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SEC Amends Continuing Disclosure Requirements

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Bond Counsel Corner
John M. Kamins
Foster Swift Municipal Law News
November 2010

Many Michigan municipalities with outstanding bonds are subject to continuing disclosure agreements (CDAs) they entered into at the closing of their bond issues. Those CDAs were necessitated by the Securities and Exchange Commission’s Rule 15c2-12 under the Securities Exchange Act of 1934. With limited exceptions, the Rule requires brokers, dealers and municipal securities dealers acting as an underwriter in a primary offering of municipal securities of $1,000,000 or more to ensure that particular continuing disclosure duties are set forth in a CDA signed by the issuer or obligated person -- to provide annual financial and operating information and notice of the occurrence of certain events.

Rule 15c2-12 was amended effective July 1, 2009 with changes binding on all parties to CDAs then existing or entered into since then. The Rule was further amended in late May this year with an effective date of December 1, 2010; these amendments will not affect CDAs entered into before that date, and will only apply to CDAs entered into for new municipal bond issues closed on and after December 1, 2010.

This article will highlight some, though not all, of the Rule changes that will apply to CDAs for bond issues closed on and after December 1, 2010, as well as the electronic filing requirements of the 2009 amendments applicable to all CDAs.

Since July 1, 2009, the amended Rule requires municipalities to provide continuing disclosure filings to the Municipal Securities Rulemaking Board (MSRB) electronically through its Electronic Municipal Market Access (EMMA) system. EMMA is intended to make municipal securities disclosure documents conveniently accessible to investors and the public. EMMA is on the Internet at www.emma.msrb.org. Every municipality with continuing disclosure obligations must obtain a password to use EMMA. All EMMA filings must be PDF files that allow documents to be saved, viewed, printed and retransmitted electronically. Since January 1, 2010, EMMA-filed PDF files also must be word-searchable (such PDFs are normally generated through PDF software rather than a scanner).

CDAs entered into beginning on December 1, 2010, must require notice of the following events to be filed with the MSRB within 10 business days after the occurrence of the event, whether or not the municipality deems the event material (in contrast, under earlier CDAs the notice of these events must be timely filed only if material, and not necessarily within ten business days):

  • principal and interest payment delinquencies
  • unscheduled draws on debt service reserves reflecting financial difficulties
  • unscheduled draws on credit enhancement reflecting financial difficulties
  • substitution of credit or liquidity providers, or their failure to perform
  • adverse tax opinions
  • defeasances
  • rating changes

CDAs entered into beginning on December 1, 2010 also must require notice of these newly added events to be filed with the MSRB within ten business days after the occurrence of the event:

  • the issuance by the IRS 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 bonds (or other securities covered by the CDA)
  • tender offers
  • bankruptcy, insolvency, receivership or similar event of the obligated person
  • the consummation of a merger, consolidation, or acquisition, or certain asset sales, involving the obligated person, or entry into or termination of a definitive agreement relating to the foregoing, if material
  • appointment of a successor or additional trustee or the change of name of a trustee, if material

If you are interested in learning more about your governmental unit’s continuing disclosure obligations in connection with its outstanding or potential future bond issues, please contact a member of Foster Swift’s Municipal Team, including John Kamins.