Proposed Amendments to Municipal Securities Disclosure, 13928-13957 [2017-04323]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 49 (Wednesday, March 15, 2017)]
[Proposed Rules]
[Pages 13928-13957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-04323]



[[Page 13927]]

Vol. 82

Wednesday,

No. 49

March 15, 2017

Part II





Securities and Exchange Commission





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17 CFR Part 240





 Proposed Amendments to Municipal Securities Disclosure; Proposed Rule

Federal Register / Vol. 82 , No. 49 / Wednesday, March 15, 2017 / 
Proposed Rules

[[Page 13928]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-80130; File No. S7-01-17]
RIN 3235-AL97


Proposed Amendments to Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule amendments.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is publishing for comment proposed amendments to the Municipal 
Securities Disclosure Rule (Rule 15c2-12) under the Securities Exchange 
Act of 1934 (``Exchange Act'') that would amend the list of event 
notices that a broker, dealer, or municipal securities dealer 
(collectively, ``dealers'') acting as an underwriter in a primary 
offering of municipal securities must reasonably determine that an 
issuer or an obligated person has undertaken, in a written agreement or 
contract for the benefit of holders of the municipal securities, to 
provide to the Municipal Securities Rulemaking Board (``MSRB'').

DATES: Comments should be received on or before May 15, 2017.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File No. S7-01-17 on the subject line; or
     Use the Federal Rulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. S7-01-17. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. 
Studies, memoranda or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion--in the comment file of any such 
materials will be made available on the Commission's Web site. To 
ensure direct electronic receipt of such notifications, sign up through 
the ``Stay Connected'' option at www.sec.gov to receive notifications 
by email.

FOR FURTHER INFORMATION CONTACT: Jessica Kane, Director; Rebecca Olsen, 
Deputy Director; Edward Fierro, Senior Counsel to the Director; Mary 
Simpkins, Senior Special Counsel; Hillary Phelps, Senior Counsel; or 
William Miller, Attorney-Adviser; Office of Municipal Securities, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-6628 or at (202) 551-5680.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on the proposed amendments to Rule 15c2-12 \1\ under the Securities 
Exchange Act of 1934.\2\
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    \1\ 17 CFR 240.15c2-12.
    \2\ The Commission is not proposing any other changes to Rule 
15c2-12, nor is the Commission otherwise reopening Rule 15c2-12 for 
comment.

I. Introduction
II. Background
    A. History
    B. Rule 15c2-12
    C. Commission's Report on the Municipal Securities Market
    D. Market Developments and the Need for Further Amendments to 
Rule 15c2-12
III. Description of the Proposed Amendments to Rule 15c2-12
    A. Overview of Proposed Amendments
    1. Incurrence of a Financial Obligation of the Obligated Person, 
If Material, or Agreement to Covenants, Events of Default, Remedies, 
Priority Rights, or Other Similar Terms of a Financial Obligation of 
the Obligated Person, Any of Which Affect Security Holders, If 
Material
    i. Definition of a Financial Obligation
    2. Default, Event of Acceleration, Termination Event, 
Modification of Terms, or Other Similar Events Under the Terms of a 
Financial Obligation of the Obligated Person, Any of Which Reflect 
Financial Difficulties
    B. Technical Amendment
    C. Compliance Date and Transition
    D. Request for Comment
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Dealers
    i. Proposed Amendments to Events To Be Disclosed Under a 
Continuing Disclosure Agreement
    ii. One-Time Paperwork Burden
    iii. Total Annual Burden for Dealers
    2. Issuers
    i. Proposed Amendments to Event Notice Provisions of the Rule
    ii. Total Burden on Issuers for Proposed Amendments to Event 
Notices
    iii. Total Burden for Issuers
    3. MSRB
    4. Annual Aggregate Burden for Proposed Amendments
    E. Total Annual Cost
    1. Dealers and the MSRB
    2. Issuers
    F. Retention Period of Recordkeeping Requirements
    G. Collection of Information Is Mandatory
    H. Responses to Collection of Information Will Not Be 
Confidential
    I. Requests for Comment
V. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. The Current Municipal Securities Market
    2. Rule 15c2-12
    3. MSRB Rules
    4. Existing State of Efficiency, Competition, and Capital 
Formation
    C. Benefits, Costs and Effects on Efficiency, Competition, and 
Capital Formation
    1. Anticipated Benefits of the Proposed Rule 15c2-12 Amendments
    i. Benefits to Investors
    ii. Benefits to Issuers and Obligated Persons
    iii. Benefits to Rating Agencies and Municipal Analysts
    2. Anticipated Costs of the Proposed Rule 15c2-12 Amendments
    i. Costs to Issuers and Obligated Persons
    ii. Costs to Dealers
    iii. Costs to Lenders
    iv. Costs to Municipal Securities Rulemaking Board
    3. Effects on Efficiency, Competition, and Capital Formation
    D. Alternative Approaches
    E. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Certification
VIII. Statutory Authority and Text of Proposed Rule Amendments

