SEC to Consider Two Amendments to Material Events Under Rule 15c2-12

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WASHINGTON – The Securities and Exchange Commission will weigh two amendments to the required material event notices under its Rule 15c2-12 on municipal disclosure during a meeting scheduled for March 1, the commission's acting chair said Friday.

Michael Piwowar made his comments about the potential amendments during a speech at the Practising Law Institute's "SEC Speaks" event here, as he outlined the new disclosure recommendations the commission would consider at the meeting.

"The proposal would amend the list of material event notices that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer or obligated person has undertaken, in a written agreement or contract for the benefit of holders of the municipal securities, to provide the Municipal Securities Rulemaking Board," Piwowar said. "The proposed amendments would add two event notices relating to certain financial obligations incurred by issuers and obligated persons."

One area the amendments may cover is the disclosure of bank loans and private placements in the muni market, market participants said. Bank loans and other financings have become popular for issuers because they can be used as a cheaper and less regulated alternative to municipal bonds. However, there is no requirement that issuers disclose such financings, and any disclosure that does occur is done on a voluntary basis.

Jessica Giroux, general counsel and managing director of Bond Dealers of America, said that discussions she has had with members indicate that both amendments may be tied to bank loans.

"We also think that the notices may be broader when drafted and could pick up swaps or other financing undertakings," Giroux said.

The MSRB had circulated a concept release in March to see whether it should require municipal advisors to disclose information about their issuer clients' bank loans. The self-regulator said it was worried that a lack of disclosure on its EMMA system hindered an investor's ability to fully understand the risks of an investment.

While market groups largely rejected the MSRB's concept release, they generally agreed that a better way to increase bank loan and private placement disclosure would be to have the SEC, through an amendment to 15c2-12, include bank loans and private placements as a material event.

For several years, market groups and others have been asking for a variety of changes to 15c2-12, and the SEC has paid even more attention to the rule since announcing its Municipalities Continuing Disclosure Cooperation initiative. MCDC promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely stated they were in compliance with their continuing disclosure agreements (CDAs).

The National Federation of Municipal Analysts, in an August letter, urged the SEC to consider expanding the list of 14 material events under the rule to include things like bank loans and private placements, as well as events like changes in debt service reserve funds or investigations by regulators. NFMA also asked that the SEC add a requirement to ensure issuers provide follow-up information to reported events to notify investors of whether and how the events were resolved.

Some market participants have said that the SEC's opening up of 15c2-12 for amendments like these may create an opportunity to amend the rule further.

"What we hope this leads to … is a more open discussion surrounding 15c2-12 such that if the idea is that the SEC is willing to look at changes to this rule, we hope they would take into consideration common sense policy changes which we believe would be beneficial to overall compliance with and value in the rule itself," Giroux said.

Groups have provided lists of changes they would like to see, including updated SEC interpretive guidance that would, among other things, help create a streamlined process for issuers to amend their CDAs without running afoul of the rule.

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