DENVER – The Government Finance Officers Association plans to continue its dialogue with the Securities and Exchange Commission about the regulator’s recently proposed amendments to its municipal disclosure rule to ensure issuers’ points of view are well heard, according to the director of the group’s Federal Liaison Center.
Emily Brock made her comments about the SEC’s proposed addition of two material events to its Rule 15c2-12 during a panel on legislative updates as part of GFOA’s annual conference here. The proposal, which had a deadline for comments of May 15, generated numerous letters from market participants, including GFOA.
“I do want to emphasize that we haven’t submitted a letter and we’re done by any means,” Brock told the audience of issuers at the panel. “We’re going to continue to have dialogue with the SEC. We feel like we articulated a story to the [SEC] commissioners and we look forward to working with them as they continue to pursue this.”
She added that GFOA also intends to bring the proposal to Congress’ attention so that legislators “know what is going on.”
The SEC’s first new material event notice the would require an issuer or borrower to file a notice if it incurs a financial obligation that is material or agrees to covenants, events of default, remedies, priority rights or similar terms “any of which affect securities holders, if material.” The proposal defines financial obligations as "a debt obligation, lease, guarantee, derivative instrument or a monetary obligation resulting from a judicial, administrative or arbitration proceeding."
Many market participants say that such a broad definition of financial obligations, coupled with the need to determine materiality without SEC guidance on the topic will cause issuers and dealers to shoulder large and unnecessary burdens. However, many also agree that the goal of disclosing bank loans and other alternative debt issuers’ have that could affect bondholders is a laudable goal.
The proposal would also create another new material event category requiring a notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.
Brock argued in GFOA’s comment letter that the proposal would be “burdensome to issuers, add complication to investors and the general public, and ultimately increase costs to taxpayers and investors.” She added that if the SEC’s goal is give investors quality information, the commission would be better off focusing on improvements to the Municipal Securities Rulemaking Board’s EMMA system and promoting existing resources that state and local governments already make available rather than imposing “new unfunded mandates.”
She told audience members at the conference that they could also still comment on the proposal even though the deadline has passed.
“I’m certain [the SEC] would appreciate it if you do feel compelled to send in a letter,” Brock said. “It will be read.”
Ed Fierro, a lawyer with Bracewell and a former attorney with the SEC’s Office of Municipal Securities, gave a general timeline for the proposal now that comments have been collected. He said that SEC staff will likely review each of the letters and then compile a summary so that new SEC Chair Jay Clayton can be briefed on their contents. He said it will be up to Clayton whether the proposal stays part of the SEC’s agenda moving forward.
Fierro added that the issue of bank loan and direct placement disclosure has been a topic of conversation for a number of years and that given market participants’ general agreement on the need to disclose bank loans, he “wouldn’t be surprised if there is movement here in the future.”
Renee Boicourt, managing director with Lamont Financial Services, similarly said during another panel on bank loans at the conference that given the comments the SEC received, she does believe there is a path forward. However, she added her stance may be overly optimistic.
Boicourt said she read through a large number of the comment letters that came in and found that some letters, like those from the National Association of Bond Lawyers and the Investment Company Institute, showed wide disagreements. NABL heavily criticized the proposal for its wide scope and the burdens it would bring, among other things. ICI said the proposal didn’t go far enough and could be changed to better gather important information for investors.
“You read them and it’s a little bit like channel-surfing and going back and forth between MSNBC and Fox,” Boicourt said about the NABL and ICI letters. “But when you start to read more letters, it’s a little more encouraging” because despite differences between the buy side and issuers, “there’s a big amount of territory that overlaps.”