SEC Proposes Amendments to Rule 15c2-12 Expanding the List of Material Events, Eliminating a Materiality Factor for Certain Specified Events, and Making VRDOs Subject to the Rule.
Background. Rule 15c2-12 (the Rule) promulgated by the U.S. Securities and Exchange Commission (SEC), requires any broker, dealer, or municipal securities dealer (a Participating Underwriter) in a primary offering to determine that the issuer or an obligated person for whom financial information or operating data is presented in the final official statement has undertaken in writing (Continuing Disclosure Agreement or CDA) to provide certain items of information to the marketplace, including notification of 11 specified events, if material, and notices of failure to comply with the Rule in a timely manner. Currently, issuers of variable rate demand obligations (VRDOs) in minimum denominations of $100,000 that may be tendered to an issuer by the holder of a VRDO at least as frequently as every nine months are exempt from the notice reporting requirements of the Rule.
On July 17, 2009, the SEC issued Release No. 34-60332 (Release), proposing various amendments to the disclosure requirements set forth in the Rule and requesting public comment within 45 days from the date of its publication in the Federal Register. If the proposed amendments are adopted, the list of material events will be expanded from 11 to 15, and eight of the 15 events will be required to be disclosed regardless of materiality. Notices of the specified events will be required to be filed with the Municipal Securities Rulemaking Board (MSRB) in electronic format no later than 10 business days after the occurrence of the event. Additionally, large-denomination VRDOs will no longer be exempted from the Rule.
Modification of the Exemption for VRDOs. The SEC proposes to delete the current exemption for VRDOs from the Rule, both with respect to an initial public offering and a remarketing of VRDOs which constitutes a primary offering within the meaning of the Rule (a Remarketing). As such, under the proposed amendments, a Participating Underwriter of a primary offering or a Remarketing of VRDOs would be required to reasonably determine that the issuer or obligated person has entered into a CDA meeting the requirements of the Rule. The proposed amendments would apply to any initial offering of VRDOs and to any remarketing of VRDOs occurring on or after the effective date of any final amendments that the SEC may adopt, including any such remarketing of VRDOs that were originally issued prior to the effective date of the proposed amendments to the Rule.
Addition of New "Listed Events" and Elimination of a Materiality Determination for Certain "Listed Events." The current Rule lists 11 events (Listed Events) relating to the issuer/obligated person or the municipal securities of such issuer that are subject to the Rule which an issuer or obligated person is required to disclose to the market if the issuer or obligated person determines that such event is “material.” The SEC proposes to (i) modify one Listed Event currently included in the Rule, (ii) add four new events to the Listed Events and (iii) delete the generally applicable "if material" condition with respect to the existing and new Listed Events and instead indicate for each Listed Event whether notice of such event must be made only to the extent that such event is material. The existing and proposed new Listed Events as well as the SEC proposal on the application of a materiality condition to a Listed Event are summarized in the table.
Deadline for Submitting Event Notices. The SEC proposes to impose a firm deadline for submitting notices of an occurrence of a Listed Event to MSRB. Instead of the current requirement of the Rule to submit a notice of a Listed Event (if deemed material by an issuer or obligated person) in a "timely manner," the proposed change would require an issuer or an obligated person to submit such notice in a timely manner not in excess of 10 business days after the occurrence of the event. This requirement does not take into account a "knowledge factor" of the issuer or obligated person about the occurrence of an event thereby imposing a heightened duty on issuers/obligated persons to monitor the occurrence of material Listed Events.
Effective Date and Transition; Effect on Existing CDAs. If the proposed amendments were to be approved, the SEC has indicated that it is preliminarily considering an effective date that would be no earlier than three months after any final adoption of the proposed amendments. The SEC also states that the proposed amendments to the Rule would impact only CDAs that are entered into in connection with primary offerings or a Remarketing of VRDOs occurring on or after the effective date of these proposed amendments. Existing CDAs would not be required to be amended to conform to the proposed amendments of the Rule. However, in connection with a Remarketing of VRDOs which were issued prior to the effective date of the proposed amendments, a Participating Underwriter will need to reasonably determine that the issuer of, and obligated persons under, outstanding VRDOs have entered into a CDA pursuant to the Rule with respect to a Remarketing of such VRDOs. The SEC also emphasized that a Participating Underwriter should affirmatively inquire as to the filing history of an issuer in order to confirm the truthfulness of the issuer's statement in the official statement as to its material compliance with the requirements of the Rule.