The two remaining SEC Commissioners agreed March 1 to propose amendments “requiring” municipal securities issuers to disclose non-security financial obligations and material events occurring in other outstanding obligations.

The Municipal Securities Rulemaking Board (“MSRB”) and other market participants have argued for years that undisclosed bank loans, direct participations, and material events occurring with an issuer’s other outstanding obligations remained “blind spots” to market transparency, and to investors’ ability to evaluate issuers’ financial status.  See http://www.msrb.org/Market-Topics/Municipal-Market-Disclosure.aspx

This corner of municipal-market regulation, however, is a jury-rigged work-around to obstacles posed by federalism and the Tower Amendment, which prohibits direct federal regulation of municipal issuers in the same way the SEC regulates private securities issuers.  So far, the solution has been for the federal government to require regulated market participants (underwriters, brokers, dealers) to themselves impose downstream requirements on their state and local government issuer-clients to certify that they’ve done what the SEC can’t compel them to do directly.  That’s SEC Rule 15c2-12.

Wednesday’s vote allows the SEC to move forward with a Rule proposal that would amend Rule 15c2-12 to add two items to the list of event-notice disclosures that underwriters must require of their issuer-clients:  (i) new financial obligations or changes in material terms of outstanding obligations; and (ii) events material to outstanding financial obligations – like a default or modification of other securities by the same issuer.  The SEC news release (2017-57) is here:  https://www.sec.gov/news/pressrelease/2017-57.html

The proposal is similar to one withdrawn by the MSRB last August.  I discussed that here:  http://www.burr.com/2016/08/03/msrb-cans-proposed-bank-loan-disclosure-rule/

Given the intergovernmental issues involved, the 60-day comment period (once the proposal is published) may be lively.

The proposal also follows a couple of years of greater SEC Enforcement activity in the municipal space, including the Municipal Continuing Disclosure Cooperation program, under which underwriters and issuers were given reduced settlement terms to “come in from the cold” and bring municipal disclosures up to baseline.

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