Amendments to Municipal Securities Disclosure

Federal RegisterAug 31, 2018

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-83885; File No. S7-01-17]

RIN 3235-AL97

Amendments to Municipal Securities Disclosure

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission” or “SEC”) is adopting amendments to the Municipal Securities Disclosure Rule under the Securities Exchange Act of 1934 (“Exchange Act”). The amendments add transparency to the municipal securities market by increasing the amount of information that is publicly disclosed about material financial obligations incurred by issuers and obligated persons. Specifically, the amendments revise the list of event notices that a broker, dealer, or municipal securities dealer (each a “dealer,” and collectively, “dealers”) acting as an underwriter (“Participating Underwriter”) in a primary offering of municipal securities with an aggregate principal amount of $1,000,000 or more (subject to certain exemptions set forth in the Rule) (an “Offering”) must 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”).

DATES:

Effective Date:

October 30, 2018.

Compliance Date:

February 27, 2019.

FOR FURTHER INFORMATION CONTACT:

Rebecca Olsen, Acting Director; Ahmed Abonamah, Senior Counsel to the Director; Mary Simpkins, Senior Special Counsel; Hillary Phelps, Senior Counsel; or William Miller, Attorney-Adviser; Office of Municipal Securities, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-6628 or at (202) 551-5680.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to 17 CFR 240.15c2-12 (“Rule 15c2-12” or “Rule”) under the Securities Exchange Act of 1934. The amendments (a) amend the list of events for which notice is to be provided to include (i) incurrence of a financial obligation of the obligated person, if material, or agreement 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; and (b) define the term “financial obligation” to mean a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) a guarantee of (i) or (ii). 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.

I. Executive Summary

II. Background

III. Description of the Amendments to Rule 15c2-12

A. Introduction

1. Incurrence of a Financial Obligation of the Obligated Person, if Material, or Agreement 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

i. Materiality

a. Use of Materiality Standard

b. Guidance

c. Burden of Materiality Determinations

d. Materiality and a Series of Related Financial Obligations

ii. Incurrence of a Financial Obligation

iii. Form of Event Notice

2. “Financial Obligation”

i. Debt Obligation

ii. Derivative Instrument Entered Into in Connection With, or Pledged as Security or a Source of Payment for, an Existing or Planned Debt Obligation

iii. Guarantee of a Debt Obligation or a Derivative Entered Into in Connection With, or Pledged as Security or a Source of Payment for, an Existing or Planned Debt Obligation

iv. Monetary Obligation Resulting From a Judicial, Administrative, or Arbitration Proceeding

v. Exclusion of Municipal Securities as to Which a Final Official Statement Has Been Provided to the MSRB Consistent With Rule 15c2-12 From Definition of “Financial Obligation”

3. 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

i. Default

ii. Modification of Terms

iii. Other Similar Events

iv. Reflect Financial Difficulties

v. Scope of Financial Obligations Subject to Paragraph (b)(5)(i)(C)(

)

B. Technical Amendment

C. Compliance Date and Transition

IV. Paperwork Reduction Act

A. Summary of Collection of Information

1. Collection of Information Prior to Amendments

2. Proposed Amendments to Rule 15c2-12

3. Adopted Amendments to Rule 15c2-12

B. Use of Information

C. Respondents

D. Total Annual Reporting and Recordkeeping Burden

1. Dealers

i. Amendments to Events To Be Disclosed Under a Continuing Disclosure Agreement

a. Estimates in Proposing Release

b. Comments Received

c. Revised Estimates of Burden

ii. One-Time Paperwork Burden

iii. Total Annual Burden for Dealers

2. Issuers

i. Amendments to Event Notice Provisions of the Rule

ii. Total Burden on Issuers for Amendments to Event Notices

iii. Comments Related to Estimated Paperwork Burden on Issuers

iv. Total Burden for Issuers

3. MSRB

4. Total Burden for Dealers Effecting Transactions in the Secondary Market

5. Annual Aggregate Burden for Amendments to Rule 15c2-12

E. Total Annual Cost

1. Dealers and the MSRB

2. Issuers

F. Retention Period of Recordkeeping Requirements

G. Collection of Information Is Mandatory

H. Responses to Collection of Information Will Not Be Kept Confidential

V. Economic Analysis

A. Introduction

B. Economic Baseline

1. The Current Municipal Securities Market

2. Rule 15c2-12

3. MSRB Rules

4. GASB Statement No. 88

5. Federal Tax Law Changes

6. Existing State of Efficiency, Competition, and Capital Formation

C. Benefits, Costs and Effects on Efficiency, Competition, and Capital Formation

1. Anticipated Benefits of Rule 15c2-12 Amendments

i. Benefits to Investors

ii. Benefits to Issuers or Obligated Persons

iii. Benefits to Rating Agencies and Municipal Analysts

2. Anticipated Costs of the Rule 15c2-12 Amendments

i. Costs to Issuers and Obligated Persons

ii. Costs to Dealers

iii. Costs to Lenders

iv. Costs to the MSRB

3. Effects on Efficiency, Competition, and Capital Formation

D. Alternative Approaches

1. Voluntary Disclosures

2. Alternative Timeline

3. Relief for Small Issuers and Obligated Persons

4. Adopt as Proposed, the Broader Definition of Financial Obligation

VI. Regulatory Flexibility Certification

VII. Statutory Authority

Text of Rule Amendments

I. Executive Summary

In March 2017, the Commission published for comment proposed amendments to Exchange Act Rule 15c2-12

designed to facilitate investors' and other market participants'

access to important information in a timely manner, help enhance transparency in the municipal securities market, and improve investor protection.

The proposed amendments would have amended the list of event notices that a dealer acting as a Participating Underwriter in an Offering must 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 (“continuing disclosure agreement”), to provide to the MSRB. Specifically, the proposed amendments would have amended the list of events for which notice is to be provided to include: (i) Incurrence of a financial obligation of the obligated person, if material, or agreement 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.

See

17 CFR 240.15c2-12(a), (b)(5)(i), (b)(5)(i)(C).

Other market participants include dealers, analysts, and vendors of information regarding municipal securities. Though investors and dealers are the intended beneficiaries of improved access to information about the financial obligations of issuers and obligated persons, the Commission expects that both groups will also benefit indirectly due to the improved ability of analysts and vendors of information regarding municipal securities to access this information.

See

Exchange Act Release No. 80130 (Mar. 1, 2017), 82 FR 13928 (Mar. 15, 2017) (“Proposing Release”). The comment period for the proposed amendments expired on May 15, 2017.

In addition, the Commission proposed a definition of the term “financial obligation.” As proposed, the term financial obligation would have meant a (i) debt obligation; (ii) lease; (iii) guarantee; (iv) derivative instrument; and (v) monetary obligation resulting from a judicial, administrative, or arbitration proceeding. The term financial obligation would not have included municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule.

The Commission also proposed a technical amendment to paragraph (b)(5)(i)(C)(

) of the Rule.

The Commission proposed a technical amendment to paragraph (b)(5)(i)(C)(

) of the Rule to remove the term “and” since new events were proposed to be added to paragraph (b)(5)(i)(C) of the Rule.

A wide range of commenters sent comment letters

to the Commission in response to the proposed amendments. Commenters included issuers, dealer associations, investor associations, attorneys, organizations representing industry participants, the SEC Investor Advisory Committee (“IAC”), the MSRB, and others. While commenters generally supported enhanced transparency in the municipal securities market, many encouraged the Commission to consider narrowing the scope of the proposed amendments to avoid overburdening market participants. Common themes raised in the comment letters include: (i) The perceived vague meaning and overly broad scope of the term “financial obligation”; (ii) the desire for additional guidance with respect to the materiality qualifier in paragraph (b)(5)(i)(C)(

) of the Rule; and (iii) the anticipated burdens and costs associated with complying with the proposed amendments. In addition, the IAC stated its support for the central purpose of the proposed amendments to Rule 15c2-12 and encouraged the Commission to work toward passage of the amendments after considering comments received.

See

SEC Comments on Proposed Rule: Proposed Amendments to Exchange Act Rule 15c2-12,

available at https://www.sec.gov/comments/s7-01-17/s70117.htm

SEC Investor Advisory Committee, Recommendation of Market Structure Subcommittee of IAC: Select Enhancements to Protect Retail Investors in Municipal and Corporate Bonds (June 5, 2018) (“IAC Recommendation”) (adopted by the IAC on June 14, 2018),

available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-market-structure-subcommittee-recommendation.pdf

The Commission has carefully considered all of the comments and, as discussed below, is adopting the amendments substantially as proposed, with some modifications to address issues raised by commenters.

The amendments address the need for timely disclosure of important information related to an issuer's or obligated person's financial obligations. The Commission believes that the amendments will facilitate investors' and other market participants' access to important information in a timely manner, enhance transparency in the municipal securities market, and improve investor protection. For the reasons discussed in this Adopting Release, the Commission believes that the amendments are consistent with the Commission's mandate to, among other things, adopt rules reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices in the municipal securities market.

15 U.S.C. 78

(c).

II. Background

Rule 15c2-12 is designed to address fraud by enhancing disclosure in the municipal securities market by establishing standards for obtaining, reviewing, and disseminating information about municipal securities by their underwriters.

In 1989, the Commission adopted paragraphs (a) and (b)(1) through (4) of Rule 15c2-12

to require dealers acting as Participating Underwriters in Offerings to obtain, review, and distribute to potential customers copies of the issuer's official statement.

In 1994, the Commission adopted paragraph (b)(5) of the Rule,

which became effective in 1995, and was amended in 2008

and 2010.

Paragraph (b)(5) of the Rule prohibits a Participating Underwriter from purchasing or selling municipal securities covered by the Rule in an Offering unless the Participating Underwriter has reasonably determined that an issuer or obligated person

municipal securities has undertaken in a continuing disclosure agreement to provide specified information to the MSRB in an electronic format as prescribed by the MSRB.

The information to be provided consists of: (i) Certain annual financial and operating information and audited financial statements, if available (“annual filings”);

(ii) timely notices of the occurrence of certain events (“event notices”);

and (iii) timely notices of the failure of an issuer or obligated person to provide required annual financial information on or before the date specified in the continuing disclosure agreement (“failure to file notices”).

See

Exchange Act Release No. 34-26985 (June 28, 1989), 54 FR 28799 (July 10, 1989) (“1989 Adopting Release”). For additional information relating to the history of the Rule,

see

Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590 (Nov. 17, 1994) (“1994 Amendments Adopting Release”), Exchange Act Release No. 34-59062 (Dec. 5, 2008), 73 FR 76104 (Dec. 15, 2008) (“2008 Amendments Adopting Release”), and Exchange Act Release No. 34-62184A (May 27, 2010), 75 FR 33100 (June 10, 2010) (“2010 Amendments Adopting Release”).

See

1989 Adopting Release,

supra

note 8.

See

17 CFR 240.15c2-12(b).

See

1994 Amendments Adopting Release,

supra

note 8.

See

2008 Amendments Adopting Release,

supra

note 8.

See

2010 Amendments Adopting Release,

supra

note 8. The 2010 Amendments (a) require Participating Underwriters to reasonably determine that an issuer or obligated person has agreed to provide event notices in a timely manner not in excess of ten business days after the event's occurrence; (b) include new events for which a notice is to be provided; (c) modify the events that are subject to a materiality determination before triggering a requirement to provide notice to the MSRB; and (d) revise an exemption for certain offerings of municipal securities with put features. The Commission also provided interpretive guidance on Participating Underwriter responsibilities under the antifraud provisions of the federal securities laws in response to market participants' concerns that some issuers and obligated persons were not consistently submitting continuing disclosure documents in accordance with the undertakings made in their continuing disclosure agreements.

The term “obligated person” means any person, including an issuer of municipal securities, who is either generally or through an enterprise

fund, or account of such person committed by contract or other arrangements to support payment of all, or part of the obligations of the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities). 17 CFR 240.15c2-12(f)(10).

On December 5, 2008, the Commission adopted amendments to Rule 15c2-12 to provide for the Electronic Municipal Market Access (“EMMA”) system. EMMA is established and maintained by the MSRB and provides free public access to disclosure documents. The 2008 Amendments designated the EMMA system as the single centralized repository for the electronic collection and availability of continuing disclosure information about municipal securities. The 2008 Amendments require the Participating Underwriter to reasonably determine that the issuer or obligated person has undertaken in its continuing disclosure agreement to provide continuing disclosure documents: (i) Solely to the MSRB; and (ii) in an electronic format and accompanied by identifying information, as prescribed by the MSRB.

See

2008 Amendments Adopting Release,

supra

note 8.

See also

Exchange Act Release No. 34-58255 (July 30, 2008), 73 FR 46138 (Aug. 7, 2008) (“2008 Proposing Release”). The 2008 Amendments became effective on July 1, 2009.

See

17 CFR 240.15c2-12(b)(5)(i)(A) and (B).

See

17 CFR 240.15c2-12(b)(5)(i)(C). Under the Rule prior to these amendments, the following events require notice in a timely manner not in excess of ten business days after the occurrence of the event: (1) Principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security; (7) modifications to rights of security holders, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the obligated person; (13) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, Rule 15c2-12(d) provides full and limited exemptions from the requirements of Rule 15c2-12.

See

17 CFR 240.15c2-12(d).

See

17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event notices, and failure to file notices are referred to collectively herein as “continuing disclosure documents.”

In July 2012, the Commission issued a Report on the Municipal Securities Market, following a broad review of the municipal securities market that included a series of public field hearings and numerous meetings with market participants.

