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Finance Law Alert – SEC Amends Rule Affecting Municipal Securities

SEC Adopts Amendment to Rule 15C2-12 Expanding Scope of Continuing Disclosure

On August 20, 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 15c2-12 (the “Rule”)1 adding two additional events that must be disclosed through a filing with the Municipal Securities Rulemaking Board’s (“MSRB”) Electronic Municipal Market Access (“EMMA”) system within ten (10) business days of the occurrence of either of the events. These amendments are effective 180 days after the amendments are published in the Federal Register. The two new events are:

“Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material;” and

“Default, event of acceleration, termination event, modification of terms, or other similar event under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.”

The term “financial obligation” is also newly added to the Rule by the amendments and means:

“a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule.”

As a result of the amendments to the Rule, it is likely that both issuers of municipal securities as well as broker dealers that underwrite such securities will need to revisit and update their internal processes and procedures relating to continuing disclosure and due diligence.


Rule 15c2-12 as originally adopted by the SEC in 1989 and it regulates the issuers and borrowers of the proceeds of municipal securities (collectively “obligated persons”) by requiring that underwriters of municipal securities obtain and review an official statement relating to the debt being issued. Although the SEC is not permitted to directly regulate disclosure by issuers of most municipal securities, the SEC has been able to indirectly regulate such disclosure through its oversight of broker dealers for such securities. The Rule has been amended several times and now also requires underwriters to reasonably determine that obligated persons have undertaken in a continuing disclosure obligation to provide certain annual information and notice of certain events to the MSRB through a filing with EMMA.

The most recent amendments to the Rule are primarily intended to address the growth of direct placements of municipal securities, including bank loans and similar structures, by requiring that notice of such additional debt (if material) and the material terms relating to such debt be provided and that notice of financial difficulties relating to such obligations also be provided. However, the amendments to the Rule are to be read broadly, and both obligated persons and underwriters will need to understand their new obligations under the Rule.


Financial Obligation. In order to be able to effectively understand the amendments to the Rule, it is important to focus on the defined terms and elements of the new events. The new term, “financial obligations” is at the heart of the amendments. As the issuing release makes clear, the term is intended to be read broadly and includes “debt, debt-like, or debt-related obligations”, whether they are short-term or long term obligations. In essence, if an obligated person enters into a financial obligation that could have an impact on the rights of the holders of outstanding debt or that competes with such debt for repayment, the obligated person should report the incurrence of such financial obligation and its material terms within ten (10) business days after the financial obligation becomes legally enforceable.

The term includes debt instruments, including bonds and notes, derivatives that relate to existing or planned debt instruments, and guarantees of either of the foregoing obligations. The SEC states that “the timely disclosure of both the incurrence of a debt obligation, if material, and the obligation’s material terms that affect existing security holders” are important to the proper functioning of the markets. The SEC has indicated that the term financial obligation should be read broadly and, although the term “lease” was dropped in the final rule from the definition of financial obligation, lease arrangements entered into by obligated persons that operate as vehicles to borrow money will constitute financial obligations and must be disclosed, if material. The SEC states that the term “debt obligation” is meant to be broader than many state law definitions of debt. Debt is deemed to be “incurred” when the obligation is enforceable against the issuer of the debt.

Derivatives subject to the event notice requirements of the Rule are also intended to be read broadly, but only as they relate to debt, even if the debt will be issued in the future. The determination is based on whether a reasonable person would view it as likely or probable under the facts and circumstances that the obligated person will incur the related yet-to-be-issued debt at a future date. Thus, for example, a forward starting interest rate swap relates to planned debt, because the swap has no economic purpose unless the debt is issued. In contrast, however, a derivative that is designed to mitigate investment risk would not be subject to the Rule’s disclosure requirements.

Lastly, a guarantee is intended to include a contingent financial obligation of the obligated person to secure the obligations or a third party or obligations of the obligated person and includes guarantees of both debt instruments and derivatives. In the context of a guarantee, both the guarantor and the party whose obligation is guaranteed should make an independent determination of whether such guarantee is material and should be disclosed to EMMA. Thus, in many cases, both parties will need to file an event notice.

Note that a financial obligation does not include any municipal security for which an official statement is filed with EMMA, but may include either a derivative or guarantee relating to or supporting such a municipal security. Thus, even if the official statement of an issue of bonds is filed with EMMA, if those bonds are guaranteed or a derivative is entered into with respect to such bonds, a separate filing likely should be made.

Obligated Person. The term “obligated person” is used in the Rule to describe the person who is actually responsible for the repayment of a municipal security. Thus, the issuer of a bond or note will often be the obligated person, but where the proceeds of such a debt obligation is loaned to another party, such as through a conduit issue, and the borrower is required to repay the loan, the borrower will be considered to be the obligated person.

Materiality. One of the most difficult and contentious issues relating to the Rule has been the proper definition of the term “material”. In the issuing release relating to the amendments, the SEC acknowledges that many commenters have noted that the term “material” has become “vague, ambiguous and unpredictable,” especially since the SEC’s Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative. In response, the SEC states that the type of analysis undertaken in connection with the MCDC Initiative is distinct from the analysis of whether a piece of information is material, and once again cites the TSC v. Northway standard that a fact is material “if there is a substantial likelihood that, under all the circumstances, the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available.”2 Thus, the SEC urges that the same standard used in determining what information should be included in an official statement in connection with the original issuance of a debt obligation should be used to determine whether a financial obligation, or its terms, is material and must be disclosed. Nevertheless, this issue is likely to one of the more difficult aspects of implementing the amendments to the Rule and will benefit from careful and thoughtful analysis on a case by case basis.