I. Introduction

    The Commission is publishing for comment proposed amendments to 
Exchange Act Rule 15c2-12 (``Rule'' or ``Rule 15c2-12'').\3\ The 
proposed amendments would amend the list of events for which notice is 
to be provided to the MSRB to include (i) incurrence of a financial 
obligation of the obligated person, if material, or agreement to 
covenants, events of default, remedies, priority rights, or

[[Page 13929]]

other similar terms of a financial obligation of the obligated person, 
any of which affect security holders, if material; and (ii) default, 
event of acceleration, termination event, modification of terms, or 
other similar events under the terms of a financial obligation of the 
obligated person, any of which reflect financial difficulties 
(collectively, the ``proposed events''). The Commission believes the 
proposed amendments would facilitate investors' and other market 
participants' access to important information in a timely manner and 
help to enhance transparency in the municipal securities market and 
improve investor protection.
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    \3\ See 17 CFR 240.15c2-12(a), (b)(5)(i), (b)(5)(i)(C).
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    Under Rule 15c2-12, a dealer that acts as an underwriter (a 
``Participating Underwriter'' when used in connection with an Offering) 
in a primary offering of municipal securities with an aggregate 
principal amount of $1,000,000 or more (an ``Offering'') is prohibited 
from purchasing or selling municipal securities in connection with an 
Offering unless the Participating Underwriter has reasonably 
determined, among other things, that an issuer of municipal securities, 
or an obligated person \4\ for whom financial or operating data is 
presented in the final official statement \5\ has undertaken in a 
written agreement or contract for the benefit of holders of such 
securities to provide to the MSRB in a timely manner not in excess of 
ten business days after the occurrence of the event, notice of certain 
events listed in Rule 15c2-12. Participating Underwriters comply with 
this provision of Rule 15c2-12 by requiring that an issuer of municipal 
securities or an obligated person undertakes in a written agreement or 
contract (``continuing disclosure agreement'') to provide event notices 
to the MSRB in a manner that is consistent with the requirements of 
Rule 15c2-12.
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    \4\ The term ``obligated person'' means any person, including an 
issuer of municipal securities, who is either generally or through 
an enterprise, fund or account of such person committed by contract 
or other arrangement to support payment of all, or part of the 
obligations on the municipal securities to be sold in the Offering 
(other than providers of municipal bond insurance, letters of 
credit, or other liquidity facilities). See 17 CFR 240.15c2-
12(f)(10).
    \5\ An ``official statement'' is a document or set of documents 
prepared by an issuer of municipal securities or an obligated 
person, or its representatives, in connection with a primary 
offering of municipal securities that discloses material information 
about the offering of such securities. Official statements include 
information concerning the terms of the proposed securities, 
financial information or operating data concerning such issuers of 
municipal securities and those entities, funds, accounts, and other 
persons material to an evaluation of the Offering, a description of 
the undertakings to be provided pursuant to the Rule, and if 
applicable, any instances in the previous five years of any failures 
to comply, in all material respects, with any previous undertakings. 
A version of the official statement referred to as the ``preliminary 
official statement'' is prepared by or for an issuer of municipal 
securities or obligated person for dissemination to potential 
customers prior to the availability of the ``final official 
statement''. Rule 15c2-12 specifically defines the terms 
``preliminary official statement'' and ``final official statement'' 
for purposes of Rule 15c2-12. See 17 CFR 240.15c2-12(f)(3) and (6).
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    Additionally, under Rule 15c2-12,\6\ it is unlawful for any dealer 
to recommend the purchase or sale of a municipal security unless such 
