FINANCIAL MANAGEMENT/Fulfilling obligations
A municipal bond issue has just closed, and the money is in the bank. The issuing government may be tempted to toss the bond transcript on the shelf and forget about it. But the New York-based Securities and Exchange Commission’s (SEC), Rule 15c2-12 requires ongoing disclosures as long as bonds are outstanding. Those generally are referred to as “secondary” market disclosures because they follow the initial offering of municipal securities.
In 1989, the SEC adopted Rule 15c2-12, which requires municipal securities underwriters to review an official statement before purchasing, offering or selling municipal securities. Although the SEC does not have the authority to regulate the issuer, it has the authority to regulate underwriters, in effect requiring the local government to assume certain duties before underwriters can legally purchase the bonds.
With those primary disclosure regulations in place, the SEC was satisfied that the initial bond purchasers would have the information necessary to make informed investment decisions. The commission, however, still was concerned about the investor who would purchase the bonds in the secondary market five or even 10 years after the initial offering. It responded in 1994 by adopting amendments to Rule 15c2-12, which prohibit underwriters from purchasing or selling municipal securities unless the issuer or a representative provides certain annual financial information and event notices to various nationally recognized municipal securities information repositories (NRMSIR) and to the appropriate state information depository. (A list of NRMSIRs can be found at www.sec.gov/info/municipal/nrmsir.htm.) The information also may be reported solely to DisclosureUSA, a “central post office” created for such filings by the Municipal Advisory Council of Texas.
Again, the underwriter is being regulated but, in effect, the issuer (or any “obligated person”) must agree to make the disclosures before an underwriter can purchase the bonds. The government issuing the bonds enters into the “continuing disclosure agreement” when the bond initially is offered.
Annual financial information and notices of material events are the two basic forms of information that must be reported under Rule 15c2-12. Annual financial information of the issuer and each obligated person for whom financial information is presented in the final official statement must be reported annually.
For municipal securities being offered, the following events, if material, must be reported: principal and interest payment delinquencies; non-payment related defaults; 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; adverse tax opinions or events affecting the tax-exempt status of the security; modifications to rights of security holders; bond calls; defeasances; release, substitution, or sale of property securing repayment of the securities; and rating changes.
Like most rules and regulations, many exceptions apply. For example, offerings of less than $1 million do not require an official statement or continuing disclosure. The issuer should evaluate each offering with help from bond counsel to determine which, if any, of the requirements apply.
The author is an attorney with Pittsburgh-based Thorp, Reed & Armstrong.
