Continuing a trend by market regulators to bring consistent and enhanced disclosure to bond market investors, the MSRB has recommended several changes to the Securities and Exchange Commission’s 1994 Interpretive Release on Municipal Securities Disclosure Obligations and its rules—particularly SEC Rule 15c2-12, governing primary and secondary market disclosure in the $3 trillion municipal bond market.

The recommendations of the Municipal Securities Rulemaking Board address a number of areas where issuers, investors, and market professionals have struggled to find common ground and clarity in disclosure, given the SEC’s limited oversight jurisdiction of the municipal bond market and the absence of line item disclosure standards.

The recommendations, which the MSRB made to the SEC on August 8, 2011, include the following:

  • Elimination of the exemption in SEC Rule 15c2-12 for variable rate demand obligations from the requirement to deliver an offering statement in connection with a primary offering of VRDOs
  • SEC clarification that remarketings in connection with mandatory tenders or otherwise at the direction of the issuer be treated like primary offerings
  • SEC guidance establishing a view that it would be a material omission to provide disclosure on the circumstances under which a credit or liquidity provider may fail to pay debt service (including insolvency or default) without providing disclosure of the financial capacity of the underlying obligor to then make the payment
  • Renewed emphasis on enhanced disclosures concerning (i) risk factors, (ii) conflicts of interest (particularly relating to payments by third-party financial counterparties), and (iii) the use of bond proceeds and other sources of funds and standardization of disclosure concerning the identities of the issuer and each obligor, the source of debt repayment, and the market sector (e.g., hospital, public power)
  • Imposition of new remedies enforceable by bondholders for noncompliance with continuing disclosure undertakings, including damages and the adoption of enhanced policies and procedures by an obligated party to ensure future compliance

It remains to be seen whether SEC efforts to improve disclosure practices in the municipal bond market can and will embrace these recommendations through rulemaking or other guidance. Nor is it known when the SEC would take any action and whether such action would apply retroactively.