dealer has procedures in place that provide reasonable assurance that 
it will receive prompt notice of event notices. Dealers typically 
comply with this provision by ensuring that they have procedures in 
place that, among other things, require their registered 
representatives who recommend municipal securities transactions to 
customers in the secondary market to have access to the MSRB's 
Electronic Municipal Market Access (``EMMA'') system, the single 
centralized repository for the electronic collection and availability 
of continuing disclosure information about municipal securities.\7\
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    \6\ See 17 CFR 240.15c2-12(c).
    \7\ See Exchange Act Release No. 34-59062 (Dec. 5, 2008), 73 FR 
76104 (Dec. 15, 2008) (``2008 Amendments Adopting Release''); see 
also Exchange Act Release No. 34-58255 (July 30, 2008), 73 FR 46138 
(Aug. 7, 2008); see also Section II.B. herein for additional 
discussion about the requirements of Rule 15c2-12.
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    Beginning in 2009, issuers and obligated persons have increasingly 
used direct purchases of municipal securities \8\ and direct loans \9\ 
(collectively, ``direct placements'') \10\ as alternatives to publicly 
offered municipal securities.\11\
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    \8\ For example, an investor purchasing a municipal security 
directly from an issuer or obligated person.
    \9\ For example, a lender entering into a bank loan, loan 
agreement, or other type of financing agreement with an issuer or 
obligated person.
    \10\ Standard and Poor's Ratings Services (``S&P'') has 
estimated that as much as $50 to $60 billion in direct placement 
transactions may occur annually. See Mike Cherney, S&P Calls for 
More Disclosure of Municipal Bank Loans, Wall St. J. (Feb. 18, 
2014), available at https://www.wsj.com/articles/SB10001424052702304675504579391431039227484.
    \11\ See e.g., Municipal Market Bank Loan Disclosure Task Force, 
Considerations Regarding Voluntary Secondary Market Disclosure About 
Bank Loans (``Considerations Regarding Voluntary Secondary Market 
Disclosure About Bank Loans'') (May 1, 2013), available at https://www.nfma.org/assets/documents/position.stmt/wp.direct.bank.loan.5.13.pdf. The Task Force was comprised of 
representatives from the American Bankers Association, Bond Dealers 
of America, Government Finance Officers Association (``GFOA''), 
Investment Company Institute (``ICI''), National Association of Bond 
Lawyers, National Association of Health and Educational Facilities 
Finance Authorities, National Association of Independent Public 
Finance Advisors, National Federation of Municipal Analysts 
(``NFMA''), and Securities Industry and Financial Markets 
Association (``SIFMA'').
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    The Commission understands that existing security holders and 
potential investors (collectively, ``investors'') and other market 
participants may not have any access or timely access to disclosure 
about the incurrence of certain debt obligations, such as direct 
placements, and other financial obligations \12\ by issuers of 
municipal securities and obligated persons. For example, investors and 
other market participants may not learn that the issuer or obligated 
person has incurred a financial obligation if the issuer or obligated 
person does not provide annual financial information or audited 
financial statements to EMMA,\13\ or does not subsequently issue debt 
in a primary offering subject to Rule 15c2-12 that results in the 
provision of a final official statement to EMMA. Even if investors and 
other market participants have access to disclosure about an issuer's 
or obligated person's incurrence of a financial obligation, such access 
may not be timely if, for example, the issuer or obligated person has 
not submitted annual financial information or audited financial 
statements to EMMA in a timely manner or does not frequently issue debt 
that results in a final official statement being provided to EMMA. 
Typically, investors and other market participants do not have access 
to an issuer's or obligated person's annual financial information or 
audited financial statements until several months \14\ or up to a year 
after the end

