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Seven Things Everyone Asks About Continuing Disclosure
In a vain attempt to be like the trendy media outlets that use odd-numbered lists and slightly misleading headlines as clickbait, we present answers to seven commonly asked questions about the continuing disclosure requirements of SEC Rule 15c2-12.
As anyone who would be interested enough to click on this post surely knows, Rule 15c2-12 generally requires underwriters of municipal securities to (1) review an official statement before an offering and (2) determine that an obligated person has promised to provide certain ongoing information to investors after the offering. In the years following the end of the SEC’s Municipalities Continuing Disclosure Cooperation initiative in 2014, many in the industry have been revisiting the continuing disclosure component of the rule. The members of the Gilmore & Bell securities group frequently receive some version of the following questions.
1. Which entity should sign a continuing disclosure agreement? The rule requires “an obligated person” to enter into an undertaking, and defines “obligated person” to mean an entity committed by contract or other arrangement to support payment of municipal securities. In a standard municipal securities transaction, the governmental issuer is the only “obligated person” and should enter into the continuing disclosure undertaking. If a transaction involves multiple obligated persons, one entity alone may undertake to provide the required information, although it may need to agree to obtain the information from other obligated persons.
2. How long after its fiscal year should an issuer or borrower have to file annual financial information? The rule itself does not dictate a specific deadline for filing annual financial information. SEC staff has informally indicated that the rule should be read to require an annual report deadline no longer than one year after the end of an obligated person’s fiscal year, but underwriters, investors and market practices generally dictate standard deadlines based on the nature of the transaction and credit. These market standard deadlines are almost always shorter than one year (typically in the range of six months) and SEC staff has informally embraced deadlines closer to the deadlines applicable to public companies. Our recommended best practice is to draft continuing disclosure undertakings consistent with market standards after confirming representatives of the obligated person understand the deadline and believe submitting the required information within the deadline will be possible.
3. Is a “private placement” automatically exempt from the rule? No. The SEC used the word “offering” in the rule instead of “distribution,” to avoid suggesting that a private placement or limited offering exemption was implicit in the rule. The rule provides explicit exemptions in certain circumstances, including in an offering of less than $1,000,000 or if the securities are sold in denominations of $100,000 or more to no more than 35 sophisticated investors who agree they are purchasing for their own account.
4. Does a change in outlook constitute a “rating change” material event under the rule? No. According to SEC guidance, indicators of an increased likelihood of an impending rating change, such as a change in outlook, do not constitute a “rating change” for purposes of the rule.
5. Is a mandatory sinking fund redemption of bonds an event requiring notice of a “bond call” under the rule? No. Notice of a mandatory, scheduled redemption is not required under a continuing disclosure undertaking if the terms of the redemption are set forth in detail in the final official statement. Note that any notices required to be provided to bondholders through DTC under a bond resolution or indenture still must be given. In instances where an event notice of a bond call is required on EMMA, the notice is not required to be provided on EMMA any earlier than notice is given through DTC.
6. Does the rule require an obligated person to prepare audited financials or require the use of certain accounting principles? No, but a compliant disclosure undertaking must state whether the financial statements that will be provided pursuant to the undertaking will be audited and specify, in reasonable detail, the accounting principles pursuant to which the financial statements will be prepared.
7. Does entering into a bank loan or private placement constitute an event requiring notice under the rule? Not yet. The SEC proposed an amendment to the rule in March 2017 that would add two new events relating to financial obligations of obligated persons, like bank loans and other similar transactions. Though the proposal has not formally been adopted, it is a good practice for issuers and obligated persons to voluntarily disclose material bank loans or private placements on EMMA if there is other publicly-offered debt outstanding. Market participants generally expect the proposed amendment will be adopted in some form and will require new undertakings to include a notice for material bank loans and private placements.
Hopefully, this post provides guidance on some aspects of the continuing disclosure component of Rule 15c2-12. At a minimum, we in the Gilmore & Bell securities group hope we can once again walk down the street without crowds of people demanding answers from us about these nuances of Rule 15c2-12.