SEC Proposes New Disclosure Rules for Municipal Securities

The SEC on Wednesday proposed amendments to SEC Rule 15c2-12 that prohibits brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments.

The proposed amendments would:

• Expand the rule to cover additional municipal securities such as variable-rate demand obligations (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.
• Improve disclosure of tax risk by requiring 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. The rule presently provides that notice of all of the listed events need be made only “if material.” The proposal would require that the following events be disclosed in a notice without regard to materiality: (1) failure to pay principal and interest; (2) unscheduled payments out of 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 where the issuer has provided for future payment of all obligations under a bond; and (5) rating changes. A materiality determination would be retained for some events such as bond calls. The proposed amendment also would 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; and (4) appointment of a successor or additional trustee or the change of the name of a trustee, if material.
• Establish a specific filing deadline. The proposed amendment would require that notices of the events listed in the rule be disclosed no more than 10 business days after the event. Currently, the rule requires disclosure “in a timely manner.”

Comments on the proposed amendments, which will be available on the SEC Web site, are due within 45 days after their publication in the Federal Register.