Tuesday, April 18, 2017

NABL says costs of muni disclosure rules would vastly exceed SEC estimates

By Jacquelyn Lumb

The National Association of Bond Lawyers has written to the SEC to express its concerns about the burdens associated with proposed amendments to Rule 15c2-12 which, based on a survey of its members, suggest may be more than 100 times the SEC’s estimate. NABL said the Office of Management and Budget should file comments and disapprove the collection of information in the proposed amendments pending a revised estimate and cost/benefit analysis.

New event notices. The SEC’s proposal would amend the list of event notices that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer or an obligated person has undertaken in a written agreement or contract for the benefit of holders of municipal securities. The events for which notice must be provided to the MSRB would include the incurrence of a financial obligation of the obligated person, if material, or agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation.

Dealers would also have to report any defaults, events of acceleration, terminations, modifications of terms, or other events under the terms of a financial obligation that may reflect financial difficulties. Participating underwriters in a municipal securities offering would have to confirm that the issuer or the obligated person has entered into a continuing disclosure agreement (CDA) to provide timely notice of the proposed events to the MSRB, in addition to the 14 events currently included in the rule.

Scope of proposal. The proposing release makes clear that the term “financial obligation” is to be broadly interpreted, NABL noted. The amendments would affect all issuers and obligated persons entering into CDAs regardless of size or type. The SEC in its 2012 report on the municipal securities market estimated that there were close to 44,000 issuers which, collectively, enter into a staggering number of leases and other financial obligations in the ordinary course of business, NABL wrote.

The SEC adopted initial continuing disclosure amendments to Rule 15c2-12 in 1995, expanded them through interpretations and amendments to the antifraud provisions, and imposed additional duties on underwriters in an effort to improve market practices. These EDGAR-like filing requirements on municipal securities issuers have been imposed even though the SEC does not have the statutory authority to regulate issuers directly, NABL noted.

Compliance time estimates. NABL explained that the SEC used prior time estimates in determining the burden of filing the new events, but the new events impose qualitatively different compliance obligations. NABL added that the SEC had been informed by knowledgeable industry participants that its prior estimates had greatly underestimated the compliance burdens of the current rule. Even if the prior estimates had been reasonable when they were made, NABL said they are no longer reliable. The new reportable events would take substantially more time to review and disclose.

Enforcement actions. NABL also pointed to SEC enforcement actions since the prior time estimates were made. The SEC has settled more than 140 proceedings under its municipalities continuing disclosure cooperation (MCDC) initiative which dramatically raised the burdens of collecting information under the existing rule, according to NABL. It is now more difficult to determine the SEC’s view of what is material, NABL said, so in order to avoid a cease-and-desist order under the MCDC initiative, underwriters must construe the term more broadly.

NABL’s comment letter addresses only the burdens imposed by the collection of information that would result from the proposed amendments, and it intends to submit additional comments to address whether the proposed amendments should be adopted or revised. The deadline for comments is May 15.