In August 2018, the Securities and Exchange Commission (SEC) approved Amendments to Rule 15c2-12. While this Rule applies to broker-dealers buying or selling municipal securities, governments, as well as any other obligated persons that issue obligations subject to the Rule on or after the effective date of February 27, 2019 will be required, through contractual undertakings, to commit to additional continuing disclosure requirements.
The Amendments are an effort by the SEC to require disclosure of the new material financial obligations as well as certain events with respect to new or outstanding financial obligations that reflect financial difficulties of the issuer. Governments will have to agree in new continuing disclosure agreements (CDAs) (including supplements to master agreements for new bond transactions) entered into on or after the effective date that they will disclose to the market (via the Municipal Securities Rulemaking Board’s (the MSRB) electronic municipal market access website (EMMA)) (1) any new material financial obligations and (2) when certain events occur with respect to outstanding or new financial obligations that reflect financial difficulties, in both cases within 10 business days of the occurrence of the event.
Financial obligations, as defined in the SEC Release approving the amendments, are those obligations that are debt-like, related to debt and debt-related products (e.g. debt-related derivatives and guarantees of debt or debt-related derivatives) and not normal business operations. The types of financial obligations that are captured under the Amendments include bank loans, capital leases or financed purchases, swaps, guarantees and other types of financial obligations that “operate as vehicles to borrow money.”
The additional category of events with respect to new or outstanding Financial Obligations that must be disclosed include default, acceleration, modification of terms or similar events under the terms of Financial Obligations that reflect financial difficulties. The phrase “financial difficulties” is not defined in the Amendments.
The most important first step governments should take is to talk with your bond and/or disclosure counsel to understand how these changes specifically relate to your debt program, future bond issuances and other financial transactions.
Governments should review their existing debt management, post-issuance compliance and continuing disclosure policies with the following in mind with respect to the Amendments:
- Is the government’s finance or debt officer (the parties most likely responsible for making filings under the issuer’s CDA) aware when such financial obligations are incurred?
- If not, what changes need to be made to the existing policies to assure the government’s finance or debt officer is made aware of the incurrence of a new financial obligation so they can (i) assess materiality, and (ii) prepare and timely submit notice pursuant to the CDA such financial obligation?
- Consider and review the role of other departments such as procurement or legal counsel in the incurrence of a financial obligation. Review lines of communication between the government’s finance or debt officer and those departments.
- Review the listing of obligations in the government’s audited financial statements to determine whether this is a good starting point for a list of financial obligations currently outstanding by including notations of the date of posting the financial obligation, if required or if completed on a voluntary basis. Maintaining this type of summary may be helpful to (i) keep track of filings made with respect to financial obligations, and (ii) an underwriter in future bond transactions when diligence of past compliance is undertaken. (See the sample template)
- Will the government’s finance officer or debt officer (the parties most likely responsible for making filings under the issuer’s CDA) be aware of covenants contained in existing financial obligation agreements and compliance issues that may reflect financial difficulties? Who within the organization will determine whether the government is experiencing financial difficulties?
- If not, what changes need to be made to the existing policies to assure the government’s finance or debt officer is made aware of the covenants and events or compliance issues that reflect financial difficulties so they can (i) assess materiality of new or existing financial obligations, and (ii) prepare and timely submit notices pursuant to the CDA for such financial obligation?
Government staff should also have a clear understanding of the new language that will be included in CDAs. Sample language is being developed and will be circulated in advance of the compliance date. In addition, questions on materiality and what information should be disclosed is something that issuers should continue to discuss with their bond and/or disclosure counsel.
Why Complying with Event Notices Required under the SEC Rule 15c2-12 is Important
This alert addresses the Amendments to the Rule. It is critical for state and local governments to be aware of these changes to SEC Rule 15c2-12, and all other continuing disclosure obligations that issuers assume when issuing bonds subject to the Rule. While outside professionals, including bond and/or disclosure counsel, will provide advice regarding CDAs so that they are in line with the new requirements, governments will continue to be responsible for their own disclosure documents and compliance with the contractual undertakings, including ensuring that event notices are filed on EMMA within 10 business days of the occurrence of the reportable event.
Non-compliance with continuing disclosure undertakings could result in delays in future financings while past non-compliance is reported and corrected. Under SEC Rule 15c2-12, underwriters must have a reasonable basis to believe in a government’s future compliance before underwriting a transaction; past material non-compliance may result in the underwriters declining to underwrite future transactions.
Updates to EMMA
Governments should familiarize themselves with how to upload documents onto the EMMA system. The Municipal Securities Rulemaking Board (MSRB) has various resources available for issuers to learn how to upload disclosure to its Electronic Municipal Market Access (EMMA) system.
The MSRB has announced it will update the EMMA platform to accept and display notices required by the Amendments. While no prescribed form of notice has been provided by the SEC, it is expected that an event notice for material financial obligations would include a summary or copy of the underlying document(s) (e.g. the loan agreement or capital lease). Additionally, an event notice regarding a default or other event that reflects financial difficulty would include a summary of the default and the financial difficulties being experienced.
Any questions or notices for the Amendments should be discussed with the issuer’s bond and/or disclosure counsel. Some issuers may decide to include a cover sheet with their filing, and a sample of cover sheets for the Amendments is attached.
Highlights from GFOA’s Disclosure Best Practices
GFOA has had longstanding best practices on disclosure for its members. These include careful review of official statements, compliance with continuing disclosure requirements, and, where appropriate, providing voluntary disclosures to the marketplace through EMMA.
Governments should also remain aware of GFOA’s Best Practices and monitor them from time-to-time for updates.
Securities & Exchange Commission Resources
- Template - Internal Record of Financial Obligations (Current and New)
- Template - Sample Cover Sheet for Material Financal Obligations Submissions to Emma
- Template - Sample Cover Sheet for Financial Difficulties Submissions to Emma
- GFOA Best Practice, Debt Management Policy
- GFOA Best Practice, Post Issuance Policies and Procedures
- GFOA Post Issuance Compliance Checklist (Disclosure Section)
- GFOA Best Practice, Primary Market Disclosure
- GFOA Best Practice, Understanding Your Continuing Disclosure Responsibilities
- GFOA Best Practice, Bank Loans
- Rule 15c2-12
- National Association of Bond Lawyers (NABL), The Bond Lawyer, Summer 2018: Federal Securities Law – Amendments to SEC Rule 15c2-12
- NABL “Crafting Disclosure Policies” (August 2015) (for an overview of issuer responsibilities under the federal securities laws, suggestions for developing disclosure procedures, sample annotated policies and procedures, and links to policies and procedures adopted by a range of issuers).
This Alert is not intended to provide legal advice. It is a brief summary of the referenced amendments. GFOA, NABL and SIFMA have jointly participated in the preparation of this Alert to provide issuers with an overview of the amendments and practical strategies to prepare for implementation. Future SEC staff interpretation, coupled with developing market practice, will help to further inform these strategies.