The 2012 Municipal Report states, among other things, that the Commission could consider further amendments to Rule 15c2-12 to mandate more specific types of secondary market event disclosures, including disclosure relating to new indebtedness (whether or not such debt is subject to Rule 15c2-12 and whether or not arising as a result of a municipal securities issuance).

The Commission further stated that market participants raised concerns that issuers and obligated persons may not properly disclose the existence or the terms of bank loans, particularly when the terms of the bank loans may affect the payment priority from revenues in a way that adversely affects bondholders.

See

Securities and Exchange Commission, Report on the Municipal Securities Market (July 31, 2012) (“2012 Municipal Report”),

available at https://www.sec.gov/news/studies/2012/munireport073112.pdf.

Id.

Currently, the municipal securities market has over $3.844 trillion in principal outstanding.

At the end of the first quarter of 2018, individuals held, either directly or indirectly through mutual funds, money market funds, closed-end funds, and exchange-traded funds, approximately $2.587 trillion of outstanding municipal securities (over 65 percent of the total amount outstanding).

According to the MSRB, approximately $2.98 trillion of municipal securities were traded in 2017 in approximately 9.89 million trades.

There are approximately 50,000

state and local issuers of municipal securities, ranging from villages, towns, townships, cities, counties, territories, and states, as well as special districts, such as school districts and water and sewer authorities.

Municipal securities defaults historically have been rarer than those involving corporate and foreign government bonds.

Nevertheless, six of the seven largest municipal bankruptcy filings in U.S. history have occurred since 2011,

and some issuers and obligated persons continue to experience declining fiscal situations and steadily increasing debt burdens.

These defaults may negatively impact investors in ways other than non-payment, including delayed payments and pricing disruptions in the secondary market.

See

Federal Reserve Board, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts (First Quarter 2018) (June 7, 2018),

available at https://www.federalreserve.gov/releases/z1/20180308/z1.pdf.

See id.

As of the first quarter of 2018, the amount of municipal securities held directly by the household sector was $1.64 trillion and mutual funds, money market funds, closed-end funds, and exchange-traded funds collectively held $946.4 billion.

See

MSRB,

2017 Fact Book

(Mar. 18, 2018),

available at http://www.msrb.org/~/media/Files/Resources/MSRB-Fact-Book-2017.ashx?la=en.

See

MSRB,

Self-Regulation and the Municipal Securities Market

(Jan. 2018),

available at http://www.msrb.org/Market-Topics/~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx.

See

Registration of Municipal Advisors, Exchange Act Release No. 34-70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013).

See

2012 Municipal Report,

supra

note 19 (citing Moody's,

The U.S. Municipal Bond Rating Scale: Mapping to the Global Rating Scale and Assigning Global Scale Ratings to Municipal Obligations

(Mar. 2007),

available at https://www.moodys.com/sites/products/DefaultResearch/102249_RM.pdf

; and

Report to Accompany H.R. 6308,

H.R. Rep. No. 110-835, at section 205 (Feb. 14, 2008),

available at https://www.gpo.gov/fdsys/pkg/CRPT-110hrpt835/html/CRPT-110hrpt835.htm

The six largest municipal bankruptcies, ranked by amount of debt, are Puerto Rico, in 2017 ($73 billion in debt); Detroit, Michigan, in 2013 ($18 billion in debt); Jefferson County, Alabama, in 2011 ($4.2 billion in debt); Orange County, California, in 1994 ($2.0 billion in debt); Stockton, California, in 2012 ($1.0 billion in debt); and San Bernardino, California, in 2012 ($492 million in debt).

See Detroit's Bankruptcy Is the Nation's Largest,

N.Y. Times (July 18, 2013),

available at http://www.nytimes.com/interactive/2013/07/18/us/detroit-bankruptcy-is-the-largest-in-nation.html; see also

Mary Williams Walsh,

Puerto Rico Declares a Form of Bankruptcy,

N.Y. Times (May 3, 2017),

available at https://www.nytimes.com/2017/05/03/business/dealbook/puerto-rico-debt.html.

E.g.,

City of Hartford, Connecticut.

See

Jenna Carlesso,

State Leaders: Hartford Bailout Imminent,

Hartford Courant (Feb. 9, 2018),

available at http://www.courant.com/community/hartford/hc-news-hartford-oversight-board-20180208-story.html.

See

2012 Municipal Report,

supra

note 19.

As the Commission discussed in the Proposing Release, in recent years issuers and obligated persons have increasingly used direct purchases of municipal securities

and direct loans

(collectively, “direct placements”) as alternatives to public offerings of municipal securities.

Despite continued efforts by market participants to encourage disclosure of certain financial obligations, the MSRB has stated that the number of actual disclosures made is limited.

The Commission believes that investors and other municipal market participants should have access to continuing disclosure information regarding financial obligations to improve their ability to analyze their investments and, ultimately, make more informed investment decisions. Access to continuing disclosure information also furthers the Commission's original intent behind adopting Rule 15c2-12, which was to prevent fraudulent, deceptive, or manipulative acts or practices in the municipal securities market.

Accordingly, the Commission believes that amendments to the Rule requiring a Participating Underwriter in an Offering to reasonably determine that an issuer or an obligated person has undertaken, in a continuing disclosure agreement, to provide to the MSRB within ten business days, the event notices specified in new paragraphs (b)(5)(i)(C)(

) and (

), are necessary.

For example, an investor purchasing a municipal security directly from an issuer or obligated person.

For example, a lender entering into a bank loan, loan agreement, or other type of financing agreement with an issuer or obligated person.

See

Proposing Release,

supra

note 3, 82 FR at 13929.

In 2016, the MSRB enhanced EMMA to allow submitters of continuing disclosure to efficiently identify “Bank Loan/Alternative Financing Filings” as the type of filing.

See

MSRB,

MSRB Improves Bank Loan Disclosure on EMMA website

(Sept. 26, 2016),

available at http://msrb.org/News-and-Events/Press-Releases/2016/MSRB-Improves-Bank-Loan-Disclosure-on-EMMA-website.

In a letter to the SEC Investor Advocate in October 2017, the MSRB stated its concern that although the number of bank loan disclosures made to EMMA had increased substantially from prior years, only 1,100 bank loan documents were posted to the EMMA website (as of October 2017), representing only a small fraction of bank loans outstanding.

See

Letter from Lynnette Kelly, Executive Director, MSRB, to Rick Fleming, Investor Advocate, Securities and Exchange Commission (Oct. 17, 2017),

available at http://www.msrb.org/Market-Topics/~/media/0E3E9F81C7BA4EB38EE80857FE378F18.ashx.

According to information received by Commission staff from MSRB staff, the MSRB received 648 filings during calendar year 2017 under the “Bank Loan/Alternative Financing Filing” category.

See

1989 Adopting Release, supra note 8.

As discussed in detail below, the Commission is adopting, substantially as proposed, amendments to Rule 15c2-12. The amendments add the following events, as proposed, as paragraphs (b)(5)(i)(C)(

) and (

) of the Rule for which a Participating Underwriter in an Offering must reasonably determine that the issuer or obligated person has agreed to provide in its continuing disclosure agreement: (1) Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect securities holders, if material; and (2) 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.

In addition, the Commission is adding, substantially as proposed, to paragraph (f) of the Rule, the following definition: The term financial obligation means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). 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.

The Commission is also adopting, as proposed, a technical amendment to paragraph (b)(5)(i)(C)(

) of the Rule.

In keeping with the objectives set forth in the Exchange Act, including Section 15(c)(2),

and the antifraud provisions of the federal securities laws, the Commission believes the amendments to Rule 15c2-12, as adopted, are reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices in the municipal securities market. The Commission believes the amendments are consistent with the limitations set forth in Exchange Act Section 15B(d)(1) because the amendments do not require an issuer of municipal securities to make any filing with the Commission or MSRB prior to the sale of municipal securities.

17 CFR 240.15c2-12 was adopted under a number of Exchange Act provisions, including Section 15(c); 15 U.S.C. 78

(c).

See

Proposing Release,

supra

note 3, 82 FR at 13931.

III. Description of the Amendments to Rule 15c2-12

A. Introduction

Commenters were generally supportive of increased transparency in the municipal securities market.

Nevertheless, some commenters suggested that the proposed amendments were unnecessary because information about issuer and obligated person financial obligations is already available in audited financial statements, other publicly available documents, and through voluntary disclosures to EMMA.

One commenter suggested that the proposed amendments were not needed because the Tax Cuts and Jobs Act of 2017

has increased the cost of tax-exempt bank direct placements as compared to publicly offered debt, resulting in a likely reversal of the recent growth of direct placements.

See, e.g.,

Houston Letter; Denver Letter; DFW Letter; GFOA Letter; BDA Letter; MSRB Letter.

See, e.g.,

Arlington SD Letter (stating that its audited financial statements contain information about financial obligations and state law requires disclosure of audited financial statements within 150 days of the end of the fiscal year); NABL Letter (stating that (i) information about financial obligations is already available due to state sunshine laws and improvements in technology, (ii) bond documents prohibit the grant of superior interests in the trust estate or such terms are permitted by outstanding bond contracts, and the risks of such terms are priced into the value of outstanding bonds, and (iii) that voluntary disclosure initiatives should be allowed to further develop); NABL III Letter (stating that Government Accounting Standards Board (“GASB”) Statement No. 88—Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placement (March 2018) (“GASB Statement No. 88”) requires additional information related to debt be disclosed in audited financial statements reducing the disclosure benefits of the amendments). GASB Statement No. 88 is

available at http://www.gasb.org/jsp/GASB/Document_C/DocumentPage?cid=1176170308047&acceptedDisclaimer=true

See

Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131 Stat. 2054 (2017).

See

NABL III Letter.

The Commission acknowledges the efforts of many issuers and obligated persons to be transparent. However, as stated in the Proposing Release, investors and other market participants may not learn that the issuer or obligated person has incurred a financial obligation if the issuer or obligated person does not provide annual financial information or audited financial statements to EMMA or does not subsequently issue debt in a primary offering subject to Rule 15c2-12 that results in the provision of a final official statement to EMMA.

Further, even if investors and other market participants have access to disclosure about an issuer's or obligated person's incurrence of a financial obligation, such access may not be timely if, for example, the issuer or obligated person has not submitted annual financial information or audited financial statements to EMMA in a timely manner or does not frequently issue debt that results in the provision of a final official statement to EMMA.

In many cases, this lack of access or delay in access to disclosure means that investors could be making investment decisions, and other market participants could be undertaking credit analyses, without important information.

See

Proposing Release,

supra

note 3, 82 FR at 13929.

Id.

Additionally, the Commission understands that to the extent information about financial obligations is disclosed and accessible to investors and other market participants, such

information currently may not include certain details about the financial obligations.

In these cases, investors could be making investment decisions, and other market participants could be undertaking credit analyses, without important information, including the debt payment priority structure of the financial obligation. Furthermore, the Commission understands that investors and other market participants may not have any access or timely access to disclosure regarding the occurrence of events reflecting financial difficulties, including a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation.

While it could be true in some cases that governing documents prohibit the granting of superior lien rights to other holders of the issuer's or obligated person's debt, there is no set standard of what provisions are set forth in the legal documents governing an issuance of municipal securities, and documents and the covenants they contain vary from issuer to issuer.

Additionally, there are other terms of financial obligations that could affect the issuer's or obligated person's liquidity, overall creditworthiness, or an existing security holder's rights. The amendments would cover any such terms if material and if they affect security holders. Further, the Commission recognizes that some states require that issuers and obligated persons submit their audited financial statements, which provide information about financial obligations, to a state repository within a certain number of days after the end of their fiscal year,

and that information about financial obligations may be available under state sunshine laws and through improved technology.

However, deadlines for such audited financial statements under state laws may extend far beyond the ten business days required by the Rule,

and the procedures for requesting information under sunshine laws may not result in the timely and widespread delivery of such information to market participants. While technology has improved the ability to obtain and disseminate information, EMMA remains the single centralized repository for the electronic collection and availability of continuing disclosure information about municipal securities. Accordingly, the Commission believes these amendments will facilitate investor access to important information in a timely manner and help to enhance transparency.

GASB Statement No. 88 has gone into effect for reporting periods beginning after June 15, 2018.

See

GASB Statement No. 88,

supra

note 39. GASB Statement No. 88 “requires that additional essential information related to debt be disclosed in notes to financial statements, including unused lines of credit, assets pledged as collateral for the debt, and terms specified in debt agreements related to significant events of default with finance-related consequences, significant termination events with finance-related consequences, and significant subjective accelerations clauses.” The Commission understands that those issuers and obligated persons who adhere to GASB standards when preparing their financial statements could provide information in their audited financial statements similar to that covered under new paragraph (b)(5)(i)(C)(

) of the Rule. However, while GASB establishes generally accepted accounting principles (GAAP) that are used by many states and local governments, there are no uniformly applied accounting standards in the municipal securities market.

See

2012 Municipal Report,

supra

note 19. Further, there is no requirement in Rule 15c2-12 that an issuer or obligated person undertake in its continuing disclosure agreement to provide audited financial statements to the MSRB.

See

17 CFR 240.15c2-12(b)(5)(i)(B) (limiting the requirement of audited financial statements to “when and if available”). While the Commission supports efforts to improve the transparency and usefulness of financial statements, GASB Statement No. 88 is not a substitute for these amendments. Industry commentators have expressed a similar view.

