The Securities and Exchange Commission (the "SEC") recently sent a clear message to participants in the municipal markets: it intends to require a greater level of disclosure, and more timely disclosure, regarding an obligated person's incurrence of debt and other financial obligations. The SEC's recent actions signal that it expects more detail about the terms of any material non-public transactions that could trigger events of default and cross-defaults for investors. Those terms include covenants and events of default. The SEC's Rule 15c2-12 (the "Rule") generally requires underwriters of municipal securities to obtain an agreement from "obligated persons" to provide, among other things, timely notice of certain events listed in the rule ("Listed Events"). "Obligated persons" include governmental issuers and nonprofit organizations that have borrowed proceeds of securities from a governmental issuer. On March 1, 2017, the SEC proposed to amend the Rule, the first significant revisions since 2010.¹

The proposed amendment (the "Proposed 2017 Amendment") modifies the Listed Events to include two new items:

• "the incurrence of a material financial obligation or any agreement to certain covenants, events of default, remedies, priority rights or other terms that could affect securities holders; and

• defaults, events of acceleration, termination events or modifications of the terms or other similar events under the terms of the financial obligation of the obligated person that reflect financial difficulties."

Financial Obligations

The term "financial obligation" is broadly defined in the Proposed 2017 Amendment to mean "a (i) debt obligation, (ii) lease, (iii) guarantee, (iv) derivative instrument, or (v) monetary obligation resulting from a judicial, administrative, or arbitration proceeding. The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule."

Implications of the Proposed 2017 Amendment

If the SEC adopts the Proposed 2017 Amendment, obligated persons will need to consider what level of detail is appropriate to describe their financial obligations, as well as the related covenants and events of default. Historically, many obligated persons have not provided detailed summaries of covenants and events of default in non-public transactions with lenders and swap providers, since those provisions can be re-negotiated by the parties to the arrangement, and the obligated person's bondholders have no rights with respect to those covenants and/or events of default.

In the SEC's commentary that accompanies the Proposed 2017 Amendment, the SEC noted its belief that "the proposed amendments would facilitate investors' and other market participants' access to important information in a timely manner and help to enhance transparency in the municipal securities market and improve investor protection."

The SEC is particularly concerned that investors may not have access or timely access to disclosure about non-public transactions, which could lead to investors making investment decisions without the ability to understand the obligated person's total debt obligations, as well as any cross-default risk if those non-public transactions include more restrictive covenants than those included in the publicly offered debt.

The SEC is also concerned that investors do not have access or timely access to disclosures regarding the occurrence of events that reflect financial difficulties (for example, defaults, events of acceleration, termination event, modifications of terms or other similar events).

The SEC's actions here are consistent with concerns that it raised in 2012 with its Report on the Municipal Securities Market (the "2012 Municipal Report").² In that 2012 Municipal Report, the SEC recommended that the Rule be amended to mandate more specific types of secondary market disclosure, including disclosure relating to new indebtedness (whether or not such debt is subject to the Rule and whether or not arising as a result of a municipal securities issuance).³

Next Steps

The SEC is seeking public comment on the Proposed 2017 Amendment for a period of sixty days from the date of publication (March 1, 2017). While the SEC may modify certain portions of the Proposed 2017 Amendment in response to these public comments, it is clear that the SEC intends to take some action to require a greater level of disclosure, and more timely disclosure, regarding an obligated person's incurrence of debt and other financial obligations.

^{1Under the 2010 revisions, the SEC modified and expanded the "listed events" that must be reported by an obligated person, and required that the obligated person provide notice of any such event within 10 business days of its occurrence.}

^{2Securities and Exchange Commission, Report on the Municipal Securities Market (July 31, 2012).}

^{3Id. at 139-40.}