Bond attorneys raised concerns last week that a Securities and Exchange Commission proposal to expedite the filing of continuing disclosure event notices, coupled with the lack of a requirement to make materiality determinations for certain notices, could pose undue burdens on issuers.

But Amy Meltzer Starr, senior special counsel in the SEC’s division of corporate finance, countered that issuers that access the public capital market have responsibilities to provide information to investors and the market.

Issuers that believe it may be difficult for them to comply with such obligations should consider alternative ways to get capital, such as through private placements, she said at a continuing disclosure panel at the National Association of Bond Lawyers’ Tax and Securities Institute here.

“If they don’t have the capacity to monitor what their business operations are ... such that they’re able to provide disclosure to investors that have bought into the market, then you go back to the question of maybe these are not the types of issuers that should be accessing the public securities markets and maybe there are certain other methods by which they may need to get their money,” Starr said. She stressed that she was speaking for herself and not necessarily the commission.

Meanwhile, Mark Zehner, deputy director of the SEC’s new specialized enforcement unit on municipal securities and pensions, warned that issuers whose finances may be spiraling downward must make sure their annual financial disclosures do not contain stale information that would make them materially misleading.

Starr’s remarks come as the SEC is considering changes to its proposed Rule 15c2-12 on disclosure. Officials said they would likely be voted on sometime this spring.

Specifically, the proposed changes would require that issuers file event notices within 10 days of an event’s occurrence, replacing the existing, more general requirement that they be filed in a “timely manner.”

The proposal also would expand to 14 from 11 the number of categories of events that must be disclosed on a continuing basis, seven of which would have to be disclosed regardless of “materiality.”

Sandy MacLennan, a partner at Squire, Sanders & Dempsey LLP in Tampa and a co-panelist with Starr, said that the 10-day-from-occurrence deadline, coupled with the lack of materiality, “raises problems” to many issuers because a number of the events are beyond their control.

It may take more than 10 days from an event’s occurrence for issuers to learn of certain events, MacLennan said.

But Starr, in addition to warning that these issuers should perhaps not be in the muni market, noted that the 10-day filing requirement is much more flexible than in the corporate world. Corporate borrowers generally only have four days to file event notices, she said.

MacLennan raised concerns about some of the specific proposals, including one that would require issuers to file an event notice in the event of principal and interest payment delinquencies, which she said was vaguely defined.

She raised several questions: What constitutes a delinquency? Is it a default? Or is it a failure to pay after a so-called cure period? MacLennan was referring to the contractual timeframe that is generally a couple of business days after a payment due date, which allows a borrower to avoid default by making the missed payment.

Alternatively, she asked, what if the issuer makes the payment to the trustee, but the trustee fails to wire the money to the investors, or the Fedwire money transfer system is down? Without a materiality determination, the burden of filing such event notices could be significant, she warned.

Starr said these are good, nuanced questions, and urged market participants to file comments with the SEC on them, even though the September deadline for them has past.

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