WASHINGTON – The Municipal Securities Rulemaking Board is strongly supporting the Securities and Exchange Commission’s proposed changes to its municipal disclosure rule that would expand required event notice filings, a stance that is at odds with market participants who have said they fear the changes would be too costly and burdensome.

The MSRB gave its support in a comment letter to the SEC about the changes to Rule 15c2-12 that would add two material events to the 14 that already exist.

“The MSRB strongly supports the commission’s proposed amendments to the continuing disclosure obligations of municipal securities issues under Rule 15c2-12,” said Lynnette Kelly, the MSRB’s executive director. “The MSRB believes the existing disclosure structure of Rule 15c2-12 is the appropriate vehicle for obtaining the desired information.”

MSRB president and executive director Lynnette Kelly.
Lynnette Kelly, MSRB executive director
Kelly explained the MSRB's past efforts at promoting bank loan disclosure in her letter that also showed support for the SEC's changes.

The MSRB “commends the commission for taking this important step towards improving transparency and investor protection in the municipal securities market,” Kelly added.

The three-page letter details theMSRB's efforts over the last several years to increase issuers’ voluntary disclosures of obligations like bank loans and direct purchases. The self-regulator has given guidance on how such disclosures can be made on its EMMA system and more recently updated the system in response to issuers’ complaints about the complexity of filing.

Kelly noted in the letter that while the MSRB is hopeful the changes to EMMA will increase the number of voluntary bank loan disclosures made, “the MSRB continues to believe that a specific disclosure requirement under an existing framework is the better approach to ensuring issuers make these disclosures.”

The board released a concept proposal in March 2016 that asked whether it could use the municipal advisor regulatory framework to require municipal advisors to share information about bank loans. Market participants largely rejected that idea, saying it would, among other things, put an undue burden on MAs. The participants instead said the changes to require bank loan disclosure should be made under Rule 15c2-12.

But now that the SEC has followed that suggestion, participants are saying it's proposed rule changes go too far.

The proposal would require event notices to be filed for a broad range of “financial obligations,” if material, including guarantees, leases, derivatives, and monetary obligations resulting from a judicial, administrative or arbitration proceeding. It would also require such notices to be filed for actions and events related to financial obligations that “reflect financial difficulties,” such as a modification of terms or an acceleration.

Comments on the proposal are not due until May 15, but participants have already said at conferences and in letters that the idea goes way beyond bank loans, which most agree would be beneficial to disclose.

The National Association of Bond Lawyers took the unusual step of complaining about the proposal to the Office of Management and Budget. NABL intends to write a separate comment letter that deals specifically with the proposal’s provisions, but said in its letter to OMB that it was concerned the SEC greatly underestimated the burdens the changes would place on market participants and that the changes were too ambiguous to be approved without revisions.

The group asked OMB to write its own letter to the SEC and use its authority under the Paperwork Reduction Act to find that the SEC’s proposal does not meet the “clear and unambiguous” standard the act requires for rules that provide for “collection of information.”

NABL also said the true total cost burden on issuers, underwriters, and brokers that would have to comply with the rule would be 15.71 million hours a year, 2,417 times more than the 6,500 hours the SEC estimates in its proposal.

Lawyers and others who have commented on the proposal since it was released have raised concerns that its use of “materiality,” which the SEC has continually declined to define, will create confusion among issuers and dealers as to what qualifies. The confusion will likely lead to over-disclosure and thus excessive burdens on issuers and dealers involved with continuing disclosure, they have warned.

There are also concerns that smaller issuers who might use alternatives to municipal bonds won’t immediately be thinking about other financial obligations as something they need to disclose. Some have said the proposed bank loan requirements could set the stage for an enforcement initiative similar to the SEC’s Municipalities Continuing Disclosure Cooperation initiative, which focused on issuers’ and underwriters’ failures in complying with their continuing disclosure obligations and drew the ire of many market participants.

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