How new 15c2-12 could change the landscape

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WASHINGTON – Securities law experts generally believe the Securities and Exchange Commission’s decision to approve a narrower version of its proposal to add more material events for issuers to file under its Rule 15c2-12 will be good for disclosure, but are concerned about the complexity of implementing the final rule.

These comments were made by lawyers as well as the Municipal Securities Rulemaking Board on Tuesday, the day after the SEC announced it was adding two new event notices to the list of events that issuers must agree to disclose through the MSRB’s EMMA system.

The final rule changes, which won’t take effect until several months into 2019, will require issuers to disclose the incurrence of bank loans as well as other types of debt that could potentially impair bondholders. It also will require issuers to disclose negative developments associated with that debt.

The SEC’s aim was to increase transparency of debt outside the bond market, particularly because the amount of commercial bank loans made to state and local governments has tripled since the financial crisis, increasing to $190.5 billion by the end of the first quarter 2018 from $66.5 billion as of the end of 2010.

The SEC’s initial proposal was broader, and would have required notices for various types of judgments and leases, but the commission chose to tailor the final rule more narrowly after muni market groups complained.

The MSRB said it supports the SEC’s decision and believes it will benefit the market.

“The MSRB believes this SEC action is a major step to ensure investors have a better understanding of the financial status of municipal securities issuers and conditions that could affect the repayment of bonds,” said MSRB President and Chief Executive Officer Lynnette Kelly.

The MSRB is in the process of updating EMMA to accept and display the new disclosures, the board said in a statement. EMMA currently accepts and displays bank loan and alternative financing disclosures that issuers file on a voluntary basis.

National Association of Bond Lawyers' President Sandy MacLennan said that NABL appreciates the narrowing of the proposal but is wary of the additional costs and complexities the rule changes could impose.

“While we are glad to see a narrowing of the scope of the events which must be disclosed and the recognition by the SEC that its previous time and cost estimates were significantly low at least with respect to dealers, we continue to be concerned about the burdens imposed on the municipal issuer and the absence of meaningful guidance on compliance issues,” MacLennan said.

A major question for many observers is the workability of leaving issuers to make their own determinations of what non-bond debt is material under the updated 15c2-12.

The Supreme Court has interpreted materiality to mean information that a reasonable investor would likely consider important when making an investment decision. Some market participants want all debt to be disclosed without regard to materiality.

Ben Watkins, director of Florida’s Division of Bond Finance, said he thinks issuers can “live with” what the SEC has done.

“Leaving the materiality issue open is also probably the right answer too, as it affords flexibility for issuers to adapt application based on individual facts and circumstances,” Watkins said.

A securities lawyer, who asked not to be identified in order to comment freely on the rule, said that the SEC’s approach seems likely to produce much more disclosure than has existed previously.

Underwriter due diligence will be an area to watch, the lawyer said, predicting that many underwriters will insist upon “over disclosure” from the issuers they work with and may struggle to verify whether those issuers have fully disclosed some of their non-bond debt.

“You’ll never satisfy people completely,” the lawyer said. “By and large, I think people are happy.”

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Securities law SEC regulations MSRB rules Municipal disclosure Primary bond market SEC MSRB NABL Washington DC