WASHINGTON - The Securities and Exchange Commission should work toward passage of its proposed amendments to Rule 15c2-12 on disclosure and partner with the Municipal Securities Rulemaking Board to improve its EMMA website, the SEC's Investor Advisory Committee said in a set of recommendations released just before its meeting in Atlanta.

The recommendations mirror some of those included in the SEC's 2012 Report on the Municipal Securities Market. That may be because the committee is vice-chaired by Elisse Walter, the former acting chairman and commissioner of the SEC who was most responsible for the 2012 report.

The committee was created by the Dodd-Frank Act and is charged with advising the commission on protecting investor issues and promoting confidence in the securities markets. The recommendations are included on the committee's agenda for the Atlanta meeting, which is set for June 14. The IAC recommendations were produced by a market structure subcommittee of the group and touch on three major muni reforms that have come up repeatedly in recent years.

The 15c2-12 amendments, proposed last year, would add two material events to the 14 that already exist. They would require an issuer or borrower to file an event notice if they incur a financial obligation that is material or that has an agreement to [material] covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders." The proposal also would require an event 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.

The proposal generated considerable complaints from issuers and bond lawyers, who said the new requirements were too far reaching and would be overly burdensome. The IAC, however, urged the SEC to move forward with a clarified proposal.

“While the committee believes that, in adopting a final rule, the commission should take into account feedback it has received, the committee supports the central purpose of the proposal,” the IAC wrote. “The committee further suggests that the proposed rules would be improved by clarifying that required disclosure should include information not only about the incurrence and amount of indebtedness but also information about financial covenants in that indebtedness.”

One term that the IAC suggested could be better defined is “financial obligation”, which the committee said should encompass indebtedness and similar obligations but “should not be so broad as to pick up items such as ordinary course leases.” At least one member of the committee suggested removing the term “material” from the proposals, while others argued that the term is well-understood, according to a footnote. The committee suggested the SEC be clear that the term means what the Supreme Court has defined it to mean: something that a reasonable investor would consider important when making an investment decision.

The committee’s recommendation to update the SEC’s 1994 interpretive guidance addresses disclosure issues in both the primary and secondary markets. The SEC undertook an initiative several years ago to ask the market what guidance it could provide about disclosure in any context that would be helpful, and the National Association of Bond Lawyers responded with a wide array of suggestions in letters in 2010 and 2011. The SEC’s 2012 Report on the Municipal Securities Market also suggested updating the 1994 guidance. The committee suggested that “updated interpretive guidance could summarize the issues raised by the commission’s enforcement actions against municipal obligors and highlight its focus on particular enforcement themes, if any.”

NABL president Sandy MacLennan, a partner at Squire Patton Boggs in Tampa, Fla., noted that NABL has twice responded to an SEC inquiry on this topic but said the IAC recommendations appear to be a compilation of things already said.

NABL president Alexandra "Sandy" MacLennan
NABL president Alexandra "Sandy" MacLennan NABL

“It doesn’t appear to be providing anything new on the subject,” she said.

Lastly the IAC recommendations said that EMMA could be enhanced by highlighting to investors when an "obligor" or borrower is out of compliance with its continuing disclosure requirements.

“Under the current system, it is difficult to determine if an obligor is in compliance with its continuing disclosure requirements,” the IAC said.

The SEC is not required to act based on the recommendations of the committee.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is the Deputy Washington Bureau Chief of The Bond Buyer. He covers securities law, regulation, and enforcement.