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of the issuer's or obligated person's applicable fiscal year,\15\ and a 
significant amount of time could pass before the issuer's or obligated 
person's next primary offering subject to Rule 15c2-12. In many cases, 
this lack of access or delay in access to disclosure means that 
investors could be making investment decisions, and other market 
participants could be undertaking credit analyses, without important 
information.
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    \12\ For the purposes of this proposing release, ``financial 
obligation'' means a debt obligation, lease, guarantee, derivative 
instrument, or monetary obligation resulting from a judicial, 
administrative, or arbitration proceeding. See Section III.A.1.i. 
herein for further discussion of the term ``financial obligation.''
    \13\ See e.g., Community Unit School District Number 18 (Blue 
Ridge), Securities Act of 1933 (``Securities Act'') Release No. 
10155 (Aug. 24, 2016), available at https://www.sec.gov/litigation/admin/2016/33-10155.pdf (settled action) (finding that the school 
district made a materially false statement in the final official 
statement for a 2012 offering that it had not failed to comply in 
all material respects in the previous five years with any 
undertaking entered into pursuant to Rule 15c2-12, when in fact the 
school district had failed to file its audited financial statements 
for fiscal years 2008 through 2011 by the time of the 2012 offering 
and filed its 2007 audited financial statements late by 811 days).
    \14\ See MSRB, Timing of Annual Financial Disclosures by Issuers 
of Municipal Securities (Feb. 2017), available at https://www.msrb.org/msrb1/pdfs/MSRB-CD-Timing-of-Annual-Financial-Disclosures-2016.pdf (stating that, excluding disclosures received 
by the MSRB more than one year after the end of the fiscal year, the 
timing of audited financial statements submissions in 2016 averaged 
199 calendar days after the end of the applicable fiscal year and 
the timing of annual financial information submissions in 2016 
averaged 189 calendar days after the end of the applicable fiscal 
year). See also Richard A. Ciccarone, Change Doesn't Come Easy for 
Municipal Bond Audit Timing, Merritt Research Services (Oct. 25, 
2015), available at https://muninetguide.com/change-doesnt-come-easy-for-municipal-bond-audit-timing/ (stating that, in a study examining 
a total of 73,586 municipal issuer audited financial statements 
submissions from 2008 to 2014, audits typically take close to six 
months to complete, while revenue bond borrowers generally take 
closer to four months to complete their audits).
    \15\ In March 2014, the Division of Enforcement announced the 
Municipalities Continuing Disclosure Cooperative Agreement (``MCDC 
Initiative''), a voluntary program to encourage underwriters and 
issuers and obligated persons to self-report federal securities law 
violations involving inaccurate certifications in primary offerings 
where issuers and obligated persons represented in their final 
official statements that they had complied with previous continuing 
disclosure agreements when they had not. The Commission brought 
settled actions against 71 issuers and obligated persons under the 
MCDC Initiative. See SEC Charges 71 Municipal Issuers in Muni Bond 
Disclosure Initiative (Aug. 24, 2016), available at https://www.sec.gov/news/pressrelease/2016-166.html. See e.g., Boulder 
County, Colorado, Securities Act Release No. 10135 (Aug. 24, 2016), 
available at https://www.sec.gov/litigation/admin/2016/33-10135.pdf 
(settled action) (Respondent stated it was in compliance with 
earlier continuing disclosure agreements, but had in fact filed its 
annual financial information and audited financial reports to the 
MSRB between 140 and 230 days late for fiscal years 2007 through 
2009); Wyoming Community Development Authority, Securities Act 
Release No. 10196 (Aug. 24, 2016), available at https://www.sec.gov/litigation/admin/2016/33-10196.pdf (settled action) (Respondent 
stated it was in compliance with earlier continuing disclosure 
agreements, but had in fact provided its fiscal years 2006, 2008, 
and 2009 audited financial statements to the MSRB approximately 50, 
26, and 13 months late, respectively); and City of Devils Lake, 
North Dakota, Securities Act Release No. 10144 (Aug. 24, 2016), 
available at https://www.sec.gov/litigation/admin/2016/33-10144.pdf 
(settled action) (Respondent stated it was in compliance with 
earlier continuing disclosure agreements, but had in fact provided 
its fiscal years 2007, 2008, 2009, and 2010 audited financial 
statements to the MSRB 228, 153, 149, and 64 days late, 
respectively).
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    Additionally, the Commission understands that to the extent 
information about financial obligations is disclosed and accessible to 
investors and other market participants, such information currently may 
not include certain details about the financial obligations. For 
example, disclosure about a financial obligation in an issuer's or 
obligated person's audited financial statements or in an official 
statement may be limited to the amount of the financial obligation and 
may not provide certain details, such as whether the financial 
obligation contains covenants, events of default, remedies, priority 
rights, or other similar terms of a financial obligation, any of which 
affect security holders, if material.\16\ In these cases, investors 
