Client Alert: SEC Proposes Amendments to Rule 15C2-12

Date: August 6, 2009

On July 17, 2009, the Securities and Exchange Commission (the "SEC") published SEC Release No. 34-60332 (Release 34-60332), Proposed Amendment to Municipal Securities Disclosure, requesting comments on proposed amendments to Rule 15c2-12 (the "Rule"). The SEC's proposed amendments, which are described in more detail below, would (1) revise the scope of the continuing disclosure requirements of the Rule to include variable rate demand obligations, (2) expand the description of events relating to tax risk required to be disclosed in a notice filing, (3) add to the list of events requiring notice filings and require notice of certain events without the need for a separate finding of materiality, and (4) establish a more specific filing date for submission of notice filings. In addition, the Release provides interpretative guidance intended to assist issuers, brokers, dealers, and municipal securities dealers in meeting their obligations under federal antifraud statutes and regulations. The Release is available at

Rule 15c2-12 was adopted by the SEC in 1989 to require underwriters of municipal securities in primary offerings to obtain, review and distribute the "deemed-final" official statement. The Rule was amended in 1994 to require that an underwriter may not purchase or sell municipal securities in connection with a primary offering unless the underwriter has reasonably determined that the issuer of the municipal securities or other obligated person (the "Obligated Party(ies)") has entered into a written undertaking to provide, either directly or indirectly through an indenture trustee or a designated agent: (1) certain financial information annually and (2) timely notice of certain specified material events. Since July 1, 2009, such disclosure information must be submitted to the Municipal Securities Rulemaking Board ("MSRB") through its Electronic Municipal Market Access ("EMMA") system. Rule 15c2-12 presently contains various exemptions from its primary offering and continuing disclosure requirements, including an exemption for certain variable rate demand obligations ("VRDOs"). Rule 15c2-12 also specifies eleven events for which the Obligated Party must agree to give notice to the MSRB through EMMA in a timely manner if the occurrence of such event is deemed material.

Proposed Amendments to Rule 15c2-12
The proposed amendments to Rule 15c2-12 would eliminate the continuing disclosure exemption for VRDOs and will affect the material events disclosure obligations of Obligated Parties. Currently, continuing disclosure agreements ("CDAs") entered into under the Rule require issuers and obligated persons to disclose the occurrence of 11 specified events, but only if such an occurrence is "material." The proposed amendments would both expand the number of the events that Obligated Parties are required to disclose and also remove the qualification of materiality from some of those events.

Omitting the materiality qualification from some of these events may require Obligated Parties to make filings in circumstances not required by the current Rule. On the other hand, there will be less need to carefully analyze whether a particular event is "material" or not since the revised Rule would mandate disclosure regardless of materiality.

The SEC has requested comments on whether the omission of the materiality qualification would require disclosure of information that is not necessary to protect investors from fraud or to aid brokers, dealers, and municipal securities dealers in satisfying their obligations under the securities laws

The following is a summary of the proposed amendments to the Rule.

1. Variable-Rate Demand Obligations. The continuing disclosure exemption will be repealed for newly-issued VRDOs and VRDOs that are subject to a remarketing that constitutes a "primary offering" within the meaning of the Rule. However, VRDOs will continue to be exempt from the primary offering requirements of the Rule.

2. Additional Material Events. Five new material events would be established:

  • the issuance by the Internal Revenue Service ("IRS") of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax-exempt status of the securities. This proposal would supplement the existing required event disclosure of changes to the tax-exempt status of the securities;
  • tender offers;
  • bankruptcy, insolvency, receivership or similar proceedings;
  • consummation of a merger, consolidation or acquisition involving an Obligated Party or the sale of substantially all of the assets of an Obligated Party, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; and
  • appointment of a successor or additional trustee or the change of name of a trustee.

3. Mandatory Material Event Disclosures. The following material events would be required to be disclosed regardless of materiality:

  • principal and interest payment delinquencies;
  • unscheduled draws on debt service reserves or credit enhancements reflecting financial difficulties;
  • substitution of credit or liquidity pro¬viders or their failure to perform;
  • adverse tax opinions, the issuance by the IRS of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax-exempt status of the securities, or other events affecting the tax-exempt status of the securities;
  • tender offers;
  • defeasances;
  • rating changes; and
  • bankruptcy, insolvency, receivership or similar proceedings.

4. Elimination of Exemption for Variable Rate Demand Obligations. The proposed amendments to the Rule also eliminate the current exemption from the annual and "material events" disclosure requirements of the Rule for securities that can be tendered to the issuer, at the option of the holder, at least as frequently as every nine months. VRDOs in most cases qualify for this exemption. The proposed amendments, if adopted, will not apply to outstanding VRDOs unless and until those securities are remarketed under circumstances that meet the definition of a "primary offering" under the Rule, which include a remarketing that is accompanied by a change in authorized denominations to less than $100,000 or a change in the tender frequency period to more than nine months.

5. New Filing Date for Notice Filings. The proposed amendments would modify the Rule to require CDAs to obligate issuers and other Obligated Parties to submit notices of important events "in a timely manner not in excess of 10 business days after the occurrence of the event," instead of "in a timely manner" as the Rule currently provides. This proposed change is likely to impose on issuers (particularly smaller issuers) more substantial procedures to monitor these important events to ensure that issuers submit these notices within the 10-business day requirement. The SEC has requested comments on whether the 10-business day period should begin when an issuer or other Obligated Party knows or should have known of the occurrence of the event, rather than on the date of the occurrence of the event itself.

6. Effective Date and Transition. The SEC has indicated that it would make the effective date of any amendments to the Rule no earlier than three months after any final adoption to permit market participants to establish the systems and procedures necessary to comply with the amended Rule.

This Alert has been prepared for general informational purposes only and is not intended as specific legal advice and no legal or business decision should be based solely on its content.

Please contact Deborah H. Diehl, D. Scott Freed, Damian Mark or Herman Rosenthal if you have any questions on the Rule Proposals.