The Securities and Exchange Commission is proposing to add certain financial obligations to the material events which municipal obligors must disclose under Rule 15c2-12. Although the SEC has yet to clarify what constitutes a financial obligation, its stated intent is to capture bank placements, where disclosure has been limited.
Last year, we discussed how the Municipal Securities Rulemaking Board (MSRB) was pushing hard to get bank placements disclosed.
A bank placement is where an entire bond issue is bought by a single investor, usually a commercial lender.
Placements have generated tremendous interest from hospitals and other municipal borrowers, growing from $67 billion in 2010 to $153 billion in 2015,
Much of their popularity comes from the fact that placements can be implemented faster and cheaper than publicly-sold debt, in large part due to their limited disclosure.
It looks like the Securities and Exchange Commission wants to change that.
In its March 1 meeting, the SEC voted to propose adding two new material events to Rule 15c2-12 which are expected to include bank placements.
Rule 15c2-12 is designed to better inform investors about the financial situation of municipal issuers and obligors. The Rule requires borrowers to disclose annual financial information as well as 14 events ranging from bond rating changes to defeasances.
15c2-12 does not require disclosure of financial obligations such as publicly-sold bonds, bank loans, bank placements, or swaps. Publicly-sold bonds are thoroughly documented in offering statements posted on EMMA, but there is currently no such disclosure for bank placements or swaps.
Lack of disclosure has landed placements in the regulators' bull's eye because they may contain covenants and terms that could affect other security holders, for example a clause that gives the bank the right to accelerate repayment ahead of bondholders in an event of default.
While most retail investors are not equipped to analyze bank placement documents, common sense dictates that they should be made aware of terms that could negatively affect their rights.
Not all placements have terms that could unfavorably affect investors, so the question becomes what information will the SEC want borrowers to disclose. So far, the plan is to add two new events to 15c2-12:
- Incurrence of a financial obligation, if material, or an agreement to terms which may affect security holders, if material;
- Any default, acceleration, modification of terms due to financial difficulties, if material.
The proposed amendments would also define the term "financial obligation" which is expected to capture bank placements and some swaps. It will also be interesting to see how borrowers will determine materiality.
The SEC will be asking for public comments for 60 days following publication of the proposed amendments in the Federal Register.