could be making investment decisions, and other market participants 
could be undertaking credit analyses, without important information, 
including the debt payment priority structure.
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    \16\ See MSRB Notice 2012-18, infra note 20 (stating that 
information about certain financings undertaken by issuers is not 
readily available to holders of an issuer's outstanding debt until 
the release of an issuer's audit, and such information is typically 
quite limited). See also 2012 Municipal Report, infra note 58, at 
65-66 (stating that commenters have expressed concern about the lack 
of detailed information in official statements about municipal 
issuers' outstanding debt, including liens, security, collateral 
pledges, etc., and stating that market participants also have raised 
concerns that municipal entities may not properly disclose the 
existence or the terms and conditions of bank loans, particularly 
when the terms of the bank loans may affect the payment priority 
from revenues in a way that adversely affects bondholders).
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    Furthermore, the Commission understands that investors and other 
market participants may not have any access or timely access to 
disclosure regarding the occurrence of events reflecting financial 
difficulties, including a default, event of acceleration, termination 
event, modification of terms, or other similar events under the terms 
of a financial obligation.\17\ For example, if an issuer or obligated 
person defaults under the terms of a financial obligation, investors 
either may not ever have access or may not have timely access to 
information about the event. This lack of access or delay in access to 
disclosure means investors could be making investment decisions, and 
other market participants could be undertaking credit analyses, without 
important information.
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    \17\ See Section II.D. herein for additional discussion.
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    The MSRB \18\ and certain market participants \19\ have raised 
concerns about the lack of secondary market disclosure about certain 
financial obligations. While some market participants have encouraged 
issuers and obligated persons to voluntarily disclose information about 
certain financial obligations,\20\ the MSRB has stated that the number 
of actual disclosures made is limited.\21\ To address concerns that 
investors and other market participants may not have any access or 
timely access to information about the incurrence of a financial 
obligation by an issuer or obligated person, the Commission proposes 
amendments to Rule 15c2-12. The proposed amendments would require a 
Participating Underwriter in an Offering to reasonably determine that 
an issuer or obligated person has undertaken in a written agreement or 
contract to provide to the MSRB, within ten business days after the 
occurrence of the events, notice of the proposed events.
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    \18\ See Letter from Kym Arnone, Chair, MSRB, to Pamela Dyson, 
Chief Information Officer, Securities and Exchange Commission (Jan. 
20, 2015) (``MSRB Letter to SEC CIO''), available at https://www.msrb.org/msrb1/pdfs/MSRB-Comment-Letter-on-SEC-Rule-15c2-12-January-2015.pdf. The MSRB noted that bank loans and direct-purchase 
debt are not subject to Rule 15c2-12 and, therefore, are not 
required to be reported through filings on EMMA. The MSRB also noted 
its concern that bank loans or other debt-like obligations such as 
swap transactions, guarantees, and lease financing arrangements, 
that create significant financial obligations and which do not get 
currently reported, could impair the rights of existing bondholders, 
including the seniority status of such bondholders, or impact the 
credit or liquidity profile of an issuer.
    \19\ See e.g., Letter from Lisa Washburn, Chair, NFMA to Mary Jo 
White, Chair, Securities and Exchange Commission (Aug. 10, 2016) 
(``NFMA Letter to SEC Chair''), available at https://www.nfma.org/assets/documents/position.stmt/ps_stateofdisclosure_aug2016white.pdf. NFMA noted that certain 
events and/or circumstances that are material are omitted from 
reporting under continuing disclosure agreements, such as the 
incurrence of additional long and short-term debt, early swap 
terminations, swap collateral postings, and defaults under other 
contractual agreements. NFMA also expressed the view that the lack 
of such disclosure--or the delay in providing such information--
impairs secondary market pricing and liquidity and can affect bond 
ratings.
    \20\ See e.g., MSRB, Notice Concerning Voluntary Disclosure of 
Bank Loans to EMMA, MSRB Notice 2012-18 (Apr. 3, 2012) (``MSRB 
Notice 2012-18''), available at https://msrb.org/Rules-and-Interpretations/Regulatory-Notices/2012/2012-18.aspx. See also GFOA, 
GFOA Alert: Bank Loan Disclosure (May 12, 2016) (recommending that 
municipal issuers should voluntarily disclose information about bank 
loans), available at https://www.gfoa.org/gfoa-alert-bank-loan-disclosure.
    \21\ See MSRB Request For Comment, infra note 76 at 3. Issuer 
representatives have indicated that challenges associated with 
posting and locating information about financial obligations on EMMA 
have led to the appearance of under-disclosure by issuers. See infra 
note 83.
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II. Background

