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Rule 15c2-12: Amendments to Rule 15c2-12 Expand Municipal Issuers’ Disclosure Duties

Public Finance Update Jeff Peelen

On Wednesday, May 26, 2010, the Securities and Exchange Commission (the "SEC") approved amendments to
Rule 15c2-12 (the "Rule") that will expand the disclosure responsibilities of issuers of municipal obligations. The amendments will become effective on December 1, 2010.

In announcing the amendments, the SEC released a "Facts Sheet" which explains that the amendments will expand the quantity and scope of events requiring disclosure by municipal issuers, and will set strict timing requirements for filing of event notices. As the SEC explains in its Facts Sheet, the amendments will:

  • Expand the Rule's Application to Cover Additional Municipal Securities - When it was first adopted, the Rule did not apply to certain securities commonly known as variable rate demand obligations or VRDOs. (VRDOs bear interest at a rate that is reset periodically and investors are able to sell them back to the issuer at certain times for their full value.) The amended Rule will apply to new issuances of such securities.

  • Improve Disclosure of Tax Risk - The amended Rule will specifically include disclosure of events that may adversely affect a bond's tax exemption, including issuance by the IRS of proposed and final decisions about whether the bond can be taxed.
  • Strengthen and Expand Disclosure of Important Events - Under the existing Rule, an underwriter must have a reasonable belief that the state or local government which issued municipal bonds has agreed to provide ongoing, continuing disclosure of certain important events. The existing Rule presently provides that notice of all of the listed events need be made only "if material."
    • Elimination of Materiality Determination for Some Events: The amended Rule will eliminate the need for a materiality determination for the following events: (1) failure to pay principal and interest; (2) unscheduled payments from debt service reserves reflecting financial difficulties; (3) unscheduled payments by parties backing the bonds, reflecting financial difficulties, or a change in the identity of parties backing the bonds or their failure to perform; (4) defeasances, including situations in which the issuer has provided for future payment of all obligations under a bond; and (5) rating changes. A materiality determination will be retained for some events, including, for example, bond calls.

    • New Events: The amended Rule will also increase the number of events to include: (1) tender offers; (2) bankruptcy, insolvency, receivership or similar proceeding; (3) mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination, if material; and (4) appointment of a successor or additional trustee or the change of the name of a trustee, if material.
  • Establish a More Specific Filing Deadline - The existing Rule simply provides for disclosure "in a timely manner." The amended Rule will provide that notices of the events listed in the Rule must be disclosed in a timely manner not more than 10 business days after the event.
  • Additional Guidance - Over the years, SEC has set forth interpretations under the antifraud provisions of the federal securities laws to require municipal securities underwriters to have a reasonable basis for recommending any municipal securities. The adopting release reaffirms that, to have a reasonable basis to recommend a security, a municipal underwriter must carefully evaluate the likelihood that a municipality will make the ongoing disclosure called for by the amended Rule. The adopting release further states that it is doubtful that an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material non-disclosure.

As noted, the effective date of the amendments to the Rule is December 1, 2010.

In addition to the approved amendments, the SEC also endorsed two additional proposals that are expected to be formally adopted sometime over the course of the next year. The proposals include:

  • Requiring underwriters to disclose on the Electronic Municipal Market Access system ("EMMA") (i) whether and when an issuer is obligated to provide secondary market disclosure, and (ii) who will be providing the disclosure information for the issuer.

  • The ability to make a designation on EMMA for municipal issuers who agree to adhere to disclosure requirements above and beyond those required by the Rule, including filing financial information sooner and preparing audited financial statements in compliance with certain accounting standards promulgated by the Governmental Accounting Standards Board.

Please call any of our Quarles & Brady Public Finance lawyers if you have questions about the amendments to the Rule.