Issuers and borrowers who enter into continuing disclosure undertakings in connection with the offering of municipal securities will be required to report two new material events beginning sometime in the first quarter of 2019. In certain circumstances, the changes may be applicable to issuers and borrowers with existing continuing disclosure undertakings. The Securities and Exchange Commission (SEC) recently announced an amendment to Rule 15c2-12 of the Securities Exchange Act (Rule 15c2-12) which finalizes two previously proposed additions to the existing list of material events for which issuers and borrowers are required to provide public notice.
According to a report of the Federal Deposit Insurance Corporation on financial institutions around the country, the dollar amount of commercial loans to state and local governments has tripled since 2010. With the rise of private placements and direct purchases in recent years, the SEC is aiming to enhance transparency with respect to these obligations, which are not currently subject to Rule 15c2-12. “Disclosures required by these rule amendments will better equip investors and intermediaries to make informed investment decisions about municipal securities,” said SEC Chairman Jay Clayton.
Under Rule 15c2-12 issuers and borrowers with certain publicly offered debt must agree to (i) annually post selected financial and operating information on the Electronic Municipal Market Access system (EMMA) maintained by the Municipal Securities Rulemaking Board (MSRB) and (ii) provide timely notice of certain material events. With the amendment to Rule 15c2-12, two new events are being added to the list of existing material events, specifically:
- Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
- Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.
The amendment defines “financial obligation” as a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) a guarantee of (i) or (ii), but financial obligation does not include municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12. The amendment does not define “materiality” in the context of a financial obligation.
According to the SEC, the amendment to Rule 15c2-12 is meant “to enhance transparency in the municipal securities market,” and that the amendment “focus[es] on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights.” The amendment to Rule 15c2-12 will go into effect 180 days after publication in the Federal Register, but in any case, not earlier than the first quarter of 2019.