A. History

    The Securities Act and the Exchange Act exempt municipal securities 
from certain registration and reporting requirements,\22\ but not the 
antifraud provisions of Securities Act Section 17(a),\23\ or Exchange 
Act Section 10(b) \24\ and Rule 10b-5 \25\ promulgated thereunder. 
Congress, as part of the Securities Acts Amendments of 1975 (``1975 
Amendments''),\26\ created a limited regulatory scheme for the 
municipal securities market at the

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federal level \27\ in response to the growth of the market, market 
abuses, and the increasing participation of retail investors.\28\ The 
1975 Amendments required firms transacting business in municipal 
securities to register with the Commission as broker-dealers, required 
banks dealing in municipal securities to register with the Commission 
as municipal securities dealers,\29\ and gave the Commission broad 
rulemaking and enforcement authority \30\ over such broker-dealers and 
municipal securities dealers. The 1975 Amendments did not establish a 
regulatory scheme for, or impose any new requirements on, issuers of 
municipal securities.\31\ In addition, the 1975 Amendments authorized 
the creation of the MSRB and granted it authority to promulgate rules 
concerning transactions in municipal securities by dealers.
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    \22\ 15 U.S.C. 77c(a)(2); 15 U.S.C. 78c(a)(12), (29).
    \23\ 15 U.S.C. 77q(a).
    \24\ 15 U.S.C. 78j(b).
    \25\ 17 CFR 240.10b-5.
    \26\ The Securities Acts Amendments of 1975, Public Law 94-29, 
89 Stat. 97 (1975).
    \27\ See, e.g., Exchange Act Sections 15(c)(1), 15(c)(2), 
15B(c)(1), 15B(c)(2), 17(a), 17(b), and 21(a)(1) (15 U.S.C. 
78o(c)(1), 78o(c)(2), 78o-4(c)(1), 78o-4(c)(2), 78q(a), 78q(b), and 
78u(a)(1)).
    \28\ S. Rep. No. 94-75, at 3-4, 37-43 (1975) (Conf. Rep.).
    \29\ The Exchange Act defines a ``municipal securities dealer'' 
as any person (including a separately identifiable department or 
division of a bank) engaged in the business of buying and selling 
municipal securities for his own account, as a part of regular 
business, through a broker or otherwise. See 15 U.S.C. 78c(a)(30).
    \30\ See, e.g., Exchange Act Sections 15(c)(1), 15(c)(2), 
15B(c)(1), 15B(c)(2), 17(a), 17(b), and 21(a)(1) (15 U.S.C. 
78o(c)(1), 78o(c)(2), 78o-4(c)(1), 78o-4(c)(2), 78q(a), 78q(b), and 
78u(a)(1)). Enforcement activities regarding municipal securities 
dealers must be coordinated by the Commission, the Financial 
Industry Regulatory Authority, and the appropriate bank regulatory 
agency. See Exchange Act Sections 15B(c)(6)(A), 15B(c)(6)(B), and 
17(c) (15 U.S.C. 78o-4(c)(6)(A), 78o-4(c)(6)(B), 78q(c)). The term 
``appropriate regulatory agency,'' when used with respect to a 
municipal securities dealer, is defined in Section 3(a)(34)(A) of 
the Exchange Act. See 15 U.S.C. 78c(a)(34)(A). The Commission also 
has the authority to examine all registered municipal securities 
dealers. See 15 U.S.C. 78q(b)(1).
    \31\ The 1975 Amendments amended the definition of ``person'' 
under Exchange Act Section 3(a)(9) to include issuers of municipal 
securities, thus clarifying that state and local government issuers 
were not exempt from the antifraud provisions of the federal 
securities laws.
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    The 1975 Amendments provided a system of regulation for both 
municipal securities professionals and the municipal securities market, 
but limited the Commission's and the MSRB's authority to require 
issuers, either directly or indirectly, to file any application, 
report, or document with the Commission or the MSRB prior to any sale 
of municipal securities by an issuer.\32\ Exchange Act Section 
15B(d)(2),\33\ however, states that ``[n]othing in this paragraph shall 
be construed to impair or limit the power of the Commission under any 
provision of this title.'' \34\ Further, in Exchange Act Section 
15(c)(2), Congress expanded the Commission's authority by providing it 
with broad rulemaking and enforcement authority over dealers. Thus, 
while Congress limited the Commission's ability to require issuers to 
file reports or documents prior to issuing municipal securities in 
Exchange Act Section 15B(d)(1),\35\ Congress preserved and expanded the 
Commission's mandate to adopt rules reasonably designed to prevent 
fraud in Exchange Act Sections 15B(d)(2) and 15(c)(2).
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    \32\ Exchange Act Section 15B(d), commonly referred to as the 
``Tower Amendment,'' states: ``(1) Neither the Commission nor the 
Board is authorized under this title, by rule or regulation, to 
require any issuer of municipal securities, directly or indirectly 
through a purchaser or prospective purchaser of securities from the 
issuer, to file with the Commission or the Board prior to the sale 
of such securities by the issuer any application, report, or 
document in connection with the issuance, sale, or distribution of 
such securities. (2) The Board is not authorized under this title to 
require any issuer of municipal securities, directly or indirectly 
through a municipal securities broker, municipal securities dealer, 
municipal advisor, or otherwise, to furnish to the Board or to a 
purchaser or a prospective purchaser of such securities any 
application, report, document, or information with respect to such 
issuer: Provided, however, That the Board may require municipal 
securities brokers and municipal securities dealers or municipal 
advisors to furnish to the Board or purchasers or prospective 
purchasers of municipal securities applications, reports, documents, 
and information with respect to the issuer thereof which is 
generally available from a source other than such issuer. Nothing in 
this paragraph shall be construed to impair or limit the power of 
the Commission under any provision of this title.''
    \33\ 15 U.S.C. 78o-4(d)(2).
    \34\ 15 U.S.C. 78o-4(d)(2).
    \35\ 15 U.S.C. 78o-4(d)(1).
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B. Rule 15c2-12

