SEC's added disclosure requirements hit some issuers harder than others

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NASHVILLE – Additional disclosure requirements under the Securities and Exchange Commission’s amended rule 15c2-12 are complicating bond sales for some municipalities, with mid-sized and infrequent issuers bearing the brunt.

Emily Brock, director of the Government Finance Officers Association’s Federal Liaison Center, told attendees at the National Municipal Bond Summit here that issuers are having very different experiences with the new rule, depending partly on their size.

Rule 15c2-12’s amendments became effective Feb. 27, adding continuing events 15 and 16 to the list of developments issuers must agree to disclose on an ongoing basis before underwriters can execute a deal. Event 15 says issuers have to disclose when they incur material financial obligations, while event 16 says that issuers have to disclose events connected to those obligations which "reflect financial difficulties," such as a default or modification of terms.

Large issuers have taken the new requirements in stride, Brock said during a panel discussion, having had to deal with it right away and in many cases having already posted Event 15-style disclosures prior to the amendments.

Mid-size issuers seem the most impacted so far, she said. One such issuer told her that an underwriter withdrew a bid on a recent deal specifically because of what that firm wanted the continuing disclosure agreement to say with respect to Event 15.

Smaller issuers are the ones frequently wrestling with the question of materiality, Brock said, especially with respect to what types of leases need to be disclosed.

Ahmed Abonamah, a senior counsel to the director in the SEC’s Office of Municipal Securities who was a panelist Tuesday, is the latest SEC officials to speak publicly on that topic. The officials have said the key determination is whether there is a borrowing in the transaction such as in those that involve a lease financing corporation. The rule was not intended to capture more straightforward leases, such as those of city vehicles.

Brock said that while issuers appreciate the SEC’s efforts to explain the requirements orally, the market could benefit from some kind of written guidance.

“We would love to see something in writing,” Brock told Abonamah.

The amount of information filed on EMMA is still limited a month after the new requirements took effect. MSRB President and Chief Executive Officer Lynnette Kelly said that as of last Friday EMMA had received 195 Event 15 filings and no Event 16 filings.

Cynthia Friedlander, senior director of fixed income at the Financial Industry Regulatory Authority, said examination of underwriter compliance with the requirements is definitely on FINRA’s agenda.

“We’ll be looking at the underwriters’ due diligence procedures,” she said. “It’ll be a little while before we see any results from our exams,” Friedlander said.

Panelists also discussed the SEC’s stated goal of improving disclosure about the timeliness of issuers’ financial disclosures. Panel moderator Ben Watkins, the director of Florida’s Division of Bond Finance, told Abonamah that the SEC should create a “safe harbor” to allow issuers to safely disclose unaudited financial information without fear of facing enforcement action if the audit turns up different information later.

“That would go a long way,” Watkins said.

Brock said there is some concern about that idea due to the fact that audits do sometimes end up painting a different picture than the unaudited financials.

“I think that is a concern,” Brock said.

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Municipal disclosure Securities law SEC enforcement Munis SEC MSRB FINRA GFOA
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