See generally,

Standard and Poor's Global Ratings,

Bank Loan Structures Risk Remain, But GASB 88 Is A Positive Step Toward Transparency in Financial Reporting

(May 2, 2018),

available at https://www.spratings.com/documents/20184/86957/Bank+Loan+Structures+Risks+Remain+But+GASB88+Is+A+Positive+Step+Toward+Transparency+In+Financial+Reporting_May-02-2018.pdf/07d7140a-0019-4907-8ab9-35d7b463e77c

(stating “[m]arkets function most efficiently when all stakeholders have symmetrical or equal access to material information. Although the [GASB Statement No. 88] release speaks to required disclosures, not all public finance issuers comply with GAAP standards or adopt all GASB statements. Consequently, we believe the municipal market is not functioning as effectively as it could around a bank loan structure. Nevertheless, the [GASB Statement No. 88] release is a significant positive development that signals even to those who have not adopted GASB statements that the marketplace is developing higher expectations about disclosures”).

See

2012 Municipal Report,

supra

note 19.

Municipal Market Bank Loan Disclosure Task Force, Considerations Regarding Voluntary Secondary Market Disclosure About Bank Loans (May 1, 2013) (“Considerations Regarding Voluntary Secondary Market Disclosure About Bank Loans”),

available at http://www.nfma.org/assets/documents/position.stmt/wp.direct.bank.loan.5.13.pdf,

(stating “Bank loan covenants and events of default can be different from or set at higher levels than those applicable to outstanding bonds, thereby enabling the bank to assert remedies prior to other bondholders (which may effectively prioritize repayment of the bank loan)” and also stating “[c]ertain assets previously available to secure bonds may be pledged to the bank as security for the bank loan”). The Task Force was composed of representatives from the American Bankers Association, Bond Dealers of America, Government Finance Officers Association, Investment Company Institute, National Association of Bond Lawyers (“NABL”), National Association of Health and Educational Facilities Finance Authorities, National Association of Independent Public Finance Advisors, National Federation of Municipal Analysts, and Securities Industry and Financial Markets Association.

See

Arlington SD Letter.

See

NABL Letter.

Id.

Additionally, the Commission recognizes that the Tax Cuts and Jobs Act of 2017 may impact the municipal debt market, including, but not limited to the use of direct placements. The amendments are intended to address the need for timely disclosure of important information related to an issuer's or obligated person's financial obligations and cover a variety of obligations incurred by issuers and obligated persons, including but not limited to direct placements.

Moreover, the Commission believes that given the diverse reasons for which issuers and obligated persons engage in direct placements in lieu of a public offering of municipal securities, it is likely that direct placements will continue to be utilized in the municipal debt market.

For a discussion of the definition of the term “financial obligation,”

see infra

Section III.A.2.

For example, Federal Deposit Insurance Corporation (“FDIC”) data show the amount of bank direct lending to state and local governments and their instrumentalities during the first quarter of 2018 ($190,533,184,000) remains at a similar level to that of the fourth quarter of 2017 ($190,531,792,000). For a discussion of these data,

see infra

note 319 and related text.

The Commission also recognizes the efforts of the MSRB, the Financial Industry Regulatory Authority (“FINRA”), academics, and industry groups to promote voluntary disclosure of financial obligations. However, as described in the Proposing Release, despite these ongoing efforts, few issuers or obligated persons have made voluntary disclosures of financial obligations, including direct placements, to the MSRB.

For a discussion of market participant efforts to promote voluntary disclosure of certain financial obligations,

see

Proposing Release,

supra

note 3, 82 FR at 13929-30.

See also

NABL Letter.

Separately, some commenters suggested that the amendments include a mechanical test for materiality. In 1994, the Commission proposed amendments to Rule 15c2-12 that would have used a mechanical test to identify any “significant obligor” with respect to an issue of municipal securities and require that both the final official statement and the annual financial information provided on an ongoing basis pursuant to the continuing disclosure agreement include disclosure with respect to any significant obligor.

In response to a number of comments, the Commission adopted amendments to Rule 15c2-12 that eliminated the requirement to provide information about specific “significant obligors” in both the final official statement and on an ongoing basis. Instead, the Commission adopted an approach that leaves to the parties (including the issuer and the underwriter) the determination of whose financial information is material to the offering and required to be included in both the final official statement and provided on an ongoing basis as part of the annual financial information.

The 1994 Adopting Release stated that the standard set forth in the defined term “final official statement” provided flexibility that many commenters asserted is necessary in determining the content and scope of the disclosed financial information and operating data, given the diversity among types of issuers, types of issues, and sources of repayment.”

The Commission believes this same need for flexibility applies to assessments of financial obligations and the materiality qualifier allows for consideration of diverse sets of factors. Therefore, the Commission does not believe that it would be appropriate to provide a mechanical test for determining the materiality of a financial obligation. Rather, the Commission continues to believe that materiality determinations should be based on whether the information would be important to the

total mix of information made available to the reasonable investor.

See

Exchange Act Release No. 34-33742 (Mar. 9, 1994), 59 FR 12759 (Mar. 17, 1994). The proposed term “significant obligor” was defined to mean any person who, directly or indirectly, is the source of 20 percent or more of the cash flow servicing obligations on the municipal securities.

See

1994 Amendments Adopting Release,

supra

note 8;

see also

17 CFR 240.15c2-12(b)(5)(i)(A) and (f)(3).

See

1994 Amendments Adopting Release,

supra

note 8 at 59593.

See Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others,

Exchange Act Release No. 34-33741 (Mar. 9, 1994), 59 FR 12748 (Mar. 17, 1994) (“1994 Interpretive Release”).

b. Guidance

Numerous commenters asked the Commission to provide guidance on how to determine the materiality of a financial obligation, stating that without such guidance, issuers, obligated persons, and dealers would not interpret materiality uniformly.

Commenters pointed to the challenges faced by issuers and obligated persons when determining materiality in connection with their participation in the Municipalities Continuing Disclosure Cooperation Initiative (“MCDC Initiative”)

as indicative of the lack of clarity that exists with respect to evaluating materiality.

In particular, commenters stated that the MCDC Initiative failed to produce clear guidance on materiality, resulting in additional market confusion about what constitutes materiality.

They also stated that following the MCDC Initiative, and absent Commission guidance, Participating Underwriters have been conservatively applying materiality determinations to limit potential liability and requiring issuers and obligated persons to disclose potentially non-material information to EMMA.

See, e.g.,

GFOA Letter; Denver Letter; THECB Letter (stating that “what constitutes an obligation and what is material, are vague in this amendment” and “what constitutes materiality can vary by entity based on the size of the overall balance sheet, the size of existing obligations or the size of the overall bond portfolio”);

see also

Brown Letter (suggesting definitions of materiality the Commission could adopt);

but see also

ACI Letter (urging the Commission to reject a one-size-fits-all definition of materiality, since what is material to a small issuer may not be material to a larger issuer).

In March 2014, the Division of Enforcement announced the MCDC Initiative, a voluntary program to encourage underwriters and issuers and obligated persons to self-report federal securities law violations involving inaccurate certifications in primary offerings where issuers and obligated persons represented in their final official statements that they had complied with previous continuing disclosure agreements when they had not. The Commission brought settled actions against 71 issuers and obligated persons under the MCDC Initiative.

See

SEC Charges 71 Municipal Issuers in Muni Bond Disclosure Initiative (Aug. 24, 2016) (“SEC Charges 71 Municipal Issuers”),

available at https://www.sec.gov/news/pressrelease/2016-166.html.

See, e.g.,

DFW Letter.

See, e.g.,

NABL Letter (stating “particularly since the MCDC Initiative, Commission interpretations of `material' are too vague, ambiguous, and unpredictable to enable issuers and underwriters to clearly determine when notice of an event must be filed or when a failure to file must be disclosed”).

See, e.g.,

Granite SD Letter; Portland Letter; NABL Letter (stating that some compliance departments and investment banks now refuse to engage in materiality evaluations of prior events and continuing disclosure deficiencies).

The Commission believes that the type of analysis undertaken in connection with the MCDC Initiative

is distinct from the analysis required to determine whether a piece of information is material and must be publicly disclosed to investors in offering materials.

In the materiality inquiry that issuers, obligated persons, and dealers must regularly undertake when preparing disclosure documents in connection with an Offering, they must assess whether a piece of information at the time of issuance is of a character that there is a substantial likelihood that, under all the circumstances, “the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information available.”

Compliance with these requirements will be evaluated using the same standard.

See

Proposing Release at

supra

note 3, 82 FR at 13930 and note 15.

The inquiry undertaken in connection with the MCDC Initiative required an assessment of whether the issuer or obligated person materially fulfilled its contractual obligations under its continuing disclosure agreement, which required a consideration of applicable state law and basic principles of contract law.

See

1994 Interpretive Release,

supra

note 67 (quoting

TSC Industries, Inc.

Northway, Inc.,

426 U.S. 438, 440 (1976)). The principles behind this inquiry are consistent each time the question of whether a piece of information is material is presented, but the factors considered by issuers and obligated persons while undertaking such an inquiry are not uniform because it is a facts and circumstances driven analysis. This inquiry is distinct from the inquiry issuers, obligated persons, and underwriters conducted as part of the MCDC Initiative, which required an assessment of the issuer's or obligated person's performance of its contractual continuing disclosure obligations.

The Commission believes that the determination by an issuer or obligated person of whether to submit an event notice under paragraph (b)(5)(i)(C)(

) requires the same analysis that is regularly made by such parties when preparing offering documents. Accordingly, under the Rule, as amended, an issuer or obligated person will need to consider whether a financial obligation or the terms of a financial obligation, if they affect security holders, would be important to a reasonable investor when making an investment decision.

As noted above,

an issuer or obligated person may consider a number of factors when assessing the materiality of a particular financial obligation.

Issuers and obligated persons have undertaken this type of analysis in the context of the Rule since 1994 when the Rule was amended to prohibit Participating Underwriters from purchasing or selling municipal securities in connection with an Offering unless the Participating Underwriter has “reasonably determined” that an issuer or an obligated person has undertaken in a continuing disclosure agreement to provide continuing disclosure information regarding the security and the issuer or obligated person for the life of the municipal security including notices of the occurrence of certain events, if material.

See

1994 Amendments Adopting Release,

supra

note 8.

Since 2010, paragraphs (b)(5)(i)(C)(

), (

), and (

) of the Rule have required a materiality analysis.

See

2010 Amendments Adopting Release,

supra

note 8.

see also

TASBO Letter (stating that “the analysis of agreements and instruments captured under the definition of “financial obligations” under the proposed regulations will require subject matter experts to review the financial obligations—which they otherwise would not be engaged to review—in detail and make nuanced determinations as to materiality”).

See, e.g.,

ACI Letter; AAPA Letter;

see also

PFM Letter (stating that absent clarity from the Commission on materiality, “issuers and investors will likely be harmed by the potential of disclosing information that could prove to be irrelevant to the credit of a particular municipal securities transaction”).

See

ABA Letter; East Bay Letter.

The Commission acknowledges that there will be costs incurred by issuers, obligated persons, and dealers when evaluating whether a financial obligation is material. However, as discussed in Section III.A.2 herein, the Commission is adopting a narrower definition of “financial obligation” than proposed, which will reduce the burden on issuers, obligated persons, and dealers. The adopted definition of financial obligation significantly limits the types of transactions that issuers and obligated persons will need to identify and assess for materiality, and focuses the amendments on debt, debt-like, and debt-related obligations of issuers and obligated persons. The narrowed definition of financial obligation, which only covers those obligations that are debt, debt-like, or debt-related, will result in fewer financial obligations that issuers and obligated persons will need to review for materiality, and should help alleviate commenter concerns about disclosing a material financial obligation within ten business days. In addition, though the period for reporting the incurrence of a material financial obligation does not begin until the date on which the financial obligation is incurred, the Commission understands that most material terms of a financial obligation are typically known to the issuer or obligated person prior to the date of its incurrence. Accordingly, issuers and obligated persons could begin the process of assessing whether a particular obligation should be disclosed pursuant to paragraph (b)(5)(i)(C)(

) in advance of its incurrence. As a result, the Commission believes ten business days is a reasonable period of time for compliance. Moreover, the ten business day requirement is already in the Rule and introducing an alternate timeline for the amendments could cause confusion, add complexity to the Rule, and increase the compliance burden for issuers, obligated persons, and dealers.

With respect to commenter concerns about the burdens of summarizing the terms of material financial obligations, issuers and obligated persons could consider amending existing disclosure policies and procedures to address the process for evaluating the disclosure of material financial obligations. Amended policies and procedures, in addition to industry practices that may develop, could help issuers and obligated persons streamline the process of disclosing material financial obligations to EMMA, and ease time and cost burdens associated with identifying, assessing, and disclosing material financial obligations.

d. Materiality and a Series of Related Financial Obligations

Commenters asked whether a series of related financial obligations could be considered material due to their aggregate par amount, though none of the constituent obligations would be material on its own.

Materiality is determined upon the incurrence of each distinct financial obligation, taking into account all relevant facts and circumstances.

For example, if the issuer or obligated person enters into a series of transactions that, though related,

are incurred at different points in time for legitimate business purposes—

e.g.,

to satisfy the necessary conditions for the debt to be considered tax-exempt under provisions of the Internal Revenue Code of 1986, as amended (“IRC”)—the issuer or obligated person would need to assess the materiality of each transaction at the time it was incurred.

See, e.g.,

For a discussion of the term “incurred,”

see infra

Section III.A.1.ii.

Relevant factors that could indicate that a series of financial obligations incurred close in time are related include the following: (i) Share an authorizing document, (ii) have the same purpose, or (iii) have the same source of security.

When an issuer or obligated person is considering whether a series of related transactions is a single incurrence or has been incurred at different points in time for legitimate business purposes for determining materiality under the amendments, such issuer or obligated person must consider all relevant facts and circumstances. An example of the type of facts and circumstances that could indicate that a series of related transactions were incurred separately for legitimate business purposes would be if the series of financial obligations satisfy the requirements set forth in the U.S. Department of Treasury regulations and guidance governing what constitutes a single issue of municipal securities under the IRC.

