Last week, the Securities and Exchange Commission proposed Rule Amendments to Improve Municipal Securities Disclosures.  According to the SEC, these rule amendments are intended to “improve investor protection and enhance transparency in the municipal securities market”.  24752961 - grunge rubber stamp with text disclosure,vector illustrationRule 15c2-12 would be amended to add two new event notices:

– 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.

Currently, Rule 15c2-12 under the ’34 Act requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine, among other things, that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (MSRB) timely notice of certain events.  The proposed amendments are aimed to “provide timely access to important information regarding certain financial obligations incurred by issuers and obligated persons that could impact such entities’ liquidity and overall creditworthiness.”

There is a 60 day comment period, so firms that are affected by these new rules and wish to comment should consult with counsel as to the most effective way to provide feedback to the SEC.

Last year, the SEC’s Division of Enforcement launched the “Municipalities Continuing Disclosure Initiative” offering “favorable settlement terms” to municipal issuers and underwriters who self-report continuing disclosure violations.  At that time, it was claimed that there were a lot of problems and that it was expected there would be more such settlements in the future.  See http://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.

Despite the fanfare, the SEC has used pre-packaged settlements in the past, and will most likely continue to do so.  Thus, not really, a year later, much to get excited about.

The new SEC Chairman wants to prosecute those underwriters who recommend municipal issuers who hae “persistent and material” disclosure delinquencies.

In particular, the SEC may apply a stricter interpretation of previous guidelines that it issued for these underwriters.  Such an interpretation would relate to the issuers’ accuracy and completeness pertaining to its disclosures. The SEC may also amend Securities Exchange Act of 1934 Rule 15c2-12, governing broker-dealers and municipal securities dealers disclosure obligations for municipal bond offerings. 

It is likely that there will be no legislative fix, and the SEC may then act accordingly.