On May 15, 2017 Kutak Rock submitted comments to the Securities Exchange Commission on its proposed amendments (the “Proposed Amendments”) to the Municipal Securities Disclosure Rule (Rule 15c2-12) issued under the Securities Exchange Act of 1934. The Proposed Amendments would require issuers or obligated persons to file two new event notices as part of their continuing disclosure obligations (undertaken in a written agreement or contract for the benefit of holders of municipal securities) to the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access (“EMMA”) system.
Specifically, the Proposed Amendments would add the following event notices to Rule 15c2-12:
1. Subparagraph (b)(5)(i)(C)(15) “Incurrence of a financial obligation of the obligated person, if material, or agreements 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
2. Subparagraph (b)(5)(i)(C)(16) “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 Amendments would also include a corresponding amendment to 15c2-12(f) by adding a definition for “financial obligation” as “a debt obligation, lease, guarantee, derivative instrument, or monetary obligation resulting from a judicial, administrative, or arbitration proceeding.” As with the existing event notices, the proposed new event notices would have to be filed within 10 business days after the occurrence of the event.
Our comments, which are available here, reflect reservations related to the SEC’s significant underestimation of the burden imposed on issuers and obligated persons, as well as dealers, and the annual costs of complying with the Proposed Amendments. Of particular concern is the SEC’s broad scope and expansive use of ambiguous terms such as “materiality,” “financial obligation,” “affect” and “financial difficulties” in the Proposed Amendments. Due to the lack of clarity surrounding the term “material” and the limited time in which to make materiality determinations, the Proposed Amendments may result in an unnecessary deluge of event notice filings to EMMA that would provide little meaningful information to the investor regarding the credit worthiness of an issuer or obligated person.
While the firm supports the underlying principles of the Proposed Amendments, we are concerned that if implemented in its current form the Proposed Amendments will not have the desired effect of providing greater transparency to investors. Rather, the Proposed Amendments will impose upon issuers and obligated persons unnecessary compliance burdens and divert precious financial resources away from their mission-oriented programs, which ultimately harm taxpayers and investors.