On May 26, 2010, the Securities and Exchange Commission approved amendments to Rule 15c2-12 of the Securities Exchange Act of 1934 and issued Release No. 34-62184A in connection therewith (Release). Rule 15c2-12 applies to underwriters who are participating in a primary offering of municipal securities, and the SEC move indicates its intention to be more involved in that market. As a reminder, the amendments contained in the Release are effective for continuing disclosure undertakings entered into beginning today, December 1, 2010.

Among other things, Rule 15c2-12 provides that an underwriter may not participate in an underwriting of municipal securities unless it reasonably determines that the issuer of such securities has entered into a written undertaking to provide annual financial and operating information and notice of the occurrence of certain events to the Electronic Municipal Market Access system (EMMA).

The Release represents the third amendment to Rule 15c2-12 since its adoption in 1989. It makes significant changes to the event notice requirements and makes the continuing disclosure requirements of the Rule applicable to previously exempted variable rate demand obligations (VRDOs). The changes contained in the Release are summarized below.

As referred to above, Rule 15c2-12 currently requires disclosure of the occurrence of any of 11 events (such as payment failures, draws on reserve funds, and rating changes) "in a timely manner." The Release expands the list of events to include:

  • Tender offers
  • Bankruptcy, insolvency, or other similar proceedings
  • Mergers, consolidations, and acquisitions and sales of assets
  • Appointment of a successor or additional trustee

The Release also substantially narrows the reporting period to no later than 10 business days after the occurrence of an event.

Rule 15c2-12 currently states that an event notice needs to be filed only if the event is determined to be material. The SEC has stated that each of the following events is of such importance to investors and so likely to significantly affect the value of the underlying securities that it has removed the materiality standard:

  • Failure to pay principal and interest
  • Unscheduled draws on debt service reserve funds reflecting financial difficulties
  • Unscheduled draws on credit enhancements reflecting financial difficulties
  • Substitution of credit or liquidity providers or their failure to perform
  • Events affecting the tax status
  • Defeasances
  • Rating changes

In addition, the Release provides that materiality will not be taken into account for the following recently added events:

  • Tender offers
  • Bankruptcy, insolvency, or other similar proceedings

One of the required event notices in the current version of Rule 15c2-12 relates to the issuance of an adverse tax opinion or the occurrence of an event affecting the tax status of the bonds. The Release expands and clarifies the type of tax event that would trigger a notice without regard to a materiality determination to include "adverse tax opinions, 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 securities, or other events affecting the tax status of the security."

VRDOs that are part of a primary offering are currently exempt from the continuing disclosure requirements of Rule 15c2-12. The Release removes that exemption. After the Release becomes effective, issuers of VRDOs will need to provide annual financial and operating information to the extent included in the Official Statement and notice of the events listed in Rule 15c2-12.

VRDOs that are issued before the effective date of the Release will be able to take advantage of the current exemption for the life of the VRDOs as long as they continuously remain in authorized denominations of at least $100,000 and may be tendered as frequently as every nine months. Furthermore, after the effective date of the Release, a remarketing issue that is also a primary offering, e.g., change in interest rate determination method, change in authorized denominations, or change to the tender period, will be subject to the continuing disclosure requirements of Rule 15c2-12.