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What municipal issuers should know about changes to securities requirements

Authored by Susan Borries Reed and Alyssa Glaser

Many municipal issuers have outstanding bonds that have been purchased by underwriters and are familiar with the securities requirements for bonds – both at the time of sale and ongoing reporting requirements known as continuing disclosure requirements (CD Requirements). Under the Securities Exchange Commission (SEC) Rule 15c2-12 (Rule), prior to purchasing municipal securities, an underwriter must obtain an agreement from the issuer that it will provide certain financial information to meet these CD Requirements, including updating certain financial information on an annual basis and providing the market with notice of certain reportable events within 10 business days of the occurrence of such event. Since the adoption of the Rule, there have been several amendments which have directly and indirectly increased responsibilities for underwriters and issuers alike. In 2009, the Municipal Securities Rulemaking Board (MSRB) became the sole repository for disclosure filings through the use of its Electronic Municipal Market Access (EMMA) system, and now all filings for CD Requirements must be filed on EMMA.

The most recent amendment requires issuers to add two new reportable events to their CD Requirements, effective for debt obligations issued on or after Feb. 27, 2019.  

  • Under the first new reportable event, the issuer is obligated to file on EMMA any new material financial obligation unless the financial obligation is issued with an official statement, as well as any material agreement to covenants, events of default, remedies, priority rights, or similar terms of any financial obligation which affect security holders. 
  • A second new reportable event requires the issuer to file any default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation, any of which reflect financial difficulties. This second event applies to any outstanding financial obligation of the issuer, even if the financial obligation existed before the Feb. 27, 2019 effective date.

It is anticipated that these new reportable events will require issuers to coordinate with their dissemination agents, like Baker Tilly Municipal Advisors, LLC (BTMA), much more than they have in the past. BTMA has worked with local issuers and bond counsels to develop some parameters to assist with compliance. Putting together strong disclosure or post-issuance compliance policies and/or procedures helps both the issuer and its dissemination agent develop a shared understanding of each person’s roles. It also assists both parties with knowing who to contact, what type of disclosure is necessary, and to discuss which employees may need to be trained to assist with successfully implementing these new requirements along with other CD Requirements. 

These procedures also assist the issuer with being able to respond quickly if a financial obligation may be deemed material and should be disclosed. Part of this determination is to assess whether the financial obligation would be a material amount for the issuer and whether the financial obligation’s terms may provide a significant financial risk to the issuer – like a rapid repayment or acceleration structure. Strong disclosure procedures help demonstrate to potential investors and regulators that the issuer understands these obligations and has a plan in place to comply. A part of this plan is to participate in periodic training to make sure the issuer officials keep up to date on these requirements and to train staff in transition.

So, what happens if issuers fail to comply with their CD Requirements? Both the issuer and its officials who made certifications regarding compliance risk enforcement action by the SEC, which may include sanctions and monetary penalties. Additionally, underwriters must be able to demonstrate that they have a “reasonable basis” for the belief that an issuer will comply with its CD Requirements. If the issuer does not demonstrate prior compliance to the market, the marketability of its future financings could be impacted as well. Suffice to say, compliance is important, and we are happy to work with you on strategies to stay or become successful with your compliance efforts and the requirements of these most recent amendments to the Rule.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

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