SEC Adopts Disclosure Changes

WASHINGTON — The Securities and Exchange Commission Wednesday unanimously approved amendments to its Rule 15c2-12 on disclosure that, like the ones proposed in July, will increase the quantity and timeliness of municipal issuers’ continuing disclosures.

Current and Proposed Notice of Requirements

Most of the commissioners, however, said that additional improvements must be made, most likely with the help of Congress.

“Although I believe the ­commission’s regulatory authority of the muni market should be expanded in order to better ­protect investors and issuers alike, the amendments under consideration Thursday represent an ­important improvement within our present authority,” SEC ­chairman Mary Schapiro said prior to the vote. The amendments to the rule, which are the first since 1994, will go into effect Dec. 1.

The SEC’s approval of the rule changes follow Schapiro’s announcement that the SEC will hold a series of public hearings across the country that will lead to recommendations for specific statutory and regulatory changes to better protect investors. Asked about the hearings, SEC staff told reporters they were still under discussion and that no timing has been set for them yet.

Elisse Walter, a Democrat who is spearheading these efforts, hinted at the direction they may take in her remarks Wednesday. She said Congress should reconsider the existing separation between the regulatory functions of the Municipal Securities Rulemaking Board and the examination and enforcement of the MSRB’s rules by the Financial Industry Regulatory Authority.

Walter also said she believes the SEC should leverage its antifraud authority to make additional improvements to the timeliness and quality of disclosures, such as through forthcoming interpretive guidance to address legal ambiguities in 15c2-12, another muni project she is also leading.

“I have a really hard time trying to understand the relative lack of attention being given to this market even though it’s enormous and operates with increasing participation by retail investors,” Walter said. She added that while she is passionate about munis, her concerns about the market keep her up at night.

Luis Aguilar, the other Democrat on the commission, said Congress should repeal the so-called Tower Amendment, which restricts both the SEC and the MSRB from collecting bond documents prior to issuance, as well as give the SEC authority to directly regulate the market,instead of relying on 15c2-12, which applies only to dealers. Specifically, the rule says a dealer may not underwrite most municipal securities unless the issuer or obligor has contractually agreed to provide certain annual and ongoing disclosures.

Additionally, Aguilar said he is concerned that the timeliness and quality of municipal disclosure remain far behind what is offered to corporate investors. He warned the amendments do not address specific disclosure items that are “highly relevant to the issuer’s financial health, such as an issuer’s exposure to swaps and other derivative products.”

“For example, as we learned through our investigation of bond offerings and swap transactions involving Jefferson County, Ala., swap termination fees of $647 million might have bankrupted that municipality,” Aguilar said, referring to a November settlement between the SEC and JPMorgan. “I think that all municipalities should make information such as this available to investors.”

But commissioner Troy Paredes, a Republican, urged staff to be mindful of the disproportionate burdens that muni rules can have on small issuers or obligors and, when appropriate, to “eschew a one-size-fits-all” approach.

The SEC made small tweaks to the rule changes from those proposed in July, including adding a provision that would “grandfather” existing variable-rate demand obligations issued prior to Dec. 1 so they remain exempt from the new disclosure requirements.

To capture the possibility that an issuer of Build America Bonds may lose its direct-subsidy payments, the SEC slightly altered the proposal to require that issuers disclose events that may adversely affect a bond’s tax status, including issuance by the Internal Revenue Service of proposed and final decisions about whether their bond’s tax status has changed.

As originally proposed, issuers only would have had to disclose events that may adversely affect a bond’s tax exemption. SEC officials said that offsets of BAB subsidies would only need to be disclosed if deemed material.

Currently, the rule makes no specific reference to IRS notices and only says issuers are required to file notices due to an adverse tax opinion or “events” affecting the bond’s tax-exempt status. Some issuers contend IRS notices are not material.

While dealers groups like the Securities Industry and Financial Markets Association said they were generally supportive of the rules changes, Frank Hoadley, capital finance director of Wisconsin and chairman of the Government Finance Officers Association’s debt committee, panned the plan.

“While we all share the goal of improving continuing disclosure, we’re disappointed the SEC did not act on the suggestions we made with regard to the amendments to 15c2-12,” he said.

Commissioners also signed off on two related proposals floated by the MSRB that they expect the board will implement over the course of the next year. The first proposal would require underwriters to disclose to the MSRB’s Electronic Municipal Market Access site whether and when an issuer is obligated to provide secondary market disclosure information as well as who will be providing that information for the issuer.

The second proposal would allow the MSRB to indicate on EMMA issuers that voluntarily include in their continuing disclosure agreements any of the following commitments: filing annual financial information within 120 days of the end of their fiscal years; during a transition period lasting through Dec. 31, 2013, filing annual financial information within 150 days of the end of their fiscal years; or preparing audited financial statements in compliance with accounting standards set by the Governmental Accounting Standards Board.

EMMA would also be able to indicate issuers that provide the MSRB with links to their investor relations websites, though this undertaking would not have to be included in continuing disclosure agreements. Hoadley said GFOA supported the provision because it “will allow the vast amount of information that is available from governments to be more easily accessible to investors.”

In addition to expanding the types of events issuers must disclose on an ongoing basis, the proposal requires that issuers disclose the events within 10 days of their occurrence. The rule currently requires that they be filed in a “timely basis.”

Issuers have complained that this would be a difficult standard to meet and have asked the commission to consider starting the 10-day requirement once they are notified of an event’s occurrence, but SEC staff rejected that idea.

During the meeting, the staff said they believe there are steps issuers can take to ensure they are apprised of certain events that are beyond their control, such as rating changes or a change in trustees.

Meanwhile, the amendments would remove the need for a materiality determination for at least five events: 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 or a change in the identity of the parties backing the bonds or the parties’ failure to perform; defeasances, including situations where the issuer has provided for future payment of all obligations under a bond; and rating changes. A materiality determination would be retained for some events, including, for example, bond calls.

The rule changes also would increase the number of events to include: tender offers; bankruptcy, insolvency, receivership or similar proceedings; mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination, if material; and the appointment of a successor or additional trustee or the change in the name of a trustee, if material.

The proposal includes antifraud guidance to dealers warning that they should not assume an issuer will adhere to its continuing disclosure obligations if it has a history of “persistent and material non-disclosure.”

The SEC’s proposals are the first significant expansion of the types of disclosures issuers must make since the continuing disclosure rules were adopted in 1994. In late 2008, 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, 2009.

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