Lawyer sees alternative to controversial SEC disclosure proposal

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CHICAGO – Lawyers meeting here this week talked about whether issuers and other transaction participants might be willing to disclose key bank loan documents on the Municipal Securities Rulemaking Board’s EMMA site as an alternative to the Securities and Exchange Commission’s controversial proposed changes to Rule 15c2-12 that would require broad disclosures.

During a hot topics session on securities issues at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop, the lawyers also talked about what they’ve learned from the SEC's muni enforcement program.

Earlier this year, the SEC proposed amendments to its Rule 15c2-12 that would require issuers, in order for dealers to underwrite their bonds, to agree to disclose material event notices when they enter into certain material financial obligations like bank loans and when certain events related to those obligations are triggered such as an acceleration of the debt, terminations, modifications, or other actions or terms indicating financial difficulties.

The SEC’s goal was to get issuers to disclose more information about bank loans, direct purchases and private placements, which are increasingly being done as alternatives to public offerings of municipal
bonds without having to meet the disclosure requirements for munis.

But the proposed amendments broadly defined financial obligations to include a debt obligation, lease, guarantee, derivative instrument, or monetary obligation resulting from a judicial, administrative, or arbitration proceeding and issuers balked.

During the BAW panel, Drew Kintzinger, counsel at Hunton & Williams in Washington D.C., said the comments on the rules suggest “a potential common ground” for an alternative proposal, under which issuers would agree to disclose on EMMA the primary documents for bank loans, direct purchases and private placements. Confidential financial terms could be redacted, as MSRB allows for disclosures of letters of credit, he said.

Kintzinger asked how many lawyers at the session currently voluntarily disclose these documents on EMMA and many raised their hands.

Rebecca Olsen, acting director of the SEC’s Office of Municipal Securities, said she appreciated the show of hands, as well as the 90 comments the SEC has received on its proposed rule changes. But she noted that the reason the SEC proposed the amendments was that the MSRB found not many issuers were disclosing information about bank loans and private placements even though regulators have been jawboning them to do it for years.

“Unless there is a requirement” only those conscientious issuers will disclose this information, she said.

Olsen said muni office lawyers are reviewing comments on the proposed rule changes but declined to say what they might recommend.

She said the SEC is an independent commission and is not subject to President's Trump's executive orders and other actions on deregulation.

Dave Sanchez, a lawyer with Norton Rose Fulbright in San Francisco who moderated the panel, asked Olsen where the SEC’s ridiculously low estimates of the rule changes’ costs and burdens came from and how the commission can justify those estimates.

Ed Fierro, a lawyer at Bracewell and former attorney in the SEC’s Office of Municipal Securities, said the SEC should be careful about the estimates because it has been sued over its estimates of costs and burdens in other rulemakings.

The panel also discussed the lessons learned and takeaways from the SEC's muni enforcement program.

Brian Fagel, a lawyer with the SEC enforcement division’s public finance abuse unit in Chicago said, “We would hope that there are lessons to be taken from our cases. We don’t bring cases solely to make lessons.”

Fagel said there are about 30 lawyers in the unit around the country. “We do what we can. We have to pick and choose … and try to get the most bang for our buck.”

Kintzinger said the unit has become good at data mining and data management and has a wealth of information from which to find enforcement issues, including issuer and dealer submissions under the Municipalities Continuing Disclosure Cooperation initiative as well as disclosures, pricing and trading information on EMMA, which he called the “Facebook for the regulatory crowd.”

He also said the unit is getting very sophisticated in its collection of information and investigative techniques. SEC enforcement lawyers will often approach issuers or lawyer’s other clients in informal settings to get information, rather than in a formal enforcement case.

Many are surprised at the breadth of information the SEC can obtain, he said. An SEC enforcement lawyer can get a city council member to admit he or she uses their phone for business and then request all the information from that phone.

Kintzinger urged lawyers to carefully consider their roles and responsibilities in muni transactions and how they describe them in documents. He said they should think about due diligence sessions for bond issues and what records are kept on those sessions.

Kintzinger noted that the SEC can investigate and bring cases over an alleged fraud charge even if no investors were harmed.

He also talked about “red flags” that may indicate enforcement issues. One is an issuer that has deteriorating finances combined with frequent bond financings. Another is when big projects are being bond-financed in small issuer communities.

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