https://www.sec.gov/rules/proposed/2017/34-80130.pdf
The proposed amendments would require information be provided about 1. The incurrence and terms of bank loans, direct purchases of securities by banks and other non-publicly offered debt; leases; guaranties; derivative instruments; and monetary obligations resulting from judicial, administrative and arbitration proceeding; and 2. the incurrence of defaults, acceleration and termination events, modification of terms or other similar events with respect to such debt.
A notice of this type was expected because as municipal issuers and conduit borrowers have increasingly turned to bank loans, direct purchases of securities by banks and other non-publicly offered debt, concerns have been raised that there are no requirements for issuers and borrowers to disclose information about this debt. Some municipal market groups, including MSRB, have urged the SEC to add events with respect to non-publicly offered debt to the list of events for which notice must be provided under Rule 15 C2 – 12.
Also predictably, this proposal goes well beyond the bank borrowing disclosure that has been the subject of discussion. As issuers, and on behalf of our conduit borrowers, we need to focus on the impact of the proposed rule and negative consequences, disruptions and burdens. Much more than disclosure concerning bank loans is required in this proposal extending to a broad range of “material financial obligations.” There will also be numerous interpretive questions concerning which financial obligations are material as well as which terms are material to investors. There are also terms in the new proposed requirements that are undefined such as “default”.
- MSRB CUSIP Proposal--
This proposal would require issuers/ MAs to obtain CUSIPs for all competitively bid securities, and expand the obligations for dealers to obtain CUSIPs for new issue private placements of municipal securities, including when they act as a placement agent. The notice also reminds dealers of their current obligations to secure a new CUSIP for secondary market securities.
MINTZ LEVIN BLOG
By CHARLES E. CAREY
On March 15, 2017, the Securities and Exchange Commission (“Commission” or “SEC”) published in the Federal Register for comment proposed amendments to Rule 15c2-12 (the “Rule”) under the Securities Exchange Act of 1934 (“Exchange Act”) that would amend the list of event notices required under the Rule in a manner that, if such amendments are finalized in their proposed form, would likely require issuers of, or “obligated persons” on, publicly offered municipal bonds to provide detailed ongoing disclosure of any new debt, derivatives and other “financial obligations.”
The Rule requires that a broker, dealer, or municipal securities dealer (collectively, “dealers”) acting as an underwriter in a primary offering of municipal securities reasonably determine that an issuer or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the municipal securities, to provide to the Municipal Securities Rulemaking Board (“MSRB”) through the MSRB’s Electronic Municipal Market Access (“EMMA”) system, prompt notice of specified events. The proposed amendments would amend the list of such event notices to include;
· (i) incurrence of a financial obligation of the obligated person, if material, or agreement [by the obligated person] 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
· (ii) 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 proposed amendment provides a broad definition of “financial obligation” which includes: a (i) debt obligation, (ii) lease, (iii) guarantee, (iv) derivative instrument, or (v) monetary obligation resulting from a judicial, administrative, or arbitration proceeding. The “financial obligation” definition excludes traditional municipal bonds which are already covered by the Rule.
In the release accompanying the proposed amendments, the SEC noted that if new financial obligations or new material covenants, events of default or remedies impacted an issuer’s or obligated person’s liquidity and creditworthiness, the credit quality of the issuer’s or obligated person’s outstanding debt could be adversely affected which could impact an investor’s investment decision or other market participant’s credit analysis. Such changes to credit quality could also affect the price of the issuer’s or obligated person’s existing bonds. Items the SEC referenced as potentially material include debt service coverage ratios, rate covenants, additional bond tests, contingent liabilities, events of default, remedies and priority payment provisions (including structural priority such as balloon payments, for example).
The Commission’s accompanying release stated that the event notice of incurrence of a material financial obligation generally should include a description of the material terms of the financial obligation. According to the release, examples of such material terms include the date of incurrence, principal amount, maturity and amortization, and interest rate, if fixed, or method of computation, if variable (and any default rates); the release states that disclosure of other terms may be appropriate as well, depending on the circumstances.
