Pioneering issuers wrestle with 15c2-12

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WASHINGTON -- Offering documents subject to the newly-amended Securities and Exchange Commission Rule 15c2-12 are beginning to appear after the Feb. 27 effective date of the changes, and some issuers are concerned about whether their new disclosures will be setting a precedent others will be able to live up to.

The concern has arisen because issuers must now enter into more wide-ranging continuing disclosure agreements under 15c2-12, which as of two weeks ago includes two new material events issuers must agree to disclose on an ongoing basis.

Event 15 says issuers have to disclose when they incur financial obligations, if material, as well as agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer that could affect security holders.

Event 16 says that in connection with those financial obligations, issuers have to disclose events which "reflect financial difficulties," such as a default or modification of terms.

David Erdman, Wisconsin’s capital finance director, will be one of the first issuers this week to submit his documents on EMMA and said he was concerned about possible standards he would be setting in how Wisconsin complies with its new CDA. Underwriters under the rule need to have a reasonable basis to believe that issuers will comply with their CDAs. But since the new events are vague and don't define materiality, Erdman said, there is no set standard of what underwriters need to know.

Erdman said he's been very transparent in his disclosure, but is focused on what underwriters need to trust issuers. Erdman said it's hard to do that since events 15 and 16 don't provide a lot of clarity.

"Unlike a new loan or a bank loan or a bond call where you can definitely point to something, this particular event notice doesn’t have that clarity," he said. "It doesn’t have that very public document that you can point to. This is a little different compared to the other 14 listed events that are currently in the rule.”

“Being one of the first groups of competitive sales, I definitely want to be aware that that dialogue doesn’t set a standard that’s going to be difficult for other issuers to achieve going forward,” Erdman said.

Erdman was concerned that the first group of issuers complying with the new rule would set an expectation that would be so wide that it would make it difficult for other issuers to adhere to.

"We don't want to agree to a standard that is problematic for future issuers," he said.

However, being a large and frequent issuer, Erdman said he would be happy to set a standard that could help issuers filing after them.

Christine Totten, financial analyst at First MidState Bank in Bloomington, Illinois recently filed voluntary disclosures for general obligation debt certificates for local school districts on EMMA and said she hasn’t had to be too concerned yet about complying with events 15 and 16.

“We’re still sorting through how exactly we’re going to help our clients understand what things constitute an event, but that hasn’t come up yet,” Totten said.

Totten listened in on a few of the Municipal Securities Rulemaking Board webinars, but said it hasn’t been giving much clarification to the questions on materiality.

“As we listen to those webinars, obviously everybody wants to know what’s material and they won’t define that,” Totten said.

To help provide clarity on the new events, the SEC and the Municipal Securities Rulemaking Board held a webinar at the end of February, which Erdman said was a sign that issuers still had many questions on the new events.

During the webinar, defining materiality was a frequent question for both groups.

Ahmed Abonamah, senior counsel to the director in the SEC's Office of Municipal Securities said their approach to materiality has been for issuers to decide what counts as material because the muni market is so diverse.

“Rather than establishing bright line standards for materiality, the commission’s historical framework for materiality has relied on issuers to assess their disclosure obligations in the context of their specific facts and circumstances,” Abonamah said during the webinar.

In the next six months, Totten hopes to have more clarity and plans to consult with their attorneys in the next coming days and weeks on the new events.

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