    In 1988, to address concerns about the quality of disclosure in 
certain municipal offerings and timely dissemination of disclosure 
documents,\36\ the Commission proposed a limited rule designed to 
prevent fraud in the municipal securities market by enhancing the 
timely access of official statements to underwriters, investors, and 
other interested persons.\37\ In 1989, the Commission adopted Rule 
15c2-12 as a means reasonably designed to prevent fraudulent, 
deceptive, or manipulative acts or practices in the municipal 
securities market.\38\ A dealer that acts as a Participating 
Underwriter in an Offering is required, subject to certain exemptions: 
(i) To obtain and review an official statement that an issuer of the 
securities ``deems final'', except for the omission of specified 
information, prior to making a bid, purchase, offer, or sale of 
municipal securities; (ii) in non-competitively bid offerings, to send, 
upon request, a copy of the most recent preliminary official statement 
(if one exists) to potential customers; (iii) to send, upon request, a 
copy of the final official statement to potential customers for a 
specified period of time; and (iv) to contract with the issuer to 
receive, within a specified time, sufficient copies of the final 
official statement to comply with the Rule's delivery requirement, and 
the requirements of the rules of the MSRB.\39\
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    \36\ The Commission also stated that the practices revealed in 
the 1988 Commission Staff Report on the Investigation in the Matter 
of Transactions in Washington Power Supply System Securities 
underscored the need to explore the benefits that would result from 
a specific regulatory requirement for underwriters to be uniformly 
subject to a requirement to obtain and review a nearly final 
disclosure document and make disclosure documents available to 
investors in both negotiated and competitive offerings. See Exchange 
Act Release No. 34-26100 (Sept. 22, 1988), 53 FR 37778, 37781 (Sept. 
28. 1988) (``1988 Proposing Release''). The Commission also 
highlighted the changes that had occurred in the municipal 
securities market since securities laws were first enacted, 
including the nationwide scope of the municipal securities market, 
size of the municipal securities market, broader range of types of 
investors in municipal securities (including a significant number of 
household investors), and increasing complexity of municipal 
financing structures. Id. at 37779.
    \37\ Id. at 37782.
    \38\ See Exchange Act Release No. 34-26985 (June 28, 1989), 54 
FR 28799 (July 10, 1989) (``1989 Adopting Release'').
    \39\ See 17 CFR 240.15c2-12(b).
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    In November 1994, the Commission adopted amendments to Rule 15c2-12 
(``1994 Amendments'') to deter fraud and manipulation in the municipal 
securities market by prohibiting the underwriting and subsequent 
recommendation of securities for which adequate information is not 
available.\40\ Specifically, Rule 15c2-12, as amended by the 1994 
Amendments, prohibits Participating Underwriters from purchasing or 
selling municipal securities in connection with an Offering unless the 
Participating Underwriter has ``reasonably determined'' that an issuer 
or an obligated person has undertaken in a written agreement or 
contract for the benefit of holders of such securities \41\ to provide 
continuing disclosure information regarding the security and the issuer 
or obligated person for the life of the municipal security.\42\ The

[[Page 13932]]

