As we reported in our November 2018 posting, the SEC amended 17 CFR 240.15c2-12 (Rule 15c2-12) to add two additional ‘material events’ that an obligated person must disclose to security holders within 10 business days of occurrence – generally, (a) the incurrence of a financial obligation, if material, or agreement to terms typical of a financial obligation that affect security holders, if material (the “Financial Obligation Event”) and (b) the occurrence of an event, such as a default, under the terms of a financial obligation that reflects financial difficulty of the obligated person (the “Financial Difficulty Event”). Our previous post described these additional disclosure items, and the interpretive questions they raise, in greater detail; here, we focus on practical timing aspects of implementation for issuers, obligated persons and municipal securities dealers.
Existing CDCs for Bonds Outstanding Prior to Compliance Date.
An obligated person’s disclosure obligations, under a continuing disclosure undertaking (a “Continuing Disclosure Certificate,” or “CDC”) executed prior to February 27, 2019 (the “Compliance Date”) with respect to bonds issued prior to the Compliance Date, will not change with the Compliance Date. The CDC is not required to be amended to include the Financial Obligation Event or the Financial Difficulty Event, and dealers are not required to have procedures in place to receive prompt notice of these new events with respect to such outstanding bonds.
Municipal Securities Offerings On or After Compliance Date.
CDCs executed on or after the February 27, 2019 Compliance Date must include the Financial Obligation Event and the Financial Difficulty Event as events that the obligated person undertakes to disclose. Note that if a preliminary official statement is distributed prior to the Compliance Date with the expectation that the municipal securities will settle, and the CDC will be executed on or after the Compliance Date, then the preliminary official statement should attach a form of the CDC that includes the new Financial Obligation Event and the Financial Difficulty Event.
Preparation by Issuers and Obligated Persons.
Issuers and obligated persons should consider updating their disclosure policies and procedures prior to the Compliance Date to reflect the new amendments in preparation for any contemplated municipal securities offering in 2019. Implementing procedures to catalog all financial obligations, monitor the occurrence of Financial Obligation Events and Financial Difficulty Events and make materiality determinations, updating forms of material event notices, and training relevant personnel on the new procedures will take time and coordination. For example, issuers and obligated persons should consider now whether your practice will be to attach the entire financial obligation document to a Financial Obligation Event notice or if a summary will be drafted (by whom? subject to internal or external counsel review?), and how you will monitor a Financial Difficulty Event that occurs with respect to a financial obligation that was entered into prior to February 27, 2019.
Preparation by Municipal Securities Dealers.
Under Rule 15c2-12(c), a dealer cannot recommend the purchase or sale of a municipal security unless the dealer has procedures in place that provide reasonable assurance that it will receive prompt notice of any material events required to be disclosed under Rule 15c2-12 as well as any notices of ‘failure to file’ annual reports required under Rule 15c2-12 with respect to the security. Thus, a firm’s existing procedures to obtain a CDC, due diligence questions, and guidelines for underwriter’s counsel should be updated to reflect inclusion of the Financial Obligation Event and Financial Difficulty Event. Appropriate communication and training of the new procedures to the firm’s municipal securities dealers will help ensure consistent compliance across the firm.