WASHINGTON – Issuers and borrowers with outstanding debt should disclose all private placements, limited public offerings and associated derivatives without regard to materiality, the National Federation of Municipal Analysts told the Securities and Exchange Commission. Other financial obligations such as leases, guarantees and court-ordered judgments should be disclosed only if material, the group said.

NFMA made its comments to the SEC in a letter on the commission’s proposal to add two material events to its Rule 15c2-12 on municipal disclosure. The group called obligations, like private placements, limited public offerings and associated derivatives “debt obligations” and deemed leases and guarantees “other financial obligations.”

“The NFMA believes that the disclosure of debt obligations should not be subject to the materiality qualification,” NFMA said in a letter jointly authored by Julie Egan, NFMA’s chair, and Lisa Washburn, chair of the organization’s industry practices and procedures committee. “The negative impact that these obligations can have on existing bondholders’ investments warrants their disclosure without qualification.”

Egan and Washburn added that subjecting debt disclosures to issuers’ determinations of materiality “would likely result in inconsistent and incomplete disclosure of meaningful debt obligations.”

“Removing this qualification would thus provide great certainty to issuers, investors, and the marketplace generally,” they wrote.

Julie Egan presented the awards.
Julie Egan presented the awards.

The SEC’s proposal would have the first new material event notice category require an issuer or borrower to file a notice if it incurs a financial obligation that is material or a financial obligation has an agreement to covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders, if material." The SEC has consistently declined to define materiality, contending it's based on facts and circumstances. The Supreme Court ruled in TSC Industries, Inc. v. Northway, Inc. that a fact is material if there is a substantial likelihood that a reasonable investor would consider it important.

NFMA suggested the SEC end its silence on the topic and help the market by providing interpretive guidance for issuers and obligated persons on making materiality determinations.

“There is a lack of clarity among many market participants, including issuers and their representatives, in how to determine materiality consistent with the standards of the SEC,” Egan and Washburn wrote. “For this reason, we recommend that the SEC provide interpretive guidance to the market to facilitate compliance with the proposed amendments.”

The second new material event category would require 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.

NFMA took the stance in its letter that such disclosures, like those for debt obligations, should also not depend on materiality.

“For all types of financial obligations covered under the SEC’s proposed definition, the triggering of an event related to financial difficulties should always be publicly disclosed on EMMA, without regard to the materiality of the obligation itself,” Egan and Washburn wrote. “Failure to do so withholds critically important information from holders of an issuer’s public debt.”

They said the definition of events related to financial difficulties should include occurrences like: payment or non-payment defaults; events of acceleration; swap termination events and collateral postings; and modification of terms. NFMA would also like to see the SEC include a provision mandating that a disclosure be filed letting the market know when the events have been resolved.

The SEC’s proposed changes come in the wake of concerns that investors and other market participants do not have the access they should to issuers and obligated persons’ full financial picture at a time when issuers have increasingly chosen alternatives to publicly offered tax-exempt bonds, such as private placements, that fall outside the current 15c2-12 disclosure requirements. Most market participants agree with the goal of increasing the transparency of issuers’ financial information, but many have expressed unease with the broad nature of the SEC’s proposed changes and the additional burdens the increased disclosure would bring.

Egan and Washburn said the amendments are “an important step in ensuring that industry regulation keeps pace with developments and changes in the municipal bond market” and that previous voluntary efforts to provide investors and others with more information “have proven to be ineffective and inadequate.”

NFMA made other suggestions to improve the rule, including fixing the text of the proposal to clearly say issuers must disclose more than just the “incurrence” of a financial obligation. As it stands, issuers could satisfy the disclosure obligation by posting that it has incurred an obligation, even if it does not describe the terms of the obligation, NFMA said.

“Providing notice of the incurrence of a financial obligation alone will be insufficient for existing bondholders to assess its impact on an issuer’s credit quality and the value of securities,” Egan and Washburn wrote. “For the proposed amendments to equalize the information available among private and public lenders and to allow bondholders to assess the obligation’s impact on their investment, the SEC needs to require that either all the relevant agreements or a detailed summary of the terms of the financial transaction be posted along with the notice on the” Municipal Securities Rulemaking Board’s EMMA system.

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