SEC Rule 15c2-12: Background
On July 15, 2009, the SEC approved proposed amendments to its Rule 15c2-12 (Rule). The SEC has proposed that these amendments, in their final form following public comment, will become effective the third month following the approval of the final changes to the Rule. These proposed amendments are the first significant overhaul of the Rule since the base version, which was adopted in 1989, was amended in 1994 to include secondary market disclosure requirements. These amendments will have significant implications for municipal issuers and borrowers of the proceeds of municipal bonds. The effects of these amendments are outlined in this alert.
Rule 15c2-12 provides the basic framework for secondary market disclosure by issuers and borrowers in the municipal bond market. The SEC lacks statutory jurisdiction over municipal issuers, other than limited, but significant, jurisdiction and oversight that derives from anti-fraud laws, including SEC Rule 10b-5. As a consequence, the SEC’s approach to regulating secondary market disclosure by municipal issuers and the borrowers of the proceeds of municipal bonds is to impose mandates on broker-dealers, in their various roles as underwriters, placement agents, and remarketing agents, to conduct their business and discharge their general securities law obligations in a manner consistent with Rule 15c2-12.
The Rule has two basic requirements. First, it obligates underwriters to obtain and review offering documents for municipal securities (if available) and file them with the Municipal Securities Rulemaking Board (MSRB).1 Second, it obligates underwriters and remarketing agents to ensure that issuers and borrowers have in place contractual obligations for the benefit of bondholders to prepare and file annual reports and financial information, and notices of the occurrence of certain described events (referred to as “listed events”) with the MSRB, through its Electronic Municipal Market Access (EMMA) system. A few categories of issuers and types of securities are currently exempted from the application of the Rule.
The timing of the proposed amendments is notable. The announcement of the amendments occurred at substantially the same time that the SEC and MSRB have pending other regulatory actions that also would serve to increase the quality and quantity of disclosure, and as legislators and regulatory agency leaders are increasingly criticizing the lack of jurisdiction over disclosure by municipal issuers. The announcement of the amendments also follows on the heels of the MSRB’s recent implementation of its EMMA system. Public comments by organizations as diverse as the National Federation of Municipal Analysts, the Investment Company Institute, and the Government Finance Officers Association have increasingly questioned the existing quality of disclosure. At the same time, the public policies surrounding exemption versus registration also continue to fuel the debate. Moreover, SEC Commissioner Mary Schapiro has delivered testimony and offered public statements that recommend legislative action toward removing or modifying the exemption in order to improve transparency in the municipal securities market.
In addition, the SEC recently announced changes in its enforcement division, which include the creation of a national enforcement unit specializing in municipal securities and public pensions. All of these developments must be considered in the context of the recent global financial crisis and recession, both of which have predictably resulted in the current political environment. This environment has led to intensified discussion surrounding the transparency and adequacy of disclosure in the municipal marketplace, which may lead to more substantial regulatory and statutory protection for investors and consumers beyond the proposed changes to the Rule described in this alert.
Thus, while the amendments to Rule 15c2-12, if adopted, will clarify and increase disclosure obligations, the likely investor demand for more frequent and improved quantity and quality of disclosure, together with the increasing level of public debate on the subject, will impose more pressure upon issuers and borrowers to enhance their current secondary market disclosure practices.
Proposed Amendments to Rule 15c2-12
The proposed amendments affect the obligation to disclose the occurrence of the “listed events,” and remove an exemption from continuing disclosure that currently exists for variable rate demand obligations.
Any significant change to federal securities laws have both intended and unintended practical consequences, including:
Proposed Revisions to MSRB Rules and Forms
The MSRB has recently proposed revisions to its Rule G-32 and Form G-32, the effect of which will be to impose an additional series of reporting burdens upon broker-dealers regarding the continuing disclosure obligations of its clients. If adopted, these revisions will obligate the broker-dealer, in its role as underwriter, placement agent, or remarketing agent, to inform the MSRB, through its EMMA system, whether the issuer or other obligated persons have undertaken to provide continuing disclosure, the identity of those obligated persons, and the specific dates by which continuing disclosure information is to be provided.
This information will be available to investors through EMMA. The information is intended to inform investors whether continuing disclosure will be made, by whom, and by when. Although the MSRB rules do not apply to issuers and borrowers, the effect of these proposed changes will be to impose on the broker-dealer an additional obligation to monitor carefully the details of the disclosure promise and to assist investors in identifying those parties obligated to provide secondary market information. The effect of the revisions is not substantive, but when considered in the context of the proposed revisions to Rule 15c2-12, can be expected to increase the significance of the continuing disclosure obligation and its increased importance before, during, and after a bond issue.
Proposed Changes to Rules Affecting Money Market Funds
The SEC has recently proposed substantial changes to its Rule 2a-7, which affects taxable and tax-exempt money market funds. Although most of the changes are highly technical and many address internal monitoring processes of these funds, some of the changes can be expected to increase pressure on issuers and borrowers from money market funds to provide, on a timely basis, the information they need in order to satisfy their obligations under Rule 2a-7, including those currently in place and those proposed. A thorough examination of the proposed revisions to Rule 2a-7 is beyond the scope of this alert.
1 Until July 1, 2009, those documents, and others described in this alert, were filed with Nationally Recognized Municipal Securities Information Repository (NRMSIRs). On that date, the repository maintained by the MSRB, known as EMMA, was the only recognized repository.
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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Robert J. Zimmerman
Janet E. Zeigler
Heidi H. Jeffery
Emily F. Magee
Chauncey W. Lever, Jr.