Unless the proposed amendments are pared back following the comment period, they are likely to result in the required disclosure by issuers or obligated persons of municipal bonds subject to the Rule of virtually all new loan agreements with banks or other private lenders, privately placed municipal bond indentures or loan agreements, swap agreements, real estate leases, and material judgments or arbitration rulings, as issuers and obligated persons are unlikely to shoulder the administrative burden and legal risk associated with determinations of which obligations, and which terms of such obligations, are “material” and which are, and will remain in hindsight, clearly immaterial. Similarly, for expense and risk reasons, it is more likely that full legal documents will be disclosed versus substantially redacted or summarized versions.
The proposed amendments do not appear to require disclosure of the termination or satisfaction of financial obligations previously disclosed on EMMA as material events; accordingly they may result in the accumulation over time on EMMA of a variety of lengthy loan agreements, indentures, swap agreements and the like with no clear way for bondholders or brokers accessing EMMA to determine whether the relevant obligations and the related agreements continue in effect. Such overdisclosure may limit the pool of investors with respect to the obligations of the issuer or obligated person, in that brokers responsible under MSRB Rule G-47 for conveying to customers all material information about the security accessible on EMMA may opt not to do so for securities with EMMA postings that include unwieldy amounts of raw legal documents.
Issuers and obligated persons may also deem the requirement to publicly disclose otherwise private transactions adverse to their business interests. Currently, for example, an issuer or obligated person may negotiate different covenants and different covenant levels with different private lenders, without each lender necessarily having access to the covenants of the other lenders. If the amendments require the issuer or obligated person to disclose on EMMA the coverage, days cash on hand, interest rates and other material terms of its private loan arrangements, the result over time may be for each new lender to require, in effect, most favored nation status with covenants and other terms at least as tough as the toughest terms previously agreed to by the applicable issuer or obligated group. Reasonable minds may disagree on whether that should “come with the territory” when an issuer chooses to access the public municipal market, but to date such public disclosure of the details of private transactions has not been required.
The second new event notice, for the occurrence of a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer or obligated person, presents a different judgment call for issuers and obligated persons, as such disclosure is only required if the event “reflects financial difficulties.” Some of the examples cited in the release for subsequent events include monetary or covenant defaults that might result in acceleration of the debt, swap events, such as rating downgrades, which might require the posting of collateral or the payment of a termination payment and changes to the contract rights of the counterparties to financial obligations. Again, it is unlikely that entities subject to such requirements would expend much legal capital on parsing through whether a swap termination event, or even an amendment of loan documents, “reflects financial difficulties”, and the tendency is likely to be towards overdisclosure.
There are additional ambiguities in the proposed amendments. According to the accompanying release, the amendments will only be applicable to continuing disclosure agreements executed after the amendments are finalized, but it is unclear, for example, whether an issuer or obligated person that executes a continuing disclosure agreement governed by the amended Rule will be required to disclose all previously incurred material “financial obligations”, or whether only “financial obligations” incurred following the execution of such an agreement will be subject to such disclosure. The accompanying release does indicate that the required notice of default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation which reflect financial difficulties would apply with respect to financial obligations previously incurred.
Unlike many of the existing events for which event notices are currently required under the Rule, which occur rarely, incurrence of financial obligations occurs regularly for many issuers and obligated persons. Accordingly, these amendments arguably would constitute the broadest expansion to date of the Rule’s continuing disclosure requirements. They are sure to generate many comments from affected parties before they are finalized.
SECURITIES LAW
SEC's Proposed Disclosure Amendments Criticized as too Costly, Burdensome
By Jack Casey
March 16, 2017
“From my perspective, the regulatory creep is like kudzu in the South in the summer, it continues perpetually,” said Ben Watkins, Florida’s director of bond finance.
PALM BEACH GARDENS, Fla. – The Securities and Exchange Commission's proposed amendments to its Rule 15c2-12, which would create numerous new disclosure obligations for issuers, received more criticism on Thursday as market participants noted a lack of specificity in them and the burdens and costs that they would impose on issuers.
Members of the bond community made their comments during various panels and speeches at The Bond Buyer and Bond Dealers of America National Municipal Bond Summit here.
