SEC votes in favor of enhancing municipal securities disclosure

By Jennifer Chiou

New York, July 15 - The Securities and Exchange Commission announced that it voted unanimously to propose rule amendments to improve the quality and timeliness of municipal securities disclosure.

According to an SEC release, the proposed amendments to SEC Rule 15c2-12 would help investors make more knowledgeable investment decisions, effectively manage and monitor their investments and avoid fraud.

The SEC added that the proposed amendments would also assist broker-dealers in carrying out their responsibilities under the securities laws.

"Currently, there is a disparity between the level of information available to investors in municipal securities versus information available to investors in corporate securities," SEC chairman Mary Schapiro said in the release.

"These proposals would help investors make more knowledgeable investment decisions about municipal securities, while at the same time enabling broker-dealers to satisfy their obligations with respect to municipal securities."

Because municipal securities, such as municipal bonds, are exempt from the disclosure requirements of the federal securities laws, the SEC adopted Rule 15c2-12 in 1989, which was designed to foster greater transparency in the municipal securities market.

SEC noted that Rule 15c2-12 prohibits brokers, dealers and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments.

Specifically, the commission voted to propose amendments that would expand the rule to cover additional municipal securities. When it was first adopted, the rule specifically did not apply to certain securities commonly known as variable-rate demand obligations.

Under the proposed amendment, the rule would apply to those securities.

The changes would also require disclosure of events that may adversely affect a bond's tax exemption, including issuance by the IRS of proposed and final decisions about whether the bond can be taxed.

Under the existing rule, an underwriter must have a reasonable belief that the state or local government that issued municipal bonds has agreed to provide ongoing, continuing disclosure of certain important events.

The rule now provides that notice of all of the listed events need be made only "if material."

The SEC said that the proposal would eliminate the need for a materiality determination and simply require that the following events be disclosed in a notice: (1) failure to pay principal and interest; (2) unscheduled payments out of debt service reserves reflecting financial difficulties; (3) unscheduled payments by parties backing the bonds, reflecting financial difficulties, or a change in the identity of parties backing the bonds or their failure to perform; (4) defeasances, including situations where the issuer has provided for future payment of all obligations under a bond; and (5) rating changes.

According to the release, the proposed amendment would also increase the number of events to include (1) tender offers; (2) bankruptcy, insolvency, receivership or similar proceeding; (3) mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination; and (4) appointment of a successor or additional trustee or the change of the name of a trustee, if material.

The proposed amendment would further require that notices of the events listed in the rule be disclosed no more than 10 business days after the event, instead of the current wording that reads "in a timely manner."

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