Beginning February 27, 2019, municipal market issuers and obligated persons must add the following two new events—relating to their indebtedness and financial health—to the list of reportable events in their continuing disclosure undertakings:

  • The 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 obligated person, any of which affect security holders, if material; and
  • A default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.

The two new event-reporting requirements are the result of amendments recently approved by the Securities and Exchange Commission (SEC) to SEC Rule 15c2-12 (the Amended Rule) and will require issuers and other obligated persons to post new notices in a timely manner to the municipal market through the Electronic Municipal Market Access (EMMA) website, which is maintained by the Municipal Securities Rulemaking Board (MSRB).

The Amended Rule defines "financial obligation" as a (i) a debt obligation; (ii) a 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) a guarantee of either (i) or (ii). The definition of "financial obligation" was narrowed in the Amended Rule from the definition initially proposed by the SEC after the SEC received numerous comments from issuers and other market participants noting the overly broad reach of the SEC's proposed definition. In the Amended Rule, the SEC eliminated a "monetary obligation resulting from a judicial, administrative, or arbitration proceeding" from the definition of "financial obligation." Regarding leases, the SEC also narrowed the scope of the proposed rule and provided guidance that the term "debt obligation" under the Amended Rule only includes lease agreements entered into by issuers and obligated persons to borrow money.

The SEC declined, once again, to provide specific guidance to market participants regarding materiality standards under the Amended Rule. Instead, the SEC will evaluate an issuer's or obligated person's disclosures under the Amended Rule using a "facts-and-circumstances" approach requiring issuers and obligated persons to "consider whether a financial obligation or the terms of a financial obligation, if they affect security holders, would be important to a reasonable investor when making an investment decision."

Several commenters suggested that the Amended Rule should eliminate from the current list of reportable events certain outdated requirements, such as EMMA notices of changes to a bond's rating. Rating agencies feed current ratings to the EMMA website on an almost real-time basis, so notices from municipal market issuers and obligated persons are duplicative and not as timely as the ratings provided directly by rating agencies. The SEC also declined to address such concerns in the Amended Rule.

Direct lending by banks to issuers and obligated persons has increased dramatically over the past decade, and the Amended Rule, in large part, seeks to address a perceived lack of investor access to information about direct placements and bank loans entered into by issuers and obligated persons—the terms of which may adversely affect bondholders. The MSRB frequently encouraged issuers and obligated persons to voluntarily disclose bank loan and alternative financing information on EMMA in recent years, but relatively few such voluntary filings have been made to date.

Municipal market issuers and obligated persons who enter into new continuing disclosure undertakings subject to the Amended Rule (i.e., on or after February 27, 2019) should update their disclosure policies and procedures to add the two new events, and train the officials who are responsible for making the related materiality and financial difficulty determinations. Similar to other event-disclosure requirements, the SEC does not mandate a form for the new event disclosures under the Amended Rule. Therefore, municipal market issuers and other obligated persons will have to determine whether to post on EMMA a summary of the key terms of a financial obligation—such as a bank loan—or instead post relevant documents or portions of documents. Those issuers and obligated parties who may have a significant number of material financial obligations and who may be planning a municipal market financing on or after February 27, 2019, should assess and document those financial obligations to prepare themselves for necessary updating of events, such as amendments, or extensions thereof.

As the SEC does not have direct regulatory authority over municipal market issuers and obligated persons, it indirectly regulates them using its authority over underwriters. Underwriters subject to the Amended Rule will be required to ensure the two new events appear in an issuer's or obligated person's continuing disclosure undertakings entered into on and after the compliance date for the Amended Rule. The two new events should also be added to a municipal underwriter's due diligence review of an issuer's or obligated person's compliance with its past continuing disclosure agreements, as applicable.

A full copy of the SEC Release published today in the Federal Register can be found here.

Ballard Spahr's Municipal Securities Regulation and Enforcement Group helps municipal market participants navigate a rapidly evolving regulatory, investigative, and enforcement environment, enabling them to anticipate and address compliance issues and respond effectively to investigations when necessary.

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