The Commission cautions issuers and obligated persons against entering into a series of transactions with a purpose of evading potential disclosure obligations established by paragraphs (b)(5)(i)(C)(

) and (

) of the Rule in a manner that is inconsistent with the purposes of the Rule.

See

26 CFR 1.150-1(c);

see

Internal Revenue Service, Lesson 2:

Advanced Topics in Arbitrage, available at https://www.irs.gov/pub/irs-tege/02%20Phase%20II%20Lesson%2002%20-%20%20Advanced%20Topics%20in%20Arbitrage.pdf

(IRS educational materials provided to the public containing the conditions under which separate bond series are considered to be a single issue for arbitrage purposes, stating: “[IRC] Regulations § 1.150-1(c)(1) provides that the term issue means two or more bonds that meet all of the following requirements: (i) Sold at substantially the same time (less than 15 days apart), (ii) sold pursuant to the same plan of financing, and (iii) reasonably expected to be paid from the same source of funds. For example, bonds sold to finance a single facility or related facilities are considered part of the same financing plan, but short-term bonds to finance working capital and long-term bonds to finance capital projects would not be considered part of the same plan. Certificates of participation in a lease and general obligation bonds secured by tax revenues would not be considered part of the same plan”).

U.S. Department of Treasury regulations similarly warn against entering “into a transaction or series of transactions with respect to one or more issues with a principal purpose of transferring to nongovernmental persons (other than as members of the general public) significant benefits of tax-exempt financing in a manner that is inconsistent with the purposes of section 141 [of the Internal Revenue Code].”

See

26 CFR 1.141-14.

ii. Incurrence of a Financial Obligation

Some commenters recommended that the Commission provide guidance on

the meaning of “incurrence.”

The Commission believes that a financial obligation generally should be considered to be incurred when it is enforceable against an issuer or obligated person.

Disclosure of a material financial obligation at such time would provide investors with important information about the current financial condition and potential liabilities of the issuer or obligated person, including potential impacts to the issuer's or obligated person's liquidity and overall creditworthiness. For example, if an issuer or obligated person enters into an agreement providing for a material drawdown bond,

or such agreement contains material terms that affect security holders, the issuer or obligated person generally should provide notice at the time the terms of the obligation are legally enforceable against the issuer or obligated person, instead of each time a draw is made.

See

SIFMA AMG Letter;

see also

NABL Letter.

This is consistent with similar concepts in Exchange Act Form 8-K. Specifically, the instructions for Item 2.03 of Form 8-K provide that “[a] registrant has no obligation to disclose information under this Item 2.03 until the registrant enters into an agreement enforceable against the registrant, whether or not subject to conditions, under which the direct financial obligation will arise or be created or issued.”

See

17 CFR 249.308.

See

NABL,

Direct Purchases of State or Local Obligations by Commercial Banks and Other Financial Institutions

(July 2017),

available at https://www.nabl.org/DesktopModules/Bring2mind/DMX/Download.aspx?portalid=0&EntryId=1118

(“Certain direct purchase financings are structured as `draw-down bonds.' Under this structure, the purchaser from time to time makes advances [to the issuer or obligated person], up to a maximum aggregate principal amount of the bonds, over a limited period of time, rather than advancing all proceeds of the bonds at the initial closing, as in a typical publicly-offered borrowing”).

The Commission likewise believes that a financial obligation is incurred with regard to a derivative instrument when the derivative instrument is enforceable against an issuer or obligated person.

See infra

note 155.

iii. Form of Event Notice

Commenters observed that the Commission did not prescribe the form of a notice made pursuant to new paragraph (b)(5)(i)(C)(

)

and some recommended that the Commission dictate the form and content of disclosures made under the new provision.

One commenter, though, stated that the Commission should avoid being too prescriptive with respect to the form and content of a material event notice submitted under paragraph (b)(5)(i)(C)(

) of the Rule.

Other commenters expressed concern about what they described as the potential negative impact of the public disclosure of financing documents on competition among lenders, as well as the possibility for the disclosure of confidential personally identifiable information.

See

Kutak Rock Letter (stating that unlike corporate issuers, there is no checklist or guidepost to assist issuers and obligated persons determine what must be included in disclosure);

see also

AZ Universities Letter (stating that there are no standard EMMA disclosure forms provided by the Commission or the MSRB and issuers will be left on their own to determine the proper format and scope of event notices posted on EMMA).

See

Vanguard Letter (recommending that the Commission require the disclosure of financial covenant reports, similar to what is provided to banks under loan agreements); BDA Letter (stating that the amendments should require issuers and obligated persons to include in any filing a description to investors describing what is material about the event); NFMA Letter (encouraging the Commission to require in the rule text that either all relevant agreements or a detailed summary of terms of the financial transaction be posted along with the notice of incurrence to EMMA); and IAC Recommendation,

supra

note 6 (suggesting that the Commission clarify that disclosures made under the amendments should include information about the incurrence and amount of indebtedness as well as information about financial covenants).

See

DAC Letter.

See

ABA Letter (urging the Commission to provide a mechanism for redacting confidential and personally identifiable information and stating that disclosure of pricing terms may set unrealistic expectations for other issuers and may have an anti-competitive effect by setting a pricing benchmark for certain transactions);

see also

LPPC Letter (stating that the disclosure of covenants, events of default, remedies, priority rights, or other similar terms could adversely impact an issuer's ability to effectively negotiate or enter into future agreements and could be used by the issuer's counterparties to strengthen their negotiating positions).

The Commission acknowledges commenter concerns regarding what form the notice should take. However, given the diversity of issuers and obligated persons, and in light of the structure of the Rule, the Commission believes at this time that market participants are best suited to consider developing best practices in this area to assist issuers and obligated persons and their advisors in carrying out the objective of the amendments, which is to facilitate the timely delivery of important information to investors and other market participants about issuers' and obligated persons' financial obligations.

As described in the Proposing Release,

a material event notice for the events described in paragraph (b)(5)(i)(C)(

) generally should include a description of the material terms of the financial obligation. Examples of some material terms may be the date of incurrence, principal amount, maturity and amortization, interest rate, if fixed, or method of computation, if variable (and any default rates); other terms may be appropriate as well, depending on the circumstances.

A description of the material terms would help further the availability of information in a timely manner to assist investors in making more informed investment decisions.

The Commission believes that, depending on the facts and circumstances, it could be consistent with the requirements of the Rule for issuers and obligated persons to either submit a description of the material terms of the financial obligation, or alternatively, or in addition, submit related materials, such as transaction documents, term sheets prepared in connection with the financial obligation, or continuing covenant agreements or financial covenant reports to EMMA. Any such related materials, if submitted as an alternative to a description of the material terms of the financial obligation, should include the material terms of the financial obligation. The amendments do not require the provision of confidential information such as contact information, account numbers, or other personally identifiable information to EMMA. Provided the necessary disclosures are made, the formatting of such disclosures tailored to avoid disclosure of such confidential information would be consistent with Rule 15c2-12.

100

Industry organizations have developed recommendations for voluntary disclosure of direct placements. Such groups and others could, for example, develop a form submission document and guidance for market participants.

See, e.g.,

Considerations Regarding Voluntary Secondary Market Disclosure About Bank Loans,

supra

note 46.

See

Proposing Release,

supra

note 3, 82 FR at 13937.

Id.

100

The Commission further notes that information about financial obligations, including transaction documents, would likely be available under state sunshine laws.

2. “Financial Obligation”

In the Proposing Release, the Commission defined the term “financial obligation” to mean a debt obligation, lease, guarantee, derivative instrument, or monetary obligation resulting from a judicial, administrative, or arbitration proceeding,

101

but not including municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12.

102

101

See

Proposing Release,

supra

note 3, 82 FR at 13957.

102

See id.

Many commenters criticized the proposed definition of “financial obligation,” characterizing it as overbroad and vague.

103

In particular, commenters argued that the proposed definition would elicit disclosures of

limited value to investors at a tremendous cost.

104

With respect to the value of disclosure, commenters argued that the breadth of the proposed definition would produce disclosures of limited value because it did not distinguish between debt and ordinary financial and operating matters of an issuer or obligated person.

105

Commenters also stated that the broad scope of the term “financial obligation,” as proposed, would impose substantial burdens on issuers, obligated persons, and other market participants.

106

For example, commenters argued that the breadth of the proposed definition of the term “financial obligation” would require a significant amount of issuer or obligated person time and financial and personnel resources to monitor and assess materiality of its financial obligations, which for some issuers or obligated persons could cover thousands of obligations incurred in the normal course of business.

107

Commenters argued that the proposed definition of the term “financial obligation,” if adopted, would make compliance with the Rule unreasonably costly for some,

108

and virtually impossible for others.

109

Ultimately, however, despite their objections to the proposed definition of “financial obligation,” many of these commenters suggested that the term should at least cover debt and debt-like obligations that could compete with the rights of existing security holders.

110

103

See, e.g.,

AAPA Letter; ABA Letter, Form Letter.

104

See

GFOA Letter; Brookfield Letter; GFOA TX Letter; Kissimmee Letter.

105

See

BDA Letter; Portland Letter (pertaining to leases); GFOA Letter (pertaining to derivative instruments).

See also

IAC Recommendation,

supra

note 6 (stating, “One term that could be better defined is `financial obligation', which should pick up indebtedness and similar obligations but should not be so broad as to pick up items such as ordinary course leases”).

106

With respect to issuers and obligated persons,

see generally

GFOA Letter; NAHEFFA Letter; NCHSA Letter; and CA Finance Letter; and with respect to dealers,

see also

SIFMA Letter.

107

See

AAPA Letter (stating that “many leases and legal or administrative proceedings are part of normal business operations”); ACI Letter (“the term `financial obligation' is very broad and would include many business and legal obligations that are not direct placements of municipal securities or bank loans and that are not generally considered to be indebtedness . . . US airports are party to well over 50,000 leases”); DAC Letter (“the scope of financial obligations [covers] obligations well beyond bank loans and direct sales . . . potentially requir[ing] issuers and obligated persons to identify, summarize, disclose, track and analyze, within tight timeframes, the incurrence and performance of a far broader range of activities”); GFOA Letter (“information suggested in the proposed requirements (

e.g.,

leases, derivatives) includes transactions that may occur multiple times a year through the normal operating activities of state and local governments and are not on par with debt obligations”); NAHEFFA Letter (“the broad definition of financial obligation could pick up financial aid contracts, health insurance contracts, food service contracts, research agreements, management contracts, sports venue contracts, equipment and vehicle leases, among other contracts”); NAMA Letter (“the definition of `financial obligations' is too broad and will require the consideration of the materiality of many types of financings and financial obligations that do not affect a government or entity's ability to pay debt . . . [many] are part of the day-to-day `operations' of governments”); Denver Letter (“the City is currently a party to thousands of contracts . . . [and] is involved in hundreds of administrative and arbitration proceedings every year”); Portland Letter (“we agree that the incurrence of a bank loan or other debt obligation is something that should be disclosed to the market, [but] we are concerned that the definition . . . is easily interpreted to include varying types of leases, such as those for the copiers, lawn mowers, and other minor equipment acquisitions”).

108

See, e.g.,

THPRD Letter (“the scope [of] `financial obligations' covered under the Proposed Amendment is overly broad and would be costly for our organization to monitor”); Port Portland Letter (“[t]o comply with the proposed amendments, issuers would have to create a centralized mechanism to monitor the creation and modification of a wide variety of financial instruments . . . [d]oing so would be unnecessarily burdensome and expensive”).

109

See, e.g.,

AZ Universities Letter (stating that “a significant investment of time and money by the Universities will be necessary to monitor the need for filing an event notice under the Proposed Amendments . . . and the widely publicized lack of funding for public universities does not permit the necessary funding to restructure the Universities' processes or hire additional staff and engage outside legal counsel at significant expense solely to comply with the Proposed Amendments”);

see also

SIFMA Letter (arguing that it would be “virtually impossible” for registered representatives to comply with their obligations under MSRB Rule G-47).

110

See

BDA Letter (“BDA believes that the primary investor desire for information giving rise to the Proposed Amendments is the way that bank debt competes with publicly traded bonds”);

see also

NAMA Letter; Portland Letter; Form Letter.

Not all commenters, however, were critical of the proposed definition of the term “financial obligation.”

111

Several commenters stated that the proposed definition of the term would provide needed transparency to the municipal securities market.

112

For example, one commenter stated that without timely disclosure of this information, investors and other market participants may not be aware that an issuer or obligated person has incurred a material financial obligation or agreed to certain terms that affect security holders.

113

111

See, e.g.,

ICI Letter; BM Letter; NFMA Letter; SIFMA AMG Letter. For example, one commenter suggested that the Commission add “crowdfunding campaigns or public projects that pledge future revenues to backers of the projects” to the definition of “financial obligation.”

See

BM Letter. In the Commission's view, the contractual arrangement between the issuer or obligated person and its backers memorializing the pledge of future revenues derived from the project could be a “debt obligation” for purposes of the Rule depending on the facts and circumstances. Accordingly, the Commission does not believe it is necessary to separately include crowdfunding-related obligations in the adopted definition of financial obligation.

112

See

BM Letter; ICI Letter; Doty Letter.

113

See

ICI Letter.

The purpose of the amendments is to facilitate investors' and other market participants' access to timely disclosure of important information related to an issuer's or obligated person's material financial obligations that could impact an issuer's or obligated person's liquidity, overall creditworthiness, or an existing security holder's rights (

e.g.,

a bank loan with a senior position in the debt payment priority structure). With these principles and commenter concerns in mind, the Commission is narrowing the definition of “financial obligation.”

