SEC attempts to clarify leasing in 15c2-12 amendments

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BONITA SPRINGS, Fla. —Bond lawyers are trying to hash out whether or not various types of leasing agreements would be considered debt obligations, which would need to be disclosed under the new events with the Securities and Exchange Commission Rule 15c2-12.

At a National Association of Bond Lawyers Conference in Florida on Thursday, Rebecca Olsen, director of the SEC’s Office of Municipal Securities addressed those questions using an example often used by the commission. But bond lawyers in attendance at Olsen's continued to pepper her with questions about the amendments, which became effective Feb. 27.

Olsen used a local police department as an example, saying that it leases a fleet of police cruisers from a local car dealership and agrees to pay the dealership every month for the right to use and possess the cars. After the lease expires, the police department has the option to buy the car for a nominal sum. It would be considered a lease and not a debt obligation, Olsen said.

However, if the police department adds a third party, such as a lease financing corporation and borrows money from them to buy the cars from the dealership, paying the third party in periodic lease payments, it would be a debt obligation.

But Sandy MacLennan, a partner at Squire Patton Boggs in Tampa, Fla., was not content that the example encapsulated all possible situations.

“The vehicle dealer doesn’t do leasing directly, they typically have a related financing company that enters into the lease,” she said. “Does it make a difference if there’s a financing company related to the car dealer that is actually doing the leasing. Is that part of the second type of transaction or the first transaction?”

Olsen said a distinguishing characteristic would be if an issuer seeks directly or indirectly to borrow money and if they know that a third party is involved.

“I would want to know, did the issuer seek to borrow and were they aware of the financiers?” Olsen said.

Materiality was again a fruitful topic of discussion, with David Cohen, senior legal counsel at RBC Capital Markets asking the SEC for additional guidance.

"It would be helpful, I think everyone is looking for it,” Cohen said. “In the absence of that, it’s (materiality) a term we all know and we all use it every day when we’re putting together a bond deal, whether the financial obligation is material enough to have been included in the OS.”

The panel weighed in on whether issuers should file a summary of their financial obligations or a copy of the relevant documents with sensitive material redacted.

MacLennan noted her first choice would likely always be to file a redacted copy.

“There is a risk that the summary might not be an accurate summary or complete summary,” she said.

Cohen agreed, adding that if it’s just a few figures a summary would suffice, but the safest way to go is a full redacted document.

“If it’s just some numbers then you’re good to go with a summary, but if you omit a material term or covenant then you’re creating a problem for yourself,” he said.

Since the 15c2-12 amendments were just effective in late February, it could be months or years before an issuer has a second transaction, Cohen said, where an underwriter would be required to do the subsequent diligence as done during the 2014 Municipalities Continuing Disclosure Cooperation Initiative.

The initiative promised that underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years when issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. It led to SEC settlements with 72 underwriters representing 96% of the underwriting market and 72 issuers. It brought with it intense scrutiny over what issuers were saying in offering documents about their past compliance with their disclosure obligations.

With the new events, Cohen isn’t changing protocol.

“We’re going to do the same things that we do now, review EMMA and ask the issuer questions,” he said.

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SEC regulations Rule 15c2-12 Auto leasing Municipal disclosure Securities law SEC Washington DC Florida
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