SEC Expands Disclosure Obligations for Governmental Bond Issuers

Summary

In August 2018, the Securities and Exchange Commission ("SEC") published final rules amending SEC Rule 15c2-12 (the "Rule") to add two additional types of events which issuers of governmental bonds which enter into continuing disclosure agreements will have to monitor and, if they occur, of which they will need to provide notice within ten (10) business days.

Background

The Rule generally requires a governmental issuer of publicly offered bonds or notes to enter into an agreement to (1) file annual financial information and operating data with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system on an annual basis, and (2) provide notice of the occurrence of certain "material events" specified by the Rule on the EMMA system on an ongoing basis within ten (10) business days of their occurrence. The amendment adds to the list of "material events" covered by the Rule.

New Requirements

The amendment added the following two new items to the list of "material events" which must be reported to EMMA within ten (10) business days of their occurrence:

1. Incurrence, or Amendment to Terms, of "Financial Obligations". Under new event (15), issuers must report the incurrence of a "financial obligation", if material. "Financial obligation" is defined as 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 guarantee of either. The SEC noted in the final rules that, with respect to a "debt obligation," whether an obligation is "debt" for state law purposes is not determinative; rather, the term "debt obligation" refers more broadly to circumstances under which an issuer has borrowed money.

Local bank notes and loans, capital leases (such as equipment leases), state trust fund loans, clean water and safe drinking water loans, temporary school borrowings, and USDA-RD loans are financing instruments commonly found in Wisconsin, which could fall within this definition, depending on their terms. A guarantee of another entity's debt could also fall within the definition. However, a "financial obligation" does not include municipal securities as to which a final official statement has been filed on EMMA in accordance with the Rule.

Additionally, issuers are required to report any agreement to amend or change the terms of such a financial obligation (such as covenants, events of default, remedies, priority rights, or other similar terms), any of which affect security holders, if material.

In the final rules, the SEC advised that notices for new event (15):

"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."

2. Event Under Financial Obligation Reflecting Financial Difficulty. Under new event (16), issuers are required to report a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation described above, any of which reflect financial difficulties.

Compliance Date

The date for compliance with the amendments has been set for February 27, 2019. This means that for all bond and note issues closing on or after February 27, 2019, the continuing disclosure undertaking must include new events (15) and (16).

What the Amendment Means for Governmental Issuers of Bonds and Notes

Beginning with any publicly offered bond or note issues closing on or after February 27, 2019, issuers should be aware that they will likely be required to agree to monitor and report:

• the incurrence of any "financial obligation", if material (which could include, but is not limited to, entering into any bank loan, state trust fund loan, capital lease, clean water or safe drinking water loan, temporary school borrowing, USDA-RD loan, and guarantee of obligations of others),
• agreeing to the amendment of the terms of a "financial obligation" (such as covenants, events of default, remedies, priority rights or similar terms) which affects holders of the bonds or notes, if material, and
• a default, event of acceleration, termination event, modification of terms or similar event under a "financial obligation" reflecting financial difficulties.

Issuers may wish to review their records and develop plans now to monitor, evaluate, and report such events.

For more information, the full text of the 2018 Amendment can be found here.

• Rebecca A. Speckhard: (414) 277-5761 / rebecca.speckhard@quarles.com