On May 26, 2010, the Securities and Exchange Commission (“SEC”) unanimously approved amendments to its Rule 15c2-12 (the “Rule”) which will expand the continuing disclosure obligations of issuers of municipal securities.1 The amendments will apply to continuing disclosure agreements entered into in connection with primary offerings of municipal securities that occur on or after December 1, 2010.
A brief summary of the amendments to the Rule is provided below. Issuers and obligated parties should be aware that their historical disclosure practices will need to change in light of the amendments to the Rule.
Additional Events Requiring Disclosure
The amended Rule includes five additional events that require disclosure and expands the disclosure requirements for certain events that may impact the tax-exempt status of the security. Specifically, the amended Rule requires that notice of the occurrence of the following events be filed with the Municipal Securities Rulemaking Board (“MSRB”) (in addition to the events enumerated in the Rule prior to amendment):
- tender offers
- the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security
- bankruptcy, insolvency, receivership or similar event of the issuer or obligated person
- the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material
- appointment of a successor or additional trustee or the change of name of a trustee, if material
Removal of Materiality Standard For Disclosure of Certain Listed Events
Prior to the amendment, the Rule provided that notice of the enumerated events in the Rule had to be filed with the MSRB only if deemed to be material. The amended Rule eliminates the materiality standard with respect to the events listed below, thereby requiring that all occurrences of the following events must be filed with the MSRB.
- principal and interest payment delinquencies
- unscheduled draws on debt service reserves reflecting financial difficulties
- unscheduled draws on credit enhancement reflecting financial difficulties
- substitution of credit or liquidity providers, or their failure to perform
- adverse tax opinions or the issuance by the IRS of a proposed or final determination of taxability
- rating changes
- tender offers
Specific Filing Deadline for Notice of Listed Events
The amended Rule establishes a specific filing deadline for notices of events requiring disclosure, providing that notice of such events be provided “in a timely manner not in excess of ten business days after the occurrence of the event” (emphasis added). Prior to the amendment, the Rule required that notice of any event listed simply be filed with the MSRB “in a timely manner.”
Modification of Exemption for Variable Rate Demand Obligations
Prior to the amendment, variable rate demand obligations (“VRDOs”) in authorized denominations of $100,000 or more that were subject to tender at the option of the holder at least as frequently as every nine months were exempt from the continuing disclosure requirements of the Rule. The amended Rule eliminates such exemption for VRDOs and, consequently, “primary offerings” (as defined in the Rule) of VRDOs occurring on or after December 1, 2010 will be subject to the continuing disclosure requirements of the Rule. The amended Rule includes a limited grandfather provision for remarketings of VRDOs outstanding as of November 30, 2010 for so long as such securities remain in authorized denominations of $100,000 or more and are subject to tender at the option of the holder at least as frequently as every nine months. However, issuers should be aware that if existing VRDOs are remarketed in such a manner that the remarketing constitutes a “primary offering” under the Rule on or after December 1, 2010, then the continuing disclosure obligations of the Rule will apply to such VRDOs.
The amended Rule further requires that, to the extent that financial information and operating data for an issuer or obligated party are included in the final official statement for VRDOs, such information must be updated annually and filed with the MSRB. Audited financial statements, if not submitted as part of the annual information filing, need be filed only when and if available.
Interpretive Guidance with Respect to Obligations of Participating Underwriter
Under the Rule, the underwriter must reasonably determine that a continuing disclosure agreement is in effect, when applicable. Furthermore, the final official statement must disclose instances of non-compliance over the past five years, when material. In connection with the amendments to the Rule, the SEC states in Interpretive Guidance that it is doubtful that an underwriter could form a reasonable basis to rely on issuer’s certifications if that issuer has a history of non-compliance and that the underwriter must independently determine compliance. A finding of continued non-compliance would make it very difficult for the underwriter to make a reasonable determination that the issuer or obligated person would be in compliance with future a continuing disclosure undertaking.
A Special Note Concerning Rating Changes
Generally, the events in the Rule, as amended, will be known to the issuer or obligated person promptly after occurrence. Some comments to the proposed rule noted that issuers and obligated persons may not receive notices from the rating agencies of a rating change. The SEC nevertheless now requires notice of all rating changes to be filed with the MSRB, whether or not material, and within 10 days of the change. Issuers and obligated persons will need to create a ratings monitoring process to become aware of any changes. Failure to monitor rating changes and failure to file notices of rating changes would be considered by an underwriter in determining whether any securities of the issuer or obligated person may be underwritten.