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SEC Amends Municipal Securities Disclosure Rules

To enhance the quality of information available to municipal securities investors, the U.S. Securities and Exchange Commission (“SEC”) recently approved amendments to the rules governing the content and timeliness of municipal securities disclosures. On May 26, 2010, the SEC published its final rule, amending Rule 15c2-12 of the Securities and Exchange Act of 1934 (hereinafter, the “Rule”).1 The Rule sets forth the procedures that brokers, dealers, and municipal securities dealers (collectively, “Participating Underwriters”) must follow in connection with a primary offering of municipal securities and what must be included in an issuer’s continuing disclosure agreement (“CDA”).

Currently, the Rule prohibits Participating Underwriters from purchasing or selling municipal securities unless they reasonably believe that the issuer or an obligated person (collectively, “Issuer”) has agreed to disclose certain information, which includes annual financial statements and notices of certain events. The amendments to the Rule augment and add to the list of information that must be disclosed, expand the Rule to apply to variable rate demand obligations (“VRDOs”), provide for the disclosure of certain identified tax risks, and create specific deadlines for Issuers to provide notice of certain events. Paragraph (d) of the Rule, which exempts certain offerings of municipal securities, has been changed by deleting the prior exemption for


The Rule provides that Participating Underwriters must have a reasonable belief that the Issuer of municipal securities has entered into a CDA to provide notice of certain events. Under the current Rule, notice of the listed events has to be given only if they are deemed “material.” The amended Rule eliminates the “material” qualification for the following events:

  • Failure to pay principal and interest;
  • Unscheduled draws on debt service reserves reflecting financial difficulties;
  • Unscheduled draws on credit enhancements reflecting financial difficulties;
  • Substitution of credit or liquidity providers, or their failure to perform;
  • Defeasances, including situations where the Issuer has provided for future payment of all obligations of a bond; and
  • Ratings changes.

Thus, under the amended Rule, Participating Underwriters must reasonably determine that the Issuer has agreed to submit an event notice to the Municipal Securities Rulemaking Board (“MSRB”) within ten business days of the occurrence of the above events, without regard to materiality. However, the materiality qualification is retained for certain other events.2

The amended Rule also adds to the list of events which require notice to the MSRB. These additional events are:

  • Tender offers;
  • Bankruptcy, insolvency, receivership or similar proceedings;
  • Mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person, agreements to enter into such transactions (or their termination other than pursuant to their terms), if material; and
  • Appointment of a successor or additional trustee or change of the name of the trustee, if material.

Due to these changes, Issuers and Participating Underwriters must ensure that the CDAs which Issuers enter into once the amended Rule takes effect require notice of these new events.


VRDOs are municipal securities which bear interest at a rate that is periodically reset and allow investors to sell (tender) them back to the Issuer at certain times for their full value. Generally, there are no CDAs covering outstanding VRDOs because primary offerings of these securities are exempt under the current Rule. Both the amount of outstanding VRDOs and their volatility has increased in recent years, prompting the SEC to re-evaluate the exemption. The amendment partially removes the exemption, so that new issuances of VRDOs will be subject to the Rule’s notice of event disclosure and reporting requirements. Thus, Participating Underwriters will have to reasonably determine that Issuers of VRDOs enter into CDAs which require continuing disclosure of the events listed in section (b)(5) of the Rule. VRDOs continue to be exempt from the primary offering provisions contained in sections (b)(1) – (4) of the Rule, which involve providing offering statements. VRDOs outstanding on November 30, 2010 are subject to a limited grandfather exemption and will not be subject to the amended disclosure rules unless their remarketing constitutes a “primary offering” under the Rule.


The tax treatment of municipal securities significantly impacts their value to investors. The amended Rule increases the number of tax-related events which trigger the requirement to provide an event notice under paragraph (b)(5)(i)(C) of the Rule. As amended, the Rule requires Participating Underwriters to reasonably determine that Issuers have entered into a CDA which covers the disclosure of the following events:

  • Adverse tax opinions;
  • Issuance by the Internal Revenue Service of proposed or final determinations of taxability;
  • Notices of Proposed Issue or other material notices or determinations with respect to the tax status of the security; and
  • Other material events affecting the tax status of the security.


The amended Rule provides that the required notice of events be disclosed in a timely manner not in excess of ten business days after the occurrence of the event. The SEC believes that the current Rule, which merely provides for disclosure “in a timely manner,” allows unacceptable delays of up to several months after an event has occurred before event notices are submitted to the MSRB.3


The amendments only affect primary offerings that occur on or after December 1, 2010. Additionally, the amended Rule provides a limited grandfather provision for remarketings of currently outstanding VRDOs.4


The SEC has previously articulated its doubt that a Participating Underwriter could form a reasonable basis to recommend a municipal security if the municipality has a history of persistent and material non-disclosure. The SEC has expanded its guidance by suggesting that a Participating Underwriter could not meet the reasonable belief standard without affirmatively inquiring about the Issuer’s filing and disclosure history. A Participating Underwriter should not rely solely on the representations of the Issuer but should base its belief on its own independent review of the Issuer’s filing and disclosure history. To do so, the SEC recommends several steps, which include obtaining certificates from the Issuer and using the MSRB EMMA electronic filing system and legacy state and national filing systems.


[1] 17 CFR § 240.15c2-12.

[2] These include: non-payment related defaults; modifications to rights of security holders; bond calls; and release, substitution, or sale of property securing repayment of the securities. 17 CFR § 240.15c2-12(b)(5)(i)(C).

[3] Since July 1, 2009, all filings are required to be made with the MSRB’s Electronic Municipal Market Access system (“EMMA”).

[4] A Participating Underwriter remarketing VRDOs that are outstanding on November 30, 2010 (and which have remained outstanding as VRDOs) is not required to reasonably determine that the Issuer has entered into a CDA in compliance with the amended Rule unless any such remarketing constitutes a “primary offering” under the Rule.