Ben Watkins, Florida's director of bond finance, during a luncheon speech that touched on regulation generally, as well as the amendments, said that the regulators don't "fully appreciate the costs and burdens they impose on the market."
"From my perspective, the regulatory creep is like kudzu in the South in the summer, it continues perpetually," he said, specifically singling out the SEC's Municipal Advisor Rule, the Municipalities Continuing Disclosure Cooperation initiative, and the recently proposed 15c2-12 amendments.
He added that investment banks "are now an elaborate front for compliance departments" because "they're not free to bank anymore" given the regulations imposed in recent years.
"So much time, effort, and energy goes into compliance that that diverts resources that would otherwise be available to deliver intellectual capital and solutions to the issuer community and for the benefit of the market as a whole," Watkins said.
The proposed amendments to 15c2-12 are designed to achieve a goal most municipal participants have supported – helping rating agencies, analysts and others obtain information about bank loans, private placements and other alternatives to publicly offered tax-exempt bonds that issuers and borrowers are increasingly using that fall outside the current 15c2-12 disclosure requirements.
The first new material event notice category would require an issuer or borrower to file a notice if they incur a financial obligation that is material or a financial obligation has an agreement to covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders, if material." The SEC has consistently declined to define materiality, contending it's based on facts and circumstances, but the Supreme Court has said a fact is material if there is a substantial likelihood that a reasonable investor would consider it important.
Financial obligations are defined as "a debt obligation, lease, guarantee, derivative instrument or a monetary obligation resulting from a judicial, administrative or arbitration proceeding."
The second new material event category would require a notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.
Underwriters would have to reasonably determine that an issuer or borrower has agreed to provide notice of such events in its continuing disclosure agreement (CDA). The proposed amendments, if adopted would apply to CDAs entered into in connection with primary offerings occurring on or after the compliance date for the amendments.
Watkins said that it would be best for the SEC to be specific and "give clear and narrow rules that people can follow rather than saying 'all material financial obligations.'"
The broad definition of material financial obligations puts everyone in the position of wondering what the SEC is talking about and what they need to do, Watkins said.
"You spend your time, effort, energy, and money focused on that rather than complying with the rule," he added.
Jessica Kane, director of the SEC's Office of Municipal Securities, said on a panel before Watkins' speech that the new amendments would use the definition of materiality in the same way it is used in the 14 event notices that are already included in 15c2-12. She added that the determination of what is material is something that an issuer or obligated person is in the best position to make based on the relevant elements and circumstances at the time.
Kane said that the SEC expects materiality "is a concept that issuers are familiar with and know how to apply."
Guy Yandel, executive vice president and co-manager of George K. Baum & Company's muni division, participated on Kane's panel and said he thinks the issue of materiality would be "a little different" in the two new event notices if they were approved.
"In all of the 14 previous events, we could counsel our clients that they shouldn't try to make a materiality call, they should just say what they did," Yandel said. "With these, it's a little more difficult because if you were to try to do that, you'd be uploading garbage contracts that municipalities enter into and I don't think that is the intent."
He added that means issuers are no longer going to be able to fall back and say 'we're just going to disclose everything' but will instead have to make a materiality determination.
Kane encouraged industry comments on the proposed amendments at various times during the panel and specifically pointed out that the amendments' proposing release asks a number of questions about whether the definition of financial obligations is the right definition with the right scope.
Watkins said the Government Finance Officers Association will be commenting on the proposal, adding that, in his view, voluntary industry initiatives and best practices coupled with collaborative efforts among stakeholders is "the best way to go" and should precede regulation and enforcement.
However, the SEC and others like financial analysts are still concerned about a lack of information despite past collaboration, GFOA best practices, and other efforts from market participants and regulators to increase voluntary bank loan disclosure.
Bill Oliver, industry and media liaison for the National Federation of Municipal Analysts, said during a separate panel on Thursday that he thinks the SEC generally did "a pretty good job in terms of defining concerns that credit analysts have in terms of disclosing financial obligations that have an impact on how you calculate debt ratios and also the effect on existing bondholders."
NFMA sent a letter to the SEC in August 2016 urging changes to Rule 15c2-12, including expanding the list of material events to include bank loans and other debt obligations.