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

March 2, 2017

At its meeting on March 1, 2017, the United States Securities and Exchange Commission (SEC) voted to formally propose and publish for comment amendments to Rule 15c2-12 to add two additional disclosure events to written continuing disclosure undertakings required to be obtained by underwriters in primary securities offerings.

Billed by the SEC as a step to improve investor protection and enhance transparency in the municipal securities market, the proposed additional event disclosures are:

  • Incurrence of a “financial obligation” of the issuer or 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
  • Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

Under the proposed amendments, “financial obligation” is defined as a (i) debt obligation, (ii) lease, (iii) guarantee, (iv) derivative instrument, or (v) monetary obligation resulting from a judicial, administrative or arbitration proceeding. 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 new requirements would apply to continuing disclosure agreements that are entered into on or after the compliance date. The SEC is presently considering a compliance date that is three months after final adoption.

These amendments represent the next chapter in the initiative strongly promoted over the last several years by the SEC and the MSRB to encourage voluntary reporting on the MSRB’s Electronic Municipal Market Access (EMMA®) system of private bank lending to municipal issuers and obligated persons. The concerns of the SEC and the MSRB, expressed in numerous prior notice publications and other forums, are that issuers and obligated persons may be subject to numerous financial terms, operating covenants, collateral exposure and debt acceleration or liquidity risks that are not disclosed and available to the municipal market generally. The regulators’ prior attempts at encouraging voluntary reporting of such bank loan information and the resultant impact on issuer/obligated person financial condition have met with limited success.

The comment period on the new regulations will be open for 60 days following publication of the proposed release in the Federal Register.

Mr. Malpezzi is Co-Chair of the Financial Services and Public Finance Group of McNees Wallace & Nurick LLC, Harrisburg and Lancaster, Pennsylvania.

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