Corporate Governance

SEC Approves Amendments to Municipal Bond Disclosures

By Misty Dalke

Earlier this summer, the Securities and Exchange Commission ("SEC") unanimously approved amendments to the disclosure rules affecting municipal bonds.  The amended rules are intended to provide investors with more complete information regarding the types of securities and events issuers must disclose.  The amendments also set forth a specific time period the issuer has to disclose events pertaining to the bond issuance.  The amendments are anticipated to go into effect December 1, 2010. 

The amendments modify SEC Rule 15c2-12 ("Rule") under the Securities Exchange Act of 1934.  Rule 15c2-12 currently disallows brokers and dealers from buying and selling municipal securities unless the issuer has agreed to disclose both financial information and notices of any events affecting the security.  The purpose behind this Rule is to prevent fraud in the municipal bond markets. 

The new disclosure rules will apply to variable rate demand notes ('VRDNs').  Prior to the amendments, the Rule did not include VRDNs.  VRDNs are a debt instrument issued by municipalities with a variable rate that resets at specified intervals in accordance with the money market rate.  These securities have a demand feature that allows the lender to demand repayment at its discretion.  The amended Rule will only apply to new issuances. 

The next amendment defines the scope and nature of bond events to which the disclosure rules apply.  Prior to the amendments, the municipal bond underwriter only had to have a reasonable belief that the municipality would disclose certain events affecting the bond.  The Rule specified that disclosure of certain events, including failure to pay, unscheduled payments, defeasances, and rating changes, only had to be made 'if material.'  The amendment eliminates the 'if material' provision and requires the disclosure of those events listed above.  In addition, the amended rule requires issuers to disclose notice of tender offers, bankruptcy, mergers and acquisitions, and successor or additional trustee appointments. 

Lastly, the amended Rule specifies that notice of the above events has to occur within 10 business days after the event has occurred.  The current Rule only provides that the event be disclosed in a 'timely manner.'

The SEC's press release can be viewed here. 

Full post as published by The Race to the Bottom on August 23, 2010 (boomark / email).