On May 26, 2010, the Securities and Exchange Commission (“SEC”) approved amendments to Rule 15c2-12 (the “Rule”) under the Securities and Exchange Act of 1934. Among other requirements, the Rule mandates that brokers, dealers, and municipal securities dealers acting as an underwriter in a primary offering of municipal securities of $1,000,000 or more ensure that certain continuing disclosure requirements are set forth in a written agreement of the issuer or obligated person. The recent amendments (1) apply the continuing disclosure requirements to new primary offerings of Variable Rate Demand Obligations (“VRDOs”), (2) include new notice events, (3) remove the materiality requirement for some notice events, and (4) implement a ten business-day timeframe for reporting the occurrence of notice events.
New Primary Offerings of VRDOs Are Now Subject to Continuing Disclosure
Prior to the amendments, new primary offerings of VRDOs that were subject to tender by the holder at least as frequently as every nine months were exempt from the requirements of the Rule. With these amendments, primary offerings of VRDOs are now subject to the continuing disclosure requirements of the Rule. VRDOs outstanding on November 30, 2010 are exempt from the new disclosure requirements, so long as such securities are in denominations of $100,000 or more and remain subject to tender at least every nine months.
New Events That Must Be Disclosed
The amendments add new events for which a disclosure notice must be provided and expand the notice event concerning tax status of the bonds. The new notice events are (1) tender offers, (2) bankruptcy, insolvency, receivership, or similar events, (3) consummation of mergers, consolidations, acquisitions, or asset sales, or entry into or termination of a definitive agreement related to do the same, if material, and (4) appointment of a successor or additional trustee or a change in the name of the trustee, if material. With respect to the tax status of the security, the Rule, as amended, now requires disclosure of adverse tax opinions, issuance by the IRS of proposed or final determinations of taxability and other material notices, and determinations or events affecting the tax status of the bonds (including a Notice of Proposed Issue).
Change in the Materiality Requirement
Prior to the amendments, disclosure was only required if the event was material. The amendments eliminate the materiality requirement for certain notice events. For those events where the materiality requirement was eliminated, the SEC believes that such events are of significant importance to investors and must always be disclosed.
The notice events now subject to disclosure in all circumstances are:
- principal and interest payment delinquencies
- unscheduled draws on debt service reserves reflecting financial difficulties
- unscheduled draws on credit enhancement reflecting financial difficulties
- substitution of credit or liquidity providers, or their failure to perform
- Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security
- tender offers
- defeasances
- ratings changes
- bankruptcy, insolvency, receivership or similar event of the obligated person
The following notice events remain subject to a materiality condition:
- non-payment related defaults
- modifications of rights of securities holders
- bond calls
- release, substitution, or sale of property securing repayment of the securities
- the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms
- appointment of a successor or additional trustee or the change of name of a trustee
Ten Business-Day Requirement
The amendments also impose a time period for notice of the above-described events. Previously, the underwriter was required to “reasonably determine” that the issuer or obligated person had undertaken in a continuing disclosure agreement to provide event notices to the MSRB in a “timely manner.” As amended, the Rule specifies that event notices must be provided “in a timely manner not in excess of ten business days after the occurrence of the event.”
Summary
Participating underwriters need to ensure that the continuing disclosure agreements executed in connection with their transactions cover the amendments discussed above. The amendments become effective for primary offerings on or after December 1, 2010.