Agreement to covenants ... or other similar terms. The second part of the new fifteenth event notice is a list of terms in a debt instrument that could have an impact on other debt obligations of the obligated person, such as covenants, events of default, remedies or priority rights. For example, in many directly placed obligations with banks, issuers are required to agree to a separate continuing covenants agreement that may contain additional or more stringent terms than the obligated person’s master indenture. In such case, a default under the continuing covenants agreement may allow the bank holding such debt to accelerate it, to the potential detriment of the holders of other debt obligations. Thus, when entering into any new financial obligation, the obligated person should consider whether any of its terms are different from those governing its outstanding debt and, if so, whether those terms could have an adverse impact on the current debt holders. If so, then disclosure is likely necessary.

Default, event of acceleration ... or other similar events ... any of which reflect financial difficulties. The second new event is intended to provide timely notice of any event relating to the obligated person’s debt obligations that may be indicative of financial stress. This is intended to be read broadly, as evidenced by the fact that a “default”, rather than a formal event of default is the chosen term. Thus, where a situation arises that, with the passage of time or the giving of notice, could ripen into an event of default, if indicative of financial difficulty, notice of such an event should be provided. An example of an event not constituting “financial difficulties” would be the failure to provide timely notice of a change of address of the obligated person, while a late payment may or may not reflect financial difficulties. Similarly, “other similar events” may include a waiver by a lender of a covenant due to the obligated person’s being in financial difficulty. Thus, where there is a change in the terms of an underlying agreement or other instrument due to financial difficulties, the obligated person should make a timely filing.

Filing Period. The new event notices must be filed within ten (10) business days of the occurrence of the event. The SEC noted that it had received many comments that noted that the new events would often be disclosed in annual financial statements as well as requesting additional time to make such filings. The SEC indicated that the Commission believes that it is important that notice of these events be made available to the markets in a timely manner. Thus, obligated persons will need to establish means to ensure that the person(s) responsible for making event notice filings are aware of these new events with sufficient time and resources to prepare and file a compliant notice within ten (10) business days of the occurrence of the event.

Effective Date. The amendments to the Rule will be effective 180 days after notice of the amendments is published in the Federal Register, or sometime in late February 2019. Until then, obligated persons and broker dealers are not required to comply with the amendments to the Rule and the MSRB will be working to update the EMMA system to accept these additional filings. Note that all bonds and other debt instruments issued before the effective date of the amendment will not be subject to the requirements of the amended Rule, but once a new continuing disclosure obligation is undertaken with respect to a series of bonds or other obligations that includes the new events, the requirements of event 16, requiring notice of default or other events reflecting financial difficulties, will be applicable to all financial obligations of the obligated person.


In order to prepare for the amendments to the Rule, both issuers and underwriters of municipal securities should consider taking several steps, including the following:

  • Updating existing internal practices and procedures to reflect these amendments. Disclosure policies should be reviewed and revised, if appropriate, to reflect the necessity of filing or, in the case of underwriters, obtaining and reviewing event notices for the incurrence of material financial obligations or occurrence of events that reflect financial difficulties.
  • Additional training for appropriate staff may be prudent, both to familiarize them with the new requirements and to assist in identifying when these events occur and must be reported.
  • Given the short (ten (10) business day) timeframe within which to file an event notice, making a filing a part of the incurrence of any debt obligation may be good practice, and in negotiating the terms of such an obligation, if they differ from those that govern existing debt obligations, the issuer will want to assure that the material terms will be disclosed in a timely manner (or conformed to the issuer’s standard terms).
  • New continuing disclosure obligations entered into in connection with debt or other financial obligations issued after the effective date of the amendments to the Rule will have to include the new event notice requirements, and underwriters will need to review such continuing disclosure obligations to ensure that they incorporate these provisions.
  • In addition, underwriters will also likely be forced to engage in more substantial due diligence in connection with new issues of municipal securities. In addition to the tasks previously performed, they may wish to obtain copies of all debt, debt-like or debt-related obligations of the obligated person and review them to be sure that such obligations and their material terms have been disclosed, if required. Furthermore, if there has been any change in terms of any financial obligation that reflects financial difficulties, underwriters will likely need to determine whether there has been timely filing relating to such events.

Given the complexity of the new amendments to the Rule, it is likely that both obligated persons and underwriters will not seek to implement its provisions substantially earlier than the effective date of the Rule.


The amendments to the Rule impose substantial new and complex requirements on both issuers and borrowers of municipal debt obligations as well as the underwriters of such obligations. Both sets of parties should familiarize themselves with the amendments and prepare for implementation of the amendments well in advance of the effective date of the amendments in February 2019.

Please contact David Bannard if you have any questions about the amendments to this Rule or any content in this Alert.

Kaplan Kirsch & Rockwell publishes Finance Law Alerts to announce late-breaking developments in legislation, regulation, and policy for our clients and colleagues. Nothing in the Alerts is intended as legal advice, and readers are reminded to contact legal counsel for legal advice on the matters that appear in our Alerts.

1. 17 CFR 24015c2-12. 
2. See TSC Industires, Inc. v. Northway, Inc., 426 U.S. 438, 440 (1976).