As adopted, “financial obligation” means a debt obligation; derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or a guarantee of either a debt obligation or a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation. The term financial obligation does not include municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12.

As discussed below, the definition of the term “financial obligation” does not include ordinary financial and operating liabilities incurred in the normal course of an issuer's or obligated person's business, only an issuer's or obligated person's debt, debt-like, and debt-related obligations.

114

The Commission believes that a definition of the term “financial obligation” that distinguishes debt, debt-like, and debt-related obligations from obligations incurred in an issuer's or obligated person's normal course of operations appropriately focuses the amendments on the types of obligations that could impact an issuer's or obligated person's liquidity, overall creditworthiness, or an existing security holder's rights.

115

Moreover, in the Commission's view, the adopted definition of the term “financial

obligation” will greatly reduce the burden of complying with the amendments, while still capturing important information about the current financial condition of the issuer or obligated person.

116

Accordingly, the Commission believes that this definition strikes the appropriate balance between benefits to investors and other market participants and costs of compliance with the Rule.

117

114

Cf.

BDA Letter (observing that the “primary investor desire for information giving rise to the Proposed Amendments is the way that bank debt competes with publicly traded bonds, and this competition is nothing new in the municipal securities market”).

For a description of commenter arguments that the term “financial obligation” should distinguish between debt and ordinary financial or operating matters,

see supra

notes 105 and 107.

115

Several commenters supported this type of approach to the disclosure of “financial obligations.”

See, e.g.,

LPPC Letter (stating “LPPC believes that the Proposed Amendments should be narrowly tailored to require municipal issuers only to provide notice of the incurrence of bank loans, private placements or direct purchases of debt obligations, and derivative instruments that are entered into in connection with, and hedge, debt obligations of an issuer”).

See also

IAC Recommendation,

supra

note 6.

116

See generally,

Proposing Release,

supra

note 3, 82 FR at 13936. For the Commission's analysis of the costs and benefits of the amendments,

see infra

Section V.C.

117

Compare

ICI Letter (arguing that “timely disclosure” of financial obligations is necessary because “such information may significantly impact the fundamental value that investors place on a municipal bond and is therefore necessary to accurately assess, monitor, and compare credit quality of securities and issuers”)

with

GFOA Letter (arguing that the “proposed additional `financial obligations' covered by Rule 15c2-12 would be information that is both superfluous to investors and costly for issuers to present outside of financial statements”).

See generally, infra

Section V for the Commission's economic analysis of the amendments.

i. Debt Obligation

As proposed, the term “debt obligation” was intended to capture the short-term and long-term debt obligations of an issuer or obligated person under the terms of an indenture, loan agreement, or similar contract that will be repaid over time.

118

As examples, the Commission stated that a direct purchase of municipal securities by an investor and a direct loan by a bank would be debt obligations of an issuer or obligated person.

119

118

See

Proposing Release,

supra

note 3, 82 FR at 13937.

119

Id.

A number of commenters supported the Commission's proposal to require disclosure of debt obligations.

120

Even commenters that opposed the Commission's proposed requirement to disclose debt obligations under the Rule advocated for the Commission to encourage voluntary disclosure of such obligations.

121

120

See, e.g.,

Portland Letter (stating “we agree that the incurrence of a bank loan or other debt obligation is something that should be disclosed to the market”); SIFMA Letter (stating “[w]e support event notice disclosure of incurrence of debt through a direct purchase, private placement, or bank loan[s]”); NAST Letter (stating “we believe that enhanced and uniform disclosure related to bank loan debt would be beneficial for issuers and investors”); NAMA Letter (stating “the definition of `financial obligation' should focus only o[n] specific behavior for which the SEC has expressed concern, namely, bank loans and private placements”).

See also

SIFMA AMG Letter (recommending that debt obligation be replaced with the definition of “direct financial obligation” in Item 2.03(c) (“Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant”) of Form 8-K).

121

See, e.g.,

NABL Letter; GFOA Letter. Despite the efforts of the MSRB and other market participants, voluntary disclosures remain relatively infrequent; moreover, under a voluntary disclosure regime, investors would not benefit from the uniform requirements of the Rule. Accordingly, and as discussed in Section III.A. and Section V.D.

infra,

and in the Proposing Release, the Commission does not believe that voluntary disclosure of debt obligations would fully achieve the Commission's objectives.

The Commission continues to believe that the definition of “financial obligation” should include debt obligations because such obligations and their terms could adversely affect the rights of existing security holders, including the seniority status of such security holders, or impact the creditworthiness of an issuer or obligated person.

122

Moreover, the Commission believes that undisclosed debt obligations and their terms could adversely affect security holders. Contrary to some commenter sentiment,

123

recent events in the direct placement market support this belief.

124

Specifically, recent changes to federal tax laws

125

have reportedly triggered provisions commonly found in direct placements relating to the rate at which a direct placement will bear interest.

126

In the Commission's view, these tax-related provisions are illustrative of the types of terms to which issuers and obligated persons agree when incurring financial obligations that could impair an issuer's or obligated person's liquidity or creditworthiness and, thus, adversely affect the interests of existing security holders. Without paragraph (b)(5)(i)(C)(

), an issuer or obligated person would not, under the terms of a continuing disclosure agreement, be required to assess the materiality of and disclose, if material, either its agreement to such terms that affect security holders or the incurrence of the underlying debt obligation. For these reasons, the Commission believes that the timely disclosure of both the incurrence of a debt obligation, if material, and the obligation's material terms that affect existing security holders, such as those related to the rate at which a debt obligation will bear interest,

127

would provide important information about the issuer's or obligated person's current financial condition.

122

See

Proposing Release,

supra

note 3, 82 FR at 13937-38.

123

See

NABL Letter (arguing that the Commission has not provided adequate evidence of investor harm related to undisclosed debt obligations).

124

See

Lynn Hume,

Spike in Issuer Bank Loan Rates Feared as Drop in Corporate Tax Rate Looms,

The Bond Buyer (Dec. 8, 2017),

available at https://www.bondbuyer.com/news/issuers-bank-loan-rate-may-spike-with-drop-in-corporate-tax-rate.

125

See

Tax Cuts and Jobs Act of 2017,

supra

note 40.

126

These terms operate such that a decline in the federal corporate income tax rate will increase the overall cost of the related direct placement to the issuer or obligated person, usually by either: (1) Increasing the interest rate paid by the issuer or obligated person to the lender, or (2) requiring the issuer or obligated person to make periodic cash payments to the lender in addition to any required interest payments. The purpose of these terms is to allow banks to maintain their after-tax yield regardless of the corporate income tax rate. The Commission understands that many of these provisions are automatically triggered upon a reduction of the federal corporate income tax rate.

See

Richard A. Newman et al.,

How to Calculate the Gross-Up,

The Bond Buyer (Jan. 18, 2018),

available at https://www.bondbuyer.com/opinion/how-banks-may-calculate-the-gross-up-on-direct-placement-bonds

(stating that interest rates paid by issuers and obligated persons could increase by as much as 102 basis points as a result of such terms).

127

See supra

Section III.A.1.iii (discussion of information that should be included in an event notice).

In the Proposing Release, the Commission proposed “lease” as a separate element of the definition of “financial obligation.”

128

Specifically, the Commission stated that the term “lease” was intended to capture a lease that is entered into by an issuer or obligated person, including an operating or capital lease.

129

The Commission stated, for example, that if an issuer or obligated person entered into a lease-purchase agreement to acquire an office building or an operating lease to lease an office building for a stated period of time, both would potentially be subject to disclosure under the Proposing Release.

130

However, in light of the GASB decision to discontinue use of the “capital lease” and “operating lease” labels in government accounting, the Commission believes it is appropriate to also discontinue its use of such labels in connection with the amendments.

131

Thus, although the Commission used the “capital lease” and “operating lease” terminology in the Proposing Release, it is discontinuing the use of such terms in connection with the definition of the term “financial obligation.” Instead, as discussed below, the Commission is providing guidance that the term “debt obligation” generally should be considered to include lease arrangements entered into by issuers and obligated persons that operate as vehicles to borrow money.

128

See

Proposing Release,

supra

note 3, 82 FR at 13937-38.

129

Id.

at 13937.

130

See

Proposing Release,

supra

note 3, 82 FR at 13937-38.

131

For a description of GASB's decision to discontinue its use of the “capital lease” and “operating lease” terminology,

see

Governmental Accounting Standards Board, Statement No. 87—Leases (June 2017),

available at http://www.gasb.org/jsp/GASB/Document_C/DocumentPage?cid=1176169170145&acceptedDisclaimer=true.

Commenters criticized the inclusion of leases, without limitation, in the definition of “financial obligation” as

overbroad and argued that the Commission should exclude “operating leases” from the definition of “financial obligation.”

132

For example, commenters argued that information about an issuer's or obligated person's non-debt-related leases would not provide useful information to bondholders, while others stated that the inclusion of leases in the proposed definition of “financial obligation” would result in a “deluge of filings” without adding any significant value to the municipal securities market.

133

Commenters also argued that requiring disclosure of all material leases would impose significant burdens on issuers and obligated persons.

134

As an alternative to the Commission's proposed treatment of leases, some commenters suggested that the disclosure of “capital leases” under the Rule would be appropriate because such obligations could compete with existing security holders.

135

Specifically, one commenter recommended that, subject to the materiality qualifier, the Commission should only require disclosure of leases that operate as a vehicle to borrow money.

136

132

See, e.g.,

Portland Letter; San Jose Letter; BDA Letter; East Bay Letter.

See also

IAC Recommendation,

supra

note 6.

133

See, e.g.,

GFOA Letter (suggesting that disclosure of operating leases would be “superfluous to investors”); East Bay Letter (stating that it “does not believe the minutiae of day to day operations would be helpful information for bond holders”).

See, e.g.,

Port Portland Letter (stating “the sheer number of leases to which the Port is a party could create a volume of postings that would overwhelm participants in the municipal market”); ACI Letter.

134

See, e.g.,

UHC Letter (“The broad definition of leases implicates a variety of lease arrangements executed by UHC in the ordinary course of business, including office leases, copier leases, etc. . . . [i]dentifying and evaluating the materiality of every one of these arrangements . . . would be burdensome and costly”).

135

See

White Plains Letter; SIFMA AMG Letter.

136

See

BDA Letter.

The Commission agrees with commenters that, as proposed, the term “lease” was too broad. Accordingly, the Commission believes that it is appropriate to limit the Rule's coverage of leases to those that operate as vehicles to borrow money.

137

The Commission believes that this is appropriate because a lease entered into as a vehicle to borrow money could represent competing debt of the issuer or obligated person. Such leases implicate the Commission's concerns regarding access to timely disclosure regarding their incurrence or terms because they could, for example, contain acceleration provisions or more restrictive debt service covenants and, as a result, could affect existing security holder's rights.

138

Due to the Commission's decision to narrow the scope of leases covered by the amendments to only include those entered into as a vehicle to borrow money, the Commission believes it is appropriate to remove the term “lease” from the definition of “financial obligation.” As discussed below, however, leases that operate as vehicles to borrow money generally would be debt obligations and thus would be defined as financial obligations under the Rule. Accordingly, the Commission believes that it is appropriate to (i) remove the term “lease” from the definition of the term “financial obligation;” and (ii) provide guidance that the term “debt obligation” generally should be considered to include lease arrangements entered into by issuers and obligated persons that operate as vehicles to borrow money.

137

See id.;

White Plains Letter.

138

See

BDA Letter.

As discussed above, the proposed term “debt obligation” did not include leases because the Commission included the term “lease” as a separate item in the definition of “financial obligation.”

139

The Commission stated in the Proposing Release that the term “debt obligation” is intended to capture debt obligations of an issuer or obligated person under the terms of an indenture, loan agreement, or similar contract that will be repaid over time. The Commission believes that an obligation to repay borrowed money over time under the terms of a lease is functionally equivalent to a similar obligation that is incurred under the terms of an indenture, loan agreement, or similar contract.

140

Accordingly, the Commission believes that a lease entered into as a vehicle to borrow money is more appropriately defined as a variety of “debt obligation” rather than a separate type of “financial obligation” as was proposed. The Commission believes that leases entered into as a vehicle to borrow money are commonly used by municipal securities issuers and obligated persons and, when used, commonly understood to be a tool for facilitating an issuer's or obligated person's ability to borrow money.

141

Therefore, under the Rule, a lease that operates as a vehicle to borrow money generally should be treated like an obligation incurred under the terms of an indenture, loan agreement, or similar contract.

139

See

Proposing Release,

supra

note 3, 82 FR at 13937.

140

See generally

Association for Governmental Lease and Finance,

An Introduction to Municipal Lease Financing: Answers to Frequently Asked Questions

(July 1, 2000) (“Municipal Lease Financing”),

available at https://aglf.memberclicks.net/assets/docs/municipal_lease_financing.pdf; see also

BDA Letter (arguing that “the definition of financial obligation should be narrowed to include only obligations for borrowed money, leases that operate as vehicles to borrow money, and derivatives that are executed for the purpose of hedging these types of transactions”).

141

For example, the types of leases that could be debt obligations include, but are not limited to, lease-revenue transactions and certificates of participation transactions. Typically, in a lease-revenue transaction, an issuer or obligated person borrows money to finance an equipment or real property acquisition or improvement and a lease secures the issuer's or obligated person's obligation to make principal and interest payments to the lender.

