United States: Call For Comments On Proposed SEC Amendment To Rule 15c2-12

Article by: Robert Feyer and Christine Reynolds

Recently, the SEC proposed amendments to Rule 15c2-12 (the "Rule"), which was published in the Federal Register on or about March 16.  Since 1995 governmental issuers and other obligors (like nonprofit health care institutions using tax-exempt debt) (collectively, "Issuers") have, as a condition of being able to use an underwriter to market their bonds, had to sign "continuing disclosure agreements" ("CDAs") promising to supply annual financial reports and to provide prompt notice upon the occurrence of certain events which would materially affect the bond issue subject to the CDA.

The proposed amendments to the Rule (the "2017 Proposed Amendments") are ostensibly in response to widespread commentary within the municipal securities community calling for better dissemination of information about bank loans or other non-publicly offered private placements.   However, if implemented without change, the 2017 Proposed Amendments would greatly complicate and increase the expense of financial monitoring and reporting for any size government using the public debt markets, and could profoundly change the nature of federal regulation of the municipal market.  While many organizations are expected to submit comments to this proposal, robust input from individual Issuers will be highly valuable.   Comments are due by May 15, 2017 but any comments submitted reasonably quickly should be read by the SEC staff.     

Proposed New "Material Events."  In brief, the proposal would add two new "events" for which Issuers would be contractually obligated to report on EMMA within 10 days of occurrence:

(i)      Incurrence of a "financial obligation," if material, or agreement to certain covenants or terms in a financial obligation, if material.  This item would apply to financial obligations entered into, or covenants etc. made, only after the effective date of a new bond issue to which a new Continuing Disclosure Certificate is signed.

(ii)     Default, event of acceleration, termination event, modification of terms or other similar events under a financial obligation, if any such event reflects financial difficulties.  This item would require reporting any such event which occurs after a new CDC is signed, but with respect to all financial obligations of the issuer, whether entered into before or after the relevant CDC. 

Critical to the new rule is the broad definition of "financial obligation," of which arguably only clause (a) relates to bank loans or private placements:  

"Financial Obligation means a (a) debt obligation, (b) lease, (c) guarantee, (d) derivative instrument or (e) monetary obligation resulting from a judicial, administrative or arbitration proceeding."  Excluded is any municipal security for which an official statement is posted to EMMA (i.e. any public bond issue otherwise subject to Rule 15c2-12). 

Far Reaching Implications.  As proposed, new "financial obligations" would have to be reported when entered into by an Issuer or when a monetary judgment is reached, and both new and old "financial obligations" have to be monitored for defaults, modification of terms or other events.  The burden of tracking every lease, court judgment or other debt or possibly debt-like obligation entered into by an Issuer's entire organization – all departments, bureaus, divisions, agencies, etc. – would be an enormous undertaking, and an unfunded obligation.  Moreover, the expansion of reporting obligations under Rule 15c2-12 from those affecting just the bonds subject to the CDA, to any one of a list of financial metrics affecting the Issuer's credit, is a fundamental change in the way the SEC (indirectly) regulates municipal governments, and moves municipal governments into the realm of "ongoing financial disclosure" which corporations have to follow, particularly by analogy of Form 8-K under the Securities Exchange Act of 1934.  While corporations (including those which use the municipal debt market) may be organized enough to be able to monitor all these new events, governments frequently are not – either by lack of sophisticated central controls or by the sheer size and complexity of a large government.   The SEC is using concerns about the growth of bank loans or private placements to bootstrap a sea change in disclosure practices in the municipal market.  

Materiality – The Great Unknown.  Aside from overreach described in the last paragraph, another serious flaw in this proposal is that the standard set forth for compliance is far too nebulous.  The SEC release suggests that using a standard of "materiality" strikes a balance between having to report very small obligations (copier leases) and those which could affect other bondholders.   Likewise, the SEC indicates that the standard of "which reflects financial difficulties" provides a good test for the new "event" to be reported under clause (ii), above. 

However, the SEC has not defined what is "material" (and "financial difficulties" is really another aspect of materiality).  In the wake of the MCDC process, Issuers and underwriters will be very reluctant to make a judgment on what is or is not a material action requiring reports. The absence of a definition of materiality from the SEC places an incalculable responsibility on Issuers and the financial staff that shoulder the burden of monitoring "financial obligations" and continuing disclosure compliance matters to make a determination as to materiality for reporting and compliance. Further, since the new rule requires reporting of material covenants and agreements, Issuers will avoid the task of trying to summarize what are the material terms by posting to EMMA entire documents (with confidential matters blacked out), creating an impossible burden for investors and analysts hoping to actually understand the significance of any new bank loan, derivative or lease, for instance.

Limitation on Financial Market Access.  It has been argued that small or infrequent Issuers can avoid this burden by simply avoiding the public debt market, but this would deprive them of what could be a  more cost-effective borrowing option, and there is no assurance that the bank loan market will remain as robust as it is presently.  Large and regular Issuers have no choice but to use the public debt market and they must suffer the burdens which this new rule would impose. 

Call to Action –  Comments Needed.   Comments on the 2017 Proposed Amendments are due to the SEC by May 15, 2017.  Every comment letter counts.  It is critical that the SEC receive as many comments as possible from Issuers that will have to comply with the new regulations under outstanding and future continuing disclosure undertakings.  The release of the 2017 Proposed Amendments includes questions upon which parties are encouraged to provide comments. 

If you have questions about preparing comment letters for submission to the SEC, members of the Orrick team are available to assist you with preparing comment letters for submission to the SEC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.