Since the first municipal debt obligation was issued, capital projects in the public sector have increased in size and complexity. Economic events, shifting investor access, and a proliferation of complex derivative municipal securities led the U.S. Securities and Exchange Commission (SEC) to establish Rule 15c2-12 under the 1934 Exchange Act in 1989. There have been several amendments made to the rule since then.
While well-intentioned, the added requirements of this rule cause headaches for issuers to maintain and manage continuing disclosure. In this article, you’ll learn what continuing disclosure is, why it gets so complicated, who are the parties involved, and best practices to keep track of required municipal security disclosures.
Definition: What is SEC Rule 15c2-12?
The U.S. Securities and Exchange Commission’s (SEC) Rule 15c2-12 requires an underwriter in a primary offering of municipal securities to reasonably determine that an issuer or obligated person has entered into a continuing disclosure agreement (CDA). A continuing disclosure agreement commits an issuer and/or obligated person to provide certain information to the Municipal Securities Rulemaking Board (MSRB) on an ongoing basis concerning the occurrence of specified events pertaining to the issuer or the securities.
Why is Continuing Disclosure Important?
Due to the growing complexity of the Municipal Securities Market, Rule 15c2-12 and its amendments are designed to bring broader market transparency to institutional and individual investors. By mandating CDAs, the rule provides more information in the muni bond market to allow investors to make informed decisions when buying and selling municipal bonds.
What do Municipal Issuers Need to Disclose?
Publicly issued debt will include a Continuing Disclosure Agreement that states, per Rule 15c2-12, that an issuer must disclose information including:
- Annual Financial Information and Operating Data
- Audited Financial Statements
- Material Event Disclosures
Additional disclosure requirements may be detailed in the agreement. However, the volume of additional requirements varies greatly throughout the market and is dependent on the perceived risk of the borrower, the type of credit, and potentially the borrower’s disclosure history. A new Debt Manager could walk into an organization that has historically complex covenants, borrowing instruments, types of credit, and/or tax treatment. This could lead to more frequent occurrences of material events and/or numerous annual, or even quarterly, filings.
On the other hand, privately placed debt will be issued with its own unique disclosure agreement that can have its own version of “events to disclose” and annual, quarterly, or even monthly, filing requirements. This is why disclosure can range from simple annual filings to constant complex monthly filings.
There are two types of material events that must be disclosed in a timely manner – the "primary" events and the "secondary" events. Let’s dive into the 16 primary event disclosures.
16 Primary Event Disclosures Required by SEC Rule 15c2-12
According to the MSRB, the 16 primary event disclosures specified by the SEC include the events below as of February 2019:
- Principal and interest payment delinquencies - any failure to make principal or interest payments on time
- Non-payment related defaults - reporting any other default, event of accelerations, modification of terms, termination event, or similar events under the bond’s official agreement
- Unscheduled draws on debt service reserves reflecting financial difficulties - any unscheduled withdrawals from the debt service reserve fund due to financial hardship
- Unscheduled draws on credit enhancements reflecting financial difficulties - letters of credit or insurance policies
- Substitution of credit or liquidity providers, or their failure to perform - must inform investors of any lender or failure to provide a required tender option
- Adverse tax opinions or events affecting the tax-exempt status of the security - any event that might adversely affect the tax-exempt status of the bonds or the interest on them
- Modifications to rights of security holders - any changes to the investor’s control of the bond
- Bond calls and tender offers - repurchasing a specified number of bonds at a particular price and specified time
- Defeasances - refunding transaction or making the bond void by cash equivalents
- Release, substitution, or sale of property securing repayment of the securities - changes in any asset that is used to secure repayment
- Rating changes - updates in the issuer's or obligated person’s credit rating
- Bankruptcy, insolvency, or receivership - legal proceeding initiated when an organization is unable to repay outstanding debts or obligations
- Merger, acquisition, or sale of all issuer assets - if a government or school sells everything it owns
- Appointment of successor trustee - change in the name of the trustee
- Financial obligation – incurrence or agreement (as of February 27, 2019) - a debt obligation, derivative instrument, or guarantee in connection with any existing debt obligation that is pledged as a source of payment
- Financial obligation – event reflecting financial difficulties (as of February 27, 2019) - 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.
How/Where Should CDAs be disclosed?
A Continuing Disclosure Agreement will detail where the disclosure requirements must be submitted, posted, or sent. If disclosures must be provided to specific recipients, an issuer must keep track of the points of contact for each agreement. Disclosures related to publicly issued debt must be posted to the MSRB’s online database, EMMA. Issuers may post to EMMA themselves or they may hire a Dissemination Agent, to assist in the legality and organization of their continuing disclosure, who may compile these reports and post to EMMA on behalf of the issuer.
How Does the Financial Data Transparency Act Impact Continuing Disclosure?
Issuers and associated professionals are patiently waiting to hear the result and impending ramifications of the SEC’s new Financial Data Transparency Act (FDTA), namely, its impact on Continuing Disclosure requirements.
The FDTA is a financial reporting standard that will be required by 2027 with the purpose of standardizing the financial data that is being disclosed by municipal issuers so that the aggregate market data can be more easily analyzed. For issuers, this creates additional rules on when, and how their disclosure requirements are submitted.
The bottom line: The FDTA does not change the substance or content of continuing disclosure as we know it today. It only changes the structuring of submissions that will need to be in a machine-readable format.
It’s Time to Automate Continuing Disclosure
For public sector issuers, the stakes are high around continuing disclosure because failure to fulfill disclosure requirements on time constitutes a technical default and can negatively impact an entity’s credit rating and ultimately its cost of borrowing. With growing complexity and an increase of stakeholders involved, managing disclosure requirements can be a confusing and frustrating process. Shifting from spreadsheets to debt management software can help issuers streamline continuing disclosure and keep their investors informed. After all, a strong track record of on-time and comprehensive disclosure helps issuers attract and retain investors, lowers their cost of borrowing, and improves their access to capital markets.
To learn more about how you can simplify Continuing Disclosure with DebtBook’s Debt Management Solution, schedule a demo today.
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