See

Municipal Lease Financing,

supra

note 140;

see also

CA Finance Letter (stating that the majority of its municipal securities transactions are structured as lease-revenue transactions). In a certificates of participation transaction, the issuer or obligated person sells certificates of participation and the proceeds of the certificates are used, typically, to finance an equipment or real property acquisition or improvement by the issuer or obligated person. The issuer or obligated person, typically, will, as part of the transaction, execute a lease with a trustee, which serves as the mechanism through which the trustee receives payments from the issuer or obligated person. The trustee then proportionately distributes the lease payments it receives from the issuer or obligated person to certificate holders to pay principal and interest when and as due.

See

Municipal Lease Financing,

supra

note 140.

Moreover, in the context of Rule 15c2-12, the Commission is not limiting the term “debt obligation” to debt as it may be defined for state law purposes, but instead is applying it more broadly to circumstances under which an issuer or obligated person has borrowed money. Debt, as defined for state law purposes, “ordinarily means general obligation debt. Typically, the limitation is interpreted to exclude revenue bonds, special fund obligations, and other debt which is not backed by the full faith and credit of the [issuer] coupled by the unlimited power to levy an ad valorem tax to pay such debt.”

See

Nat'l Ass'n of Bond Lawyers, Fundamentals of Municipal Bond Law 25 (2018). The Commission believes that, for the purposes of Rule 15c2-12, a narrow interpretation of “debt” would be under-inclusive because issuers and obligated persons can, and often do, borrow money through a variety of transactions, many of which would not qualify as “debt” under relevant state laws.

See id.

(describing forms of debt that would not be “debt” as ordinarily defined by state law).

See also

Steven Maguire and Jeffrey M. Stupak, Cong. Research Serv., RL30638, Tax-Exempt Bonds: A Description of State and Local Government Debt (2015),

available at https://www.hsdl.org/?view&did=761823

(stating that “an advantage of [lease rental revenue bonds and certificates] is that many states' constitutional and statutory definitions do not consider this type of financing to be debt[.]”).

For a discussion of when a debt obligation is incurred for purposes of the Rule,

see supra

Section III.A.1.ii.

In the Proposing Release, the Commission included the phrase “that will be repaid over time” when discussing the term “debt obligation.” As adopted, the Rule does not include the phrase “that will be repaid over time” to avoid any suggestion that there is a temporal consideration regarding the repayment period of a short-term or long-term debt obligation that could be used to distinguish an obligation that is

a “debt obligation” from one that is not. In the Commission's view, any short-term or long-term debt obligation of an issuer or obligated person under the terms of an indenture, loan agreement, lease, or similar contract

142

is covered by the term “debt obligation” regardless of the length of the debt obligation's repayment period.

142

A “similar contract” could, for example, include a line of credit obtained from a bank or other lender.

As adopted, the term “debt obligation” includes short-term and long-term debt obligations of an issuer or obligated person under the terms of an indenture, loan agreement, lease, or similar contract.

With respect to leases that do not operate as vehicles to borrow money, the Commission agrees with commenters that the burden of assessing their materiality and disclosing such leases within ten business days would not justify the benefit of such disclosures. While the Commission continues to believe that lease arrangements that are not vehicles to borrow money might be relevant to the general financial condition of an issuer or obligated person, the Commission also believes that such lease arrangements do not warrant inclusion in the Commission's definition of “financial obligation” because they generally do not represent competing debt of the issuer or obligated person.

143

Accordingly, at this time, the Commission does not believe that such leases raise the same concerns regarding timely disclosure of their incurrence as leases entered into as a vehicle to borrow money.

144

143

See

BDA Letter (stating that leases entered into in the ordinary course of an issuer's operations do not represent competing debt and should be excluded from the definition of financial obligation);

see also

TASBO Letter (stating that operating transactions “have little or no impact on a school district's ability to pay debt service on public securities secured by a separate unlimited ad valorem debt service tax”).

A determination of whether a lease is a “debt obligation” should be based on the substance of the arrangement, not its label. Accordingly, any type of lease arrangement could, under the appropriate facts and circumstances, be a “debt obligation” and be subject to disclosure under the Rule, if it is entered into as a vehicle to borrow money and is material.

144

Several commenters stated that such disclosures would likely be available in an issuer's or obligated person's audited financial statements.

See, e.g.,

Arlington SD Letter; Lebanon Letter. Examples of such leases that are typically not vehicles to borrow money that are common among issuers and obligated persons include, but are not limited to: Commercial office building leases (

see

San Jose Letter), airline and concessionaire leases at airport facilities (

see

ACI Letter and DFW Letter), and copy machine leases (

see

PFM Letter). Unless they are a debt obligation under the Rule, disclosure of these types of lease arrangements pursuant to the Rule will not be required. However, issuers and obligated persons may choose to voluntarily disclose such leases to EMMA.

ii. Derivative Instrument Entered Into in Connection With, or Pledged as Security or a Source of Payment for, an Existing or Planned Debt Obligation

As proposed, the term “derivative instrument” was intended to capture any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument to which an issuer or obligated person is a counterparty.

145

The Commission stated that though issuers and obligated persons may not use each type of derivative instrument listed, the proposed list was sufficiently broad to cover the use of derivative instruments that may develop in the future.

146

As discussed below, many commenters raised questions about the proposed scope of the term “derivative instrument.” A common theme was that the Commission should limit the scope of derivative instruments covered by the Rule to those instruments related to debt, such as interest-rate swaps, because only such instruments could compete with the rights of existing securities holders.

147

Commenters also stated that an overly broad interpretation of the term would elicit disclosures that would be of minimal value to investors because such instruments would not represent competing debt of an issuer or obligated person.

148

Commenters cited instruments entered into to manage fuel prices or power price volatility or to reduce other similar risks related to commodity or future inventory purchases by issuers and obligated persons as the types of instruments that should not be covered by the Rule.

149

145

See

Proposing Release,

supra

note 3, 82 FR at 13938.

146

Id.

147

See, e.g.,

LPPC Letter.

148

See id.,

Kissimmee Letter; BDA Letter; and WPPI Letter (stating “in the normal course of operations, power utilities enter physical commodities derivatives and we would strongly oppose the inclusion of these lengthy contracts as a material event”).

149

See

LPPC Letter.

The Commission continues to believe derivative instruments should be included in the adopted definition of the term “financial obligation” because such instruments could adversely impact an issuer's or obligated person's liquidity and overall creditworthiness, or adversely affect security holders.

150

However, the Commission agrees with commenters that the term, as proposed, was too broad, and is adopting a more tailored approach to derivative instruments by limiting the definition to those that are “entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation.” In the Commission's view, derivative instruments entered into in connection with an existing or planned debt obligation such as an interest rate swap could, for example, expose an issuer or obligated person to contingent liquidity risk, such as a requirement to post collateral or pay a termination fee upon the occurrence of certain events,

151

any of which could adversely impact the issuer's or obligated person's liquidity and overall creditworthiness, and affect the interests of security holders. Therefore, such instruments raise the Commission's fundamental concern that security holders lack access or lack timely access to information about an issuer's or obligated person's material financial obligations. Accordingly, as adopted, the definition of “financial obligation” includes a “derivative

instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation.”

150

In its comment letter, NABL argued that the Commission offered little evidence of the need for disclosure of derivative instruments.

See

NABL Letter.

But see

NFMA,

Recommended Best Practices in Disclosure for Direct Purchase Bonds, Bank Loans, and Other Bank-Borrower Agreements

(June 2015),

available at http://www.nfma.org/assets/documents/RBP/rbp_bankloans_615.pdf

(stating, “In any credit analysis, liquidity is a key component. Bank loans—like a host of other financial products, including LOCs, liquidity facilities, and swaps—often include obligor payment provisions that change upon the occurrence of certain events. These `triggers' can result in the acceleration of debt payments or in the requirement for the payment or posting of collateral for termination payments, either of which can potentially impair obligor liquidity”).

See also

Elizabeth Campbell,

Chicago Settling $390 Million Tab When City Can Least Afford It,

Bloomberg (Mar. 17, 2016),

available at https://www.bloomberg.com/news/articles/2016-03-17/chicago-settling-390-million-tab-when-city-can-least-afford-it

(stating that the City of Chicago had already paid about $290 million to exit various swaps and was planning to spend $100 million more).

See also

Government Finance Officers Association,

Potential Impacts of Tax Reform on Outstanding and Future Municipal Debt Issuance

(Feb. 2018),

available at http://www.gfoa.org/potential-impacts-tax-reform-outstanding-and-future-municipal-debt-issuance

(highlighting derivatives as a tool to simulate tax-exempt advance refundings, which were abolished under recent changes to the federal tax laws, and reminding issuers to “fully understand” the “specific benefits, risks, and costs” of such a financial tool), and Brian Tumulty,

What GFOA is Warning on Alternatives to Advance Refundings,

The Bond Buyer (Feb. 15, 2018),

available at https://www.bondbuyer.com/news/what-gfoa-is-warning-on-alternatives-to-advance-refundings?brief=00000159-f607-d46a-ab79-fe27f2be0000.

151

See e.g.,

Ianthe Jeanne Dugan,

School District, Bank in Swap Clash,

Wall St. J. (May 24, 2011),

available at https://www.wsj.com/articles/SB10001424052702303654804576341772921133838

(discussing potential swap termination fee liability of a school district to its swap counterparty);

see also

Statement of State College Area School District Board of School Directors (Jan. 14, 2013) (“State College Area Swap Statement”),

available at http://www.statecollege.com/news/local-news/state-college-area-school-district-agrees-to-9-million-payment-in-interest-rate-swap-agreement-with-royal-bank-of-canada,1222044/.

The term “derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation” is not limited to derivative instruments incurred by issuers or obligated persons solely to hedge the interest rate of a debt obligation or to hedge the value of a debt obligation to be incurred in the future.

152

Instead, the term covers any type of derivative instrument that could be entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation. Accordingly, the Commission reiterates that the definition captures any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument to which an issuer or obligated person is a counterparty in the adopted definition of “financial obligation” provided that such instruments are related to an existing or planned debt obligation.

153

This includes, under certain circumstances, instruments that are related to an existing or planned debt obligation of a third party. To determine whether a derivative instrument that relates to an existing or planned debt obligation of a third party is covered by paragraph (b)(5)(i)(C)(

), the Commission believes that it would be reasonable to distinguish derivative instruments designed to hedge against the risks of a related debt obligation (

i.e.,

debt-related derivatives) from derivative instruments designed to mitigate investment risk. In the Commission's view, the former generally would be covered by paragraph (b)(5)(i)(C)(

), while the latter would not. This definition is sufficiently comprehensive to cover the use of derivative instruments that may develop in the future, while, at the same time, limiting the scope of its current and future application to the types of instruments that are related to an existing or planned debt obligation.

152

For a discussion of when an issuer or obligated person should assess the materiality of a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation,

see supra

Section III.A.1.ii.

153

See

Proposing Release,

supra

note 3, 82 FR at 13938.

The Commission believes that a debt obligation is “planned” at the time the issuer or obligated person incurs the related derivative instrument if, based on the facts and circumstances, a reasonable person would view it likely or probable that the issuer or obligated person will incur the related yet-to-be-incurred debt obligation at a future date. In the Commission's view, it would be likely or probable that an issuer or obligated person will incur a future debt obligation if, for example, the relevant derivative instrument would serve no economic purpose without the future debt obligation (regardless of whether the future debt obligation is ultimately incurred).

154

For example, in a forward starting interest rate swap transaction, an issuer or obligated person typically incurs the forward starting interest rate swap in advance of the incurrence of a debt obligation. As part of such agreement, the issuer or obligated person agrees to pay its counterparty interest at a fixed rate, and, in exchange, the counterparty agrees to provide payments to the issuer or obligated person at a variable rate.

155

These payment obligations will commence and the initial rate for the counterparty's variable rate payments will be set only once the related debt obligation is incurred. In addition, upon incurrence of the forward starting interest rate swap, the issuer or obligated person would typically pay a premium to its swap counterparty to establish the fixed rate payment based on the then prevailing interest rates. Accordingly, without the future incurrence of a debt obligation, the forward starting interest rate swap would have no economic value (for the issuer or obligated person). Therefore, the Commission believes that such an instrument would generally serve no economic purpose (for the issuer or obligated person) except if and when it is paired with a planned incurrence of a debt obligation.

154

See

State College Area Swap Statement,

supra

note 151.

155

For purposes of paragraph (b)(5)(i)(C)(

), a forward starting interest rate swap generally would mean any swap used in the municipal debt market that is anticipated to be cash settled at the time of incurrence of a debt obligation, swap anticipated to be part of a synthetic fixed rate debt obligation, or similar product.

For a discussion of when a forward starting interest rate swap is “incurred,”

see supra

Section III.A.1.ii. If the incurrence of such a swap is material, a forward starting interest rate swap would be disclosed within ten business days of its incurrence because, in the Commission's view, the issuer's or obligated person's contingent obligation to make payments, post collateral, etc. would begin at the point of incurrence of the swap, not if or when the planned debt obligation is incurred because the terms of the swap will be set at the time that the swap is incurred. As a result, the issuer or obligated person would, at that time, assume market risk (

e.g.,

interest rate fluctuations) and counterparty risk (

e.g.,

counterparty liquidity).

