SEC Establishes Additional Disclosures for Municipal Securities

The U.S. Securities and Exchange Commission (SEC) yesterday released a final rule that increases HFAs’ and other municipal bond issuers’ disclosure obligations. Issuers and underwriters will have to begin complying with the rule’s requirements 180 days after it is published in the Federal Register, which is expected to be shortly.

The rule amends SEC Rule 15c2-12, which forbids municipal brokers, underwriters, and dealers from purchasing or selling any primary offering of municipal securities that exceeds $1 million unless it can reasonably determine that the issuer of the security has agreed to meet certain disclosure obligations. These obligations include providing annual disclosures and also notifying investors within 10 business days after specific events occur.

The rule establishes two new events that will trigger the 10-day disclosure requirement:

• When an issuer incurs a financial obligation, if material, or any agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, if these are material.
• Certain actions or events related to a financial obligation that “reflect financial difficulties” such as a default, event of acceleration, termination event, or modification of terms.

For the purposes of the rule, financial obligation is defined as a debt obligation or derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation or a guarantee of a debt obligation or derivative. This is a much narrower definition than the SEC suggested in its original proposed version of the rule, which was published in March 2017. The proposed rule also included in its definition leases and any “monetary obligations resulting from judicial, administrative, or arbitration proceedings” incurred by issuers. The new definition appears to reduce the amount of obligations that issuers will be required to disclose.

In its comments on the proposed rule, NCSHA urged SEC to narrow the definition, arguing that the proposed definition would compel HFAs to file disclosures on even routine expenses while providing little valuable information to the market. NCSHA asked that SEC adopt a definition of financial obligation that would allow issuers to easily determine which financial obligations they must disclose and require issuers to disclose only those obligations that are truly relevant to investors.

In addition, NCSHA also recommended that SEC provide more guidance on how to determine whether a financial obligation is “material.” SEC reports in the Final Rule that various industry groups made similar requests in their comments. SEC largely declines to provide such guidance in the Final Rule. Rather, the agency says issuers should consider whether learning of a financial obligation would be important to a reasonable investor when making their investment decisions. The agency also notes that issuers may choose to consider a variety of factors when determining the materiality of a particular financial obligation.

NCSHA also suggested the new disclosure requirements were unnecessary and asked SEC to rescind the proposed rule and consider alternative means for increasing transparency and information-sharing in the municipal bond market. The comments point out that all material financial transactions are already required to be included in issuers’ audited annual financial statements, which issuers are mandated to share in a timely manner. HFAs and other issuers also share other disclosures too, including any changes to their credit ratings or the ratings of their individual bond issuances. SEC acknowledges in the final rule that many commenters advanced this argument but argues that investors are not always aware of such disclosures.

NCSHA will continue to study the rule to determine how it will impact HFA programs. Please reach out to Greg Zagorski with any questions or comments you may have.