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SEC Approves Amendments to Rule 15c2-12 to Address Bank Loan Disclosure Concerns

August 21, 2018

by Timothy Horstmann and Penny Pollick

On August 20, 2018, the U.S. Securities and Exchange Commission (SEC) approved amendments to Rule 15c2-12 of the Securities Exchange Act to add two additional disclosure events to written continuing disclosure undertakings required to be obtained by underwriters in primary securities offerings. A copy of the final rule approving the amendments can be accessed here.

The SEC originally proposed the amendments in March 2017. Read our previous commentary on the amendments here. The new event disclosures that will be added to the Rule remain the same as was originally proposed:

  1. Incurrence of a “financial obligation” of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
  2. Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the obligated person, any of which reflect financial difficulties.

The original proposed version of the amendments would have defined a “financial obligation” to mean a: (i) debt obligation, (ii) lease, (iii) guarantee, (iv) derivative instrument, or (v) monetary obligation resulting from a judicial, administrative or arbitration proceeding. A “financial obligation” would not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board (MSRB).

The proposed amendments generated substantial comments from the municipal bond community. In response to those comments, the SEC softened the reach of the amendments by removing from the definition monetary obligations resulting from judicial, administrative or arbitration proceedings. The revised definition also limits the scope of covered guarantees, derivative instruments, and leases.

As revised, “financial obligation” now means a: (i) debt obligation; (ii) derivative instrument entered into in connection with, or, pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The exclusion for municipal securities as to which a final official statement has been provided to the MSRB remains in place. And while the separate, broad category for “leases” was removed, the SEC has changed its interpretation of “debt obligation” to include any lease which operates as a vehicle to borrow money.

The compliance date for the new event disclosures is 180 days after publication in the Federal Register. For bonds sold after the compliance date, underwriters will have to ensure that the new event disclosures are included in the continuing disclosure agreement entered into with the issuer or obligated person with respect to the bonds.

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