Factors relevant to whether an issuer's or obligated person's debt obligation is “planned” might include, but are not be limited to, whether: (1) The documents evidencing the relevant derivative instrument explicitly or implicitly assume a future debt obligation; (2) the legislative body of the issuer or obligated person has taken any preliminary (

e.g.,

preliminary resolution) or final (

e.g.,

authorizing resolution) action to authorize the related future debt obligation; or (3) the issuer or obligated person has hired any professionals (

e.g.,

municipal advisor, bond counsel, rate consultant) to assist or advise the issuer or obligated person on matters related to the future debt obligation. Determinations by issuers and obligated persons of whether a derivative instrument contemplates a future debt obligation should prioritize substance over form. In addition, whether a debt obligation is “planned” is based on an objective assessment of the facts and circumstances prevailing at the time of incurrence of the derivative instrument, and is not a bright-line test.

iii. Guarantee of a Debt Obligation or a Derivative Entered Into in Connection With, or Pledged as Security or a Source of Payment for, an Existing or Planned Debt Obligation

As proposed, the term “guarantee” was intended to capture a contingent financial obligation of the issuer or obligated person to secure obligations of a third-party or obligations of the issuer or obligated person.

156

Several commenters requested further clarification or asked that the Commission better define the scope of the term “guarantee.”

157

In response, the Commission is revising the definition of “financial obligation” with respect to guarantees and clarifying the scope of guarantees that, if material, would be subject to disclosure under the Rule.

156

See

Proposing Release,

supra

note 3, 82 FR at 13938.

157

See, e.g.,

OMPA Letter; Oregon Treasurer Letter; WPPI Letter.

As adopted, the term “financial obligation” is defined to include a guarantee of a debt obligation or a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation. The Commission's refinement of this aspect of the definition of “financial obligation” is generally responsive to commenter requests for greater clarity as to the scope of guarantees covered by the term “financial obligation” and consistent with commenter sentiment that the Rule only cover guarantees that relate to debt, debt-like, or debt-related

obligations.

158

In the Commission's view, the adopted rule text eliminates any ambiguity between the proposed rule text and the Commission's intended scope of the term “guarantee.”

158

See

BDA Letter; ICI Letter; SIFMA AMG Letter.

The Commission continues to believe that the guidance provided in the Proposing Release regarding the term “guarantee” accurately sets forth the coverage of guarantee of a debt obligation or derivative instrument entered into in connection with, pledged as security or a source of payment for, an existing or planned debt obligation by the Rule.

159

Moreover, the Commission continues to believe that guarantees should be included in the adopted definition of the term “financial obligation” because such arrangements could impact an issuer's or obligated person's liquidity, overall creditworthiness, or existing security holder's rights. However, to provide additional clarity, the term “guarantee” is intended to capture any guarantee provided by an issuer or obligated person (as a guarantor)“

160

for the benefit of itself or a third party, which guarantees payment of a financial obligation.

159

See

Proposing Release,

supra

note 3, 82 FR at 13938. As stated in the Proposing Release, under certain circumstances, in order to facilitate a financing by a third party, an issuer or obligated person may provide a guarantee to reduce risks to the provider of the financing and lower the cost of borrowing for the third party. That guarantee may assume different forms including a payment guarantee or other arrangement that could expose the issuer or obligated person to a contingent financial obligation. For example, an issuer that is a county could agree to guarantee the repayment of municipal securities issued by a town located in the county. In this instance, the county could be required to use its own funds to repay the town's municipal securities. Furthermore, an issuer or obligated person may provide a guarantee with respect to its own financial obligation. For example, an issuer or obligated person could, in connection with the issuance of variable rate demand obligations, agree to repurchase, with its own capital, bonds that have been tendered but are unable to be remarketed. In this instance, the issuer or obligated person uses its own funds to purchase the bonds instead of a third party liquidity facility. A guarantee provided for the benefit of a third party or a self-liquidity facility or other contingent arrangement would be a guarantee under the amendments.

160

For a discussion of materiality considerations in connection with the Rule,

see supra

Section III.A.1.i, and for a discussion of the form of event notices provided under paragraph (b)(5)(i)(C)(

) of the Rule,

see supra

Section III.A.1.iii.

A guarantee of a debt obligation or a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation could raise two disclosures under the Rule—one for the guarantor and one for the beneficiary of the guarantee. Specifically, if an issuer or obligated person incurs a material guarantee, such guarantee would be subject to disclosure under the Rule, as amended. For an issuer or obligated person that is the beneficiary of a guarantee provided in connection with a debt obligation or a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation, the Commission believes that, generally, such beneficiary issuer or obligated person should assess whether such guarantee is a material term of the underlying debt obligation or derivative instrument and, if so (and if the underlying debt obligation or derivative instrument is material), disclose the existence of such guarantee under the Rule.

iv. Monetary Obligation Resulting From a Judicial, Administrative, or Arbitration Proceeding

As proposed, the term “monetary obligation resulting from a judicial, administrative, or arbitration proceeding” was included in the definition of “financial obligation” because the Commission believed that the requirement to pay such an obligation could adversely impact an issuer's or obligated person's overall creditworthiness and liquidity, and adversely affect security holders.

161

Commenters who addressed this issue were almost uniformly opposed to the inclusion of this term in the definition of “financial obligation.”

162

A common sentiment among commenters was that monetary obligations resulting from a judicial, administrative, or arbitration proceeding are of a fundamentally different character than the other categories included within the definition of financial obligation, and therefore are ill-suited to being subject to the same set of regulatory language and materiality and financial difficulties determinations.

163

161

See

Proposing Release,

supra

note 3, 82 FR at 13938.

162

See, e.g.,

GA Finance Letter (“The SEC should exclude monetary obligations resulting from judicial, administrative, or arbitration proceedings from the definition of financial obligation.”); DAC Letter (same);

see also

Denver Letter; Houston Letter; San Jose Letter.

163

See

DAC Letter.

Moreover, commenters argued that monitoring the numerous judicial, administrative, and arbitration proceedings to which they are party would be overly burdensome and would require the expenditure of a significant amount of issuer and obligated person time and financial and personnel resources.

164

One commenter questioned whether disclosure of these obligations was necessary, suggesting that many issuers and obligated persons have insurance or funding reserves to cover potential fines or penalties incurred through judicial, administrative or arbitration proceedings.

165

Another commenter stated that in one of the examples cited by the Commission in the Proposing Release as an instance in which a monetary obligation resulting from a judicial proceeding impaired the liquidity and creditworthiness of an issuer, the obligation had been disclosed in the issuer's publicly available audited financial statements, reviewed by rating agencies, and had been widely covered by media prior to the bankruptcy date.

166

164

See, e.g.,

San Jose Letter (“[T]he City is involved in a variety of administrative, judicial and arbitration proceedings at any given time.”); Denver Letter (“[T]he City is involved in hundreds of judicial, administrative and arbitration proceedings every year . . . [i]n the vast majority of cases, staff involved in these contracts, regulatory, judicial and administrative proceedings are not aware of the Rule, making the likelihood of an inadvertent non-compliance much greater . . . [t]he City anticipates a significant amount of time, expense and resources would be required to actively monitor its financial obligations, if the term remains so broadly defined”).

165

See

LPPC Letter.

166

See

NABL Letter.

The Commission is revising the definition of the term “financial obligation” to exclude the term “monetary obligation resulting from a judicial, administrative, or arbitration proceeding.” The Commission believes that, though a monetary obligation resulting from a judicial, administrative, or arbitration proceeding might be relevant to the general financial condition of an issuer or obligated person, such obligations do not typically impact the rights or interests of security holders as issuers and obligated persons generally have reserve funding or insurance to cover such costs, with such funding and insurance typically being reflected in their financial statements.

167

In addition, an initial judgment in a judicial, administrative, or arbitration proceeding may not reflect the ultimate disposition of the proceeding, and years could pass between entry of the initial judgment and the payment of any resulting monetary obligation. Given this delay, the Commission believes that it is unlikely that a monetary obligation resulting from a judicial, administrative, or arbitration proceeding would have an immediate impact on an issuer's or obligated person's liquidity or

creditworthiness or would adversely affect security holders.

167

See

LPPC Letter (arguing that issuers and obligated persons typically have funding reserves and insurance to cover costs related to judicial, administrative, or arbitration hearings).

Accordingly, at this time, the Commission does not believe that monetary obligations resulting from judicial, administrative, or arbitration proceedings raise the same concerns regarding ready and prompt access to information about their existence as the other types of obligations included in the adopted definition of financial obligation. Therefore, the Commission is removing the term “monetary obligation resulting from a judicial, administrative, or arbitration proceeding” from the term “financial obligation.”

v. Exclusion of Municipal Securities as to Which a Final Official Statement Has Been Provided to the MSRB Consistent With Rule 15c2-12 From Definition of “Financial Obligation”

As proposed and adopted, the term financial obligation does not include municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12.

168

In response to the proposed exclusion, some commenters suggested that the Commission should revise the language so the exclusion would apply when the Rule requires a final official statement to be provided to the MSRB rather than when the final official statement has actually been provided to the MSRB by an underwriter.

169

According to commenters, such a revision would allow an issuer or obligated person to utilize the exclusion even when an underwriter fails to submit the final official statement to the MSRB.

170

The Commission declines to adopt the recommended revision. The Commission continues to believe that the exclusion as proposed is consistent with the current regulatory framework in which an underwriter is responsible for delivering the final official statement to the MSRB. Moreover, this framework establishes appropriate incentives for all involved parties to ensure that the final official statement is, in fact, provided to the MSRB, and helps ensure the relevant information is made available to investors.

168

See

Proposing Release,

supra

note 3, 82 FR at 13957.

169

See, e.g.,

DAC Letter;

see also

GA Finance Letter.

170

See, e.g.,

DAC Letter.

Commenters also requested that the Commission revise the proposed language to include an exclusion from disclosure under paragraph (b)(5)(i)(C)(

) for any financial obligation for which a final official statement is provided to the MSRB voluntarily.

171

The Commission declines to adopt the recommended revision. The Commission continues to believe that the exclusion should apply only to municipal securities as to which a final official statement is provided to the MSRB consistent with the Rule, and that such final official statement could be provided to the MSRB voluntarily. If such final official statement is provided to the MSRB voluntarily, the Commission believes that such voluntary submission would be made consistent with the Rule if it is provided to the MSRB consistent with the requirements set forth in Rule 15c2-12(b).

172

Therefore, for this exclusion to apply, whether the final official statement is submitted voluntarily or not, the issuer or obligated person must submit the final official statement to the MSRB subject to the requirements of Rule 15c2-12(b). This exclusion from the definition of “financial obligation” covers only “

municipal securities

as to which a final official statement has been provided to the [MSRB] consistent with this rule”

173

and does not extend to instruments or obligations (contingent or otherwise) related to such municipal securities. Under a continuing disclosure agreement, an issuer or obligated person will need to disclose any such derivative instrument or guarantee if it is material and affects security holders for purposes of new paragraph (b)(5)(i)(C)(

) of the Rule and make any related disclosures required under new paragraph (b)(5)(i)(C)(

) of the Rule.

171

See id.

172

The Commission understands that issuers and obligated persons have since 1995 followed a similar approach with respect to voluntarily submitted final official statements when choosing to opt out of the small issuer exception of Rule 15c2-12(d)(2)(ii)(A).

Cf.

Division of Market Regulation, U.S. Securities and Exchange Commission, Staff Opinion Letter on Rule 15c2-12 (June 23, 1995), at Question 17,

available at https://www.sec.gov/info/municipal/nabl-1-interpretive-letter-1995-06-23.pdf

(staff guidance regarding an issuer's or obligated person's obligations under the Rule if such issuer or obligated person chooses to opt out of the small issuer exception of Rule 15c2-12(d)(2)(ii)(A)).

173

See

17 CFR 240.15c2-12(f) (emphasis added).

The Commission is adopting as proposed the amendment to add new paragraph (b)(5)(i)(C)(

) to the Rule, which requires that a Participating Underwriter in an Offering must reasonably determine that the continuing disclosure agreement provides for the submission of notice of 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 obligated person, provided the occurrence reflects financial difficulties.

As the Commission stated in the Proposing Release, although the occurrence of the events listed in paragraph (b)(5)(i)(C)(

) may not be common in the municipal market, they can significantly and adversely impact the value of an issuer's or obligated person's outstanding municipal securities.

174

The Commission also believes the amendments would facilitate investor access to important information in a timely manner and help to enhance transparency in the municipal securities market and enhance investor protection.

174

See

Proposing Release,

supra

note 3, 82 FR at 13941.

i. Default

Two commenters recommended that “default” be revised to “event of default,” arguing that “default” was vague while “event of default” is usually defined in transaction documents.

175

Because an “event of default” is often specifically defined in transaction documents, it would be more narrowly applied than “default.” As described in the Proposing Release, a default could be a monetary default, where an issuer or obligated person fails to pay principal, interest, or other funds due, or a non-payment related default, where an issuer or obligated person fails to comply with specified covenants.

176

Typically, if a monetary default occurs, or a non-payment related default is not cured within a specified period, such default becomes an “event of default” and the trustee or counterparty to the financial obligation may exercise legally available rights and remedies for enforcement, including an event of acceleration. The Commission believes that there are defaults that may reflect financial difficulties even if they do not qualify as “events of defaults” under transaction documents. This may constitute important information related to an issuer's or obligated person's material financial obligations that could impact an issuer's or obligated person's liquidity, overall creditworthiness, or an existing security holder's rights. Accordingly, the Commission believes the concept of “default” should be retained as proposed.

175

See

Kutak Rock Letter; DAC Letter.

176

See

Proposing Release,

supra

note 3, 82 FR at 13940.

ii. Modification of Terms

One commenter proposed revising “modification of terms” to “modification of material terms”

177

and another commenter recommended adding “including written or verbal waivers” after “modification of terms.”

