On May 26, 2010, the Securities and Exchange Commission (the "SEC") adopted revisions to the continuing disclosure requirements of SEC Rule 15c2-12 (the "Rule").
The revisions (the "Amendment"), which are described in detail below, (i) eliminate the exemption from the continuing disclosure provisions of the Rule for variable rate demand obligations ("VRDOs"), (ii) establish a ten (10) business day time frame for the filing of event notices, (iii) apply the standard of materiality to the notice requirement only for certain of the listed events, (iv) expand the tax events that require an event filing, and (v) add several items to the list of events that require a filing. Compliance with the Amendment is required commencing December 1, 2010.
Elimination Of The Variable Rate Exemption
Prior to the Amendment, VRDOs were exempted from the Rule if they were issued in denominations of $100,000 or more and subject to tender at least as frequently as every nine months. The Amendment eliminates the exemption with respect to the continuing disclosure requirements of the Rule. However, the Amendment maintains the exemption for VRDOs with respect to the primary offering provisions of the Rule, meaning that issuers and obligors with respect to VRDOs do not have to produce a new official statement or offering circular upon each remarketing.
The Amendment explicitly preserves the exemption from the continuing disclosure requirements of the Rule for VRDOs outstanding on November 30, 2010, provided that such VRDOs remain in authorized denominations of at least $100,000, and remain subject to tender at the option of the holders thereof at least as frequently as every nine months.
In its Release with respect to the Amendment (the "Release"), the SEC explains that at the time the Rule was initially promulgated, VRDOs were relatively new, and a fear existed in the marketplace that the requirements of the Rule would unnecessarily hinder remarketings of VRDOs. However, given the current prevalence of VRDOs in the marketplace and the recent financial crises, the SEC believes that continuing disclosure with respect to VRDOs is appropriate and will enhance the decision-making ability of investors in that market.
Time Frame For Event Notices
Prior to the Amendment, the Rule required that notices of the events listed therein be filed "in a timely manner." The Amendment requires such notices to be filed no later than ten (10) business days following the occurrence of the event.
Materiality Determinations With Respect To Event Notices
Prior to the Amendment, the Rule stated that notice of any of the events listed therein must be filed only "if material." The Amendment deletes "if material" in the introductory language, and inserts it into the description of certain of the events. Thus, certain events will now trigger a filing regardless of materiality, and others will require a determination of materiality prior to filing.
Other than the new events added by the Amendment (see below), the following listed events will trigger a filing regardless of materiality: (i) principal and interest payment delinquencies; (ii) unscheduled draws on debt service reserve funds; (iii) unscheduled draws on credit enhancements reflecting financial difficulties; (iv) substitution of credit or liquidity providers, or their failure to perform; (v) adverse tax opinions or events (modified as described below); (vi) defeasances; and (vii) rating changes.
The remaining events will remain subject to a materiality determination prior to filing. These events, other than new events added by the Amendment (see below), include (i) non-payment-related defaults; (ii) modifications to rights of security holders; (iii) bond calls; and (iv) release, substitution or sale of property securing repayment of the securities.
Filing With Respect To Tax Events
Prior to the Amendment, the Rule required a notice filing upon the occurrence of an adverse tax opinion or event affecting the tax-exempt status of a security, if material. The Amendment revises this provision to include "adverse tax opinions, the issuance by the Internal Revenue Service 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 status of the security, or other material events affecting the tax status of the security."
In the Release, the SEC states that it believes that certain types of tax events, such as formal IRS determinations, should not be subject to a materiality determination, whereas others, such as audits, should be subject to such a determination. The Release also explains that the SEC believes that proposed determinations of taxability are important to bondholders and must be disclosed, despite the fact that a majority of such proposed determinations are settled or appealed prior to finality.
Addition Of Events Subject To Continuing Disclosure
The Amendment adds the following four items to the list of events in the Rule that trigger a notice filing: (i) tender offers; (ii) bankruptcy, insolvency, receivership or similar event of an obligated person; (iii) merger, consolidation, acquisition, or sale of all or substantially all of the assets of an obligated person, other than in the ordinary course of business, and the entry into or termination of an agreement to undertake such action, if material; and (iv) appointment of a successor trustee or change in name of a trustee, if material.
Compliance Date
The Amendment impacts only those continuing disclosure agreements that are entered into in connection with primary offerings of municipal securities that occur on or after December 1, 2010. In the Release, the SEC acknowledges that agreements entered into prior to December 1, 2010 do not need to comply with the new requirements of the Amendment.
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