178

The Commission believes both revisions are unnecessary. A modification of terms would be reported under a continuing disclosure agreement only if the modification “reflect[s] financial difficulties of the issuer or obligated person.” This qualifier is included to help target the disclosure of information relevant to investors in making an assessment of the current financial condition of the issuer or obligated person. Accordingly, because the modification of terms already is subject to a qualifier, the Commission believes there is no need to also include a materiality qualifier. Additionally, “modification of terms” is broad, and as such, a written or verbal waiver of a deal provision would be a modification of the terms of an agreement because such waivers are a departure from what was agreed to under the terms of the agreement. Consequently, the Commission is adopting the concept of “modification of terms” without any changes.

179

177

See

DAC Letter.

178

See

SIFMA Letter.

179

The Commission believes that a “modification of terms” occurs when such modified terms become enforceable against the issuer or obligated person which is consistent with the Commission's view of when a financial obligation is incurred.

See supra

Section III.A.1.ii.

iii. Other Similar Events

One commenter stated that the “other similar events” language was too vague

180

and another recommended that the Commission remove it from the rule text.

181

The Commission continues to believe that the term should be retained in the rule text to ensure that paragraph (b)(5)(i)(C)(

) covers not only defaults, events of acceleration, termination events, or modifications of terms that reflect financial difficulties of the issuer or obligated person, but also events arising under the terms of a financial obligation that similarly reflect financial difficulties of the issuer or obligated person. As stated in the Proposing Release, in order to be subject to disclosure under the Rule, the term “other similar events under the terms of a financial obligation of the obligated person reflecting financial difficulties” must necessarily share similar characteristics with one of the preceding listed events (a default, event of acceleration, termination event, or modification of terms).

182

The Commission is adopting “other similar event” as proposed to address the disclosure of the occurrence of events that, although not specifically set forth in the rule text, are still relevant to investors and other market participants in making an assessment of the current financial condition of the issuer or obligated person. Such events may have potential adverse impacts on the issuer's or obligated person's liquidity and overall creditworthiness, or affect security holders.

180

See

San Jose Letter.

181

See

DAC Letter.

182

See

Proposing Release,

supra

note 3, 82 FR at 13939-40.

iv. Reflect Financial Difficulties

Some commenters argued that “reflect financial difficulties” was vague and encouraged the Commission to provide additional guidance to prevent a flood of event notices to EMMA.

183

One commenter suggested alternative language that would narrow the events reported under paragraph (b)(5)(i)(C)(

184

Some commenters, with the goal of prompting more disclosure to the market, encouraged the Commission to remove the reflects financial difficulties qualifier, stating that it would limit the disclosure of the occurrence of events unrelated to financial difficulties, such as legislative dysfunction, but were nonetheless important to investors.

185

183

See, e.g.,

ABA Letter; Brookfield Letter; Bishop Letter; Kutak Rock Letter.

184

See

SIFMA Letter (recommending the Commission consider replacing “reflecting financial difficulties” with “materially impairs the ability of an issuer/obligated person to pay debt service as scheduled on outstanding obligations,” or “materially impairs the creditworthiness of the issuer/obligated person”).

185

See

ICI Letter; Vanguard Letter; SIFMA AMG Letter;

see also

NFMA Letter (arguing that “the triggering of an event related to financial difficulties should always be publicly disclosed on EMMA, without regard to the materiality of the obligation itself”).

The Commission continues to believe that the “reflect financial difficulties” qualifier is appropriate. The Commission believes that the term is not vague, as the concept of “reflecting financial difficulties” has been used in paragraphs (b)(5)(i)(C)(

) and (

) since the 1994 amendments to Rule 15c2-12, and, as such, market participants should be familiar with the concept as it relates to the operation of Rule 15c2-12.

186

Furthermore, the Commission also believes that additional guidance on the term would be difficult to provide, due to the diversity of issuers and obligated persons as well as the financial conditions affecting them. Accordingly, the Commission believes that “reflect financial difficulties” is an appropriate qualifier to help target the disclosures to result in information relevant to investors in making an assessment of the current financial condition of the issuer or obligated person. Removing “reflect financial difficulties” could result in overly broad disclosures of event occurrences that would not necessarily be relevant or important to investors' decisions, for instance, by not reflecting on the creditworthiness of an issuer or obligated person.

187

Moreover, the narrowed definition of “financial obligation,” as adopted, will limit the number of financial obligations that issuers and obligated persons will need to evaluate when considering whether a disclosure is required under paragraph (b)(5)(i)(C)(

) and thereby reduce the burden on issuers, obligated persons, and dealers.

186

See

Proposing Release,

supra

note 3, 82 FR at 13939.

187

For example, as described in the Proposing Release, an issuer or obligated person may covenant to provide the counterparty with notice of change in its address and may not promptly comply with the covenant. A failure to comply with such a covenant may not reflect financial difficulties; therefore, absent other circumstances, this event likely does not raise the concerns the amendments are intended to address. On the other hand an issuer or obligated person could agree to replenish a debt service reserve fund if draws have been made on such fund. In this example, if an issuer or obligated person fails to comply with such covenant, then such an event likely should be disclosed to investors and other market participants.

See

Proposing Release,

supra

note 3, 82 FR at 13939.

Issuers and obligated persons may consider disclosing the occurrence of events that do not reflect financial difficulties as a matter of best practice if they believe investors would find those occurrences important.

v. Scope of Financial Obligations Subject to Paragraph (b)(5)(i)(C)(

)

Some commenters stated their belief that paragraph (b)(5)(i)(C)(

) applies to all of an issuer's or obligated person's currently outstanding financial obligations as opposed to just those incurred after the effective date of the amendments.

188

Another commenter recommended limiting this event to only those financial obligations that had been previously disclosed under paragraph (b)(5)(i)(C)(

189

188

See

Kutak Rock Letter; NAMA Letter.

189

See

SIFMA Letter.

As discussed below, the amendments will only affect those continuing disclosure agreements entered into on or after the compliance date for these amendments. Issuers and obligated persons with a continuing disclosure agreement entered into on or after the compliance date must disclose, pursuant to paragraph (b)(5)(i)(C)(

), material financial obligations incurred on or after the date on which such a

continuing disclosure agreement was entered into. However, an event under the terms of a financial obligation pursuant to paragraph (b)(5)(i)(C)(

) that occurs on or after the compliance date must be disclosed regardless of whether such obligation was incurred before or after the compliance date. The Commission believes narrowing paragraph (b)(5)(i)(C)(

) to only financial obligations incurred after the compliance date or disclosed under paragraph (b)(5)(i)(C)(

) would exclude important information regarding the current financial condition of the issuer or obligated person that could potentially adversely impact the issuer's or obligated person's liquidity and overall creditworthiness. Financial obligations incurred prior to the compliance date for these amendments may have long maturity dates and the occurrence of the events set forth in paragraph (b)(5)(i)(C)(

) can significantly and adversely impact the value of an issuer's or obligated person's outstanding municipal securities. Additionally, the Commission believes that the burden on issuers and obligated persons to monitor for these events will be limited because the occurrence of a default, event of acceleration, termination event, modification of terms, or other similar events, are significant in nature, and therefore issuers and obligated persons should typically be aware that they have occurred.

B. Technical Amendment

The Commission did not receive any comments on its proposed technical amendment to paragraph (b)(5)(i)(C)(

) of the Rule to remove the term “and” because new events are proposed to be added to paragraph (b)(5)(i)(C) of the Rule. The Commission is adopting this amendment as proposed.

C. Compliance Date and Transition

The amendments to Rule 15c2-12 will impact only those continuing disclosure agreements entered into in connection with Offerings that occur on or after the compliance date of these amendments.

190

Accordingly, continuing disclosure agreements entered into prior to the compliance date would not be required to reflect changes made to the Rule by such amendments. As a result, for municipal securities issued prior to the compliance date, a recommending dealer would not be required to have procedures in place that provide reasonable assurance that it will receive prompt notice of the events added to the Rule by the amendments.

191

190

For a discussion of how issuers and obligated persons should proceed when a preliminary official statement is distributed prior to the compliance date, but the Offering is settled and the continuing disclosure agreement is executed after the compliance date,

see

below in this Section III.C.

191

In the Proposing Release, the Commission stated that under paragraph (c) of the Rule, a dealer cannot recommend the purchase or sale of a municipal security unless such dealer has procedures in place that provide reasonable assurance that it will receive prompt notice of any event disclosed pursuant to paragraphs (b)(5)(i)(C) and (D) and paragraph (d)(2)(ii)(B) of the Rule with respect to the security. The Commission recognized that for continuing disclosure agreements entered into prior to the compliance date, the recommending dealer would receive notice solely of those events covered by that continuing disclosure agreement, which would likely not include any of the items added by the amendments.

See

Proposing Release,

supra

note 3, 82 FR at 13941. The Commission solicited comments on the impact of the proposed amendments with respect to recommending dealers. With the exception of one related comment that is discussed in Section IV.D.4., the Commission received no comments on this subject.

Additionally, in the Proposing Release, the Commission stated that the amendments would apply to continuing disclosure agreements that are entered into in connection with Offerings occurring on or after the compliance date of the amendments.

192

One commenter inquired whether, under that formulation, a primary offering “occurs” on the date of the distribution of the preliminary official statement or on the date the corresponding issuance of municipal securities is settled and the continuing disclosure agreement is executed.

193

For the purposes of these amendments, the Commission believes that an Offering generally should be considered to occur on the date the continuing disclosure agreement is executed. However, if a preliminary official statement is distributed before the compliance date, with an expectation that the Offering will occur on or after the compliance date, the preliminary official statement should generally attach a form of continuing disclosure agreement that reflects the adopted amendments.

192

See id.

193

See

Hawkins Letter.

In the Proposing Release, the Commission proposed a compliance date three months after the final adoption of the amendments. Several commenters argued that the proposed compliance period of three months after adoption was insufficient.

194

Commenters stated that issuers and obligated persons would need to establish and implement procedures to centralize information, which would both be costly and time-consuming.

195

Another commenter questioned whether the MSRB would be able to implement the necessary adjustments to EMMA by the compliance date.

196

However, another commenter argued that the three-month period was suitable and urged the Commission to make the amendments effective as soon as practicable.

197

The Commission has considered these comments and is extending the compliance date to 180 days after publication of the amendments in the

Federal Register

. The Commission believes that a date of 180 days after publication of the amendments in the

Federal Register

should be sufficient time for Participating Underwriters to revise their procedures to comply with the Rule, and for issuers and obligated persons to become aware of the amendments and plan for their implementation. Moreover, after consultation by Commission staff with MSRB staff, the Commission believes 180 days after publication of the amendments in the

Federal Register

will be adequate for the MSRB to make the necessary modifications to the EMMA system. The Commission is establishing February 27, 2019 as the compliance date for these amendments.

198

194

See

GFOA Letter; ABA Letter; BDA Letter; NABL Letter.

195

See

GFOA Letter; NABL Letter; NAMA Letter.

196

See

ABA Letter.

197

See

ICI Letter.

198

If any of the provisions of these amendments, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

IV. Paperwork Reduction Act

The Rule, as amended, contains “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).

199

In accordance with 44 U.S.C. 3507 and 5 CFR 1320.11, the Commission submitted revisions to the currently approved collection of information titled “Municipal Securities Disclosure” (17 CFR 240.15c2-12) (OMB Control No. 3235-0372) to the Office of Management and Budget (“OMB”). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

199

44 U.S.C. 3501

et seq.

In the Proposing Release, the Commission provided estimates of the burden of complying with the proposed amendments to the Rule and solicited comments on those estimates and the collection of information requirements. On April 26, 2018, the Commission published a notice soliciting comment

on the currently approved collection of information;

200

the Commission hereby withdraws this notice from the

Federal Register

, but addresses the comments received

201

in response to it below in this Section IV. In the Proposing Release, the Commission stated that the estimates of the effect that the amendments will have on the collection of information were based on data from various sources, including the most recent PRA submission for Rule 15c2-12.

202

As discussed above, the Commission received numerous comment letters on the proposed rulemaking. Of the comment letters the Commission received, some commenters addressed the collection of information aspects of the proposal.

203

Certain commenters addressed the accuracy of the Commission's burden estimates for the proposed collection of information, stating that the estimates were too low. The Rule as amended includes several modifications or clarifications from the proposed rule amendments that address concerns raised by commenters and that are intended, in part, to decrease implementation burdens relative to the proposal. As discussed in Section III.A.2., the Commission is narrowing the scope of the amendments to Rule 15c2-12 and expects that the total burden of complying with the adopted amendments to Rule 15c2-12 will be significantly lower than the burden of complying with the amendments as originally proposed. Nevertheless, in response to comments received on the burden estimates in the Proposing Release, the Commission is revising its approach to estimating the PRA burden related to the Rule and is increasing its PRA burden estimates related to the amendments and Rule 15c2-12.

200

Proposed Collection; Comment Request (Extension: Rule 15c2-12, SEC File No. 270.330, OMB Control No. 3235-0372), 83 FR 18358 (Apr. 26, 2018).

201

See

SIP Letter; NABL III Letter.

202

See

Submission for OMB Review; Comment Request (Extension: Rule 15c2-12, SEC File No. 270.330, OMB Control No. 3235-0372), 80 FR 9758 (Feb. 24, 2015) (“2015 PRA Notice”).

203

See, e.g.,

NABL OMB Letter; GFOA Letter; Kutak Rock Letter; ABA Letter; AZ Universities Letter; Arlington SD Letter; Denver Letter; NAHEFFA Letter; NCSHA Letter; SIFMA Letter; SIP Letter; and TASBO Letter.

Discussed below is the revised Paperwork Reduction Act analysis for Rule 15c2-12. First, the Commission provides a summary of the collection of information required under Rule 15c2-12 prior to these amendments, the amendments to Rule 15c2-12 as proposed, and the amendments to Rule 15c2-12 as adopted. Second, the Commission summarizes the use of the information collected under the Rule. Third, the Commissi

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