continuing disclosure information consists of: (i) Certain annual 
financial and operating information and audited financial statements, 
if available (``annual filings''); \43\ (ii) notices of the occurrence 
of certain events (``event notices''); \44\ and (iii) notices of the 
failure of an issuer or obligated person to provide required annual 
financial information, on or before the date specified in the 
continuing disclosure agreement (``failure to file notices'').\45\ The 
1994 Amendments also prohibit a dealer from recommending the purchase 
or sale of a municipal security unless it has procedures in place that 
provide reasonable assurance that such dealer will promptly receive any 
event notices and failure to file notices with respect to that 
security.\46\ The Commission stated that as a result of the 1994 
Amendments dealers would be better able to satisfy both their 
obligation under the federal securities laws to have a reasonable basis 
on which to recommend municipal securities in the secondary market and 
their obligations under MSRB rules.\47\ The Commission further stated 
that the availability of secondary market disclosure to all market 
participants would enable investors to better protect themselves from 
misrepresentations or other fraudulent activities by dealers.\48\ The 
Commission emphasized that a lack of consistent secondary market 
disclosure impairs investors' ability to acquire information necessary 
to make informed investment decisions, and thus, protect themselves 
from fraud.\49\
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    \40\ See Exchange Act Release No. 34-33742 (Mar. 9, 1994), 59 FR 
12759 (Mar. 17, 1994) (``1994 Amendments Proposing Release''); 
Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590, 
59591 (Nov. 17, 1994) (``1994 Amendments Adopting Release'').
    \41\ In some instances, continuing disclosure undertakings may 
be set forth in other deal documents (e.g., the bond resolution or 
trust indenture).
    \42\ See 17 CFR 240.15c2-12(b)(5)(i). This provision now 
requires submission of annual information and event notices to a 
single repository maintained by the MSRB. See 2008 Amendments 
Adopting Release, supra note 7.
    \43\ See 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \44\ See 17 CFR 240.15c2-12(b)(5)(i)(C). Currently, the 
following events require notice in a timely manner not in excess of 
ten business days after the occurrence of the event: (1) Principal 
and interest payment delinquencies; (2) non-payment related 
defaults, if material; (3) unscheduled draws on debt service 
reserves reflecting financial difficulties; (4) unscheduled draws on 
credit enhancements reflecting financial difficulties; (5) 
substitution of credit or liquidity providers, or their failure to 
perform; (6) 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; (7) modifications to rights of security holders, if 
material; (8) bond calls, if material, and tender offers; (9) 
defeasances; (10) release, substitution, or sale of property 
securing repayment of the securities, if material; (11) rating 
changes; (12) bankruptcy, insolvency, receivership or similar event 
of the obligated person; (13) the consummation of a merger, 
consolidation, or acquisition involving an obligated person or the 
sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry 
into a definitive agreement to undertake such an action or the 
termination of a definitive agreement relating to any such actions, 
other than pursuant to its terms, if material; and (14) appointment 
of a successor or additional trustee or the change of name of a 
trustee, if material. In addition, Rule 15c2-12(d) provides full and 
limited exemptions from the requirements of Rule 15c2-12. See 17 CFR 
240.15c2-12(d).
    \45\ See 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event 
notices, and failure to file notices are referred to collectively 
herein as ``continuing disclosure documents.''
    \46\ See 1994 Amendments Adopting Release, supra note 40, at 
59602; 17 CFR 240.15c2-12(c).
    \47\ See 1994 Amendments Adopting Release, supra note 40, at 
59591.
    \48\ Id.
    \49\ Id.
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    In December 2008, in connection with its longstanding interest in 
reducing the potential for fraud and manipulation in the municipal 
securities market by facilitating greater availability of information 
about municipal securities, the Commission adopted amendments to Rule 
15c2-12 (``2008 Amendments'') to provide for the EMMA system.\50\ EMMA 
is established and maintained by the MSRB and provides free public 
access to disclosure documents. The 2008 Amendments require the 
Participating Underwriter to reasonably determine that the issuer or 
obligated person has undertaken in its continuing disclosure agreement 
to provide continuing disclosure documents: (i) Solely to the MSRB; and 
(ii) in an electronic format and accompanied by identifying 
information, as prescribed by the MSRB.\51\ In adopting the 2008 
Amendments, the Commission stated that it was furthering its efforts to 
deter fraud and manipulation in the municipal securities market.\52\ 
The Commission further stated that public access to all continuing 
disclosure documents on the Internet, as required by the 2008 
Amendments, would promote market efficiency and deter fraud by 
improving the availability of information to investors, market 
professionals, and the public generally.\53\
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    \50\ See 2008 Amendments Adopting Release, supra note 7.
    \51\ See id. See also Exchange Act Release No. 34-59061 (Dec. 5, 
2008), 73 FR 75778 (Dec. 12, 2008) (order approving the MSRB's 
proposed rule change to establish as a component of its central 
municipal securities document repository, the EMMA system, the 
collection and availability of continuing disclosure documents over 
the Internet free of charge).
    \52\ See 2008 Amendments Adopting Release, supra note 7, at 
76105.
    \53\ Id. at 76110.
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    In May 2010, the Commission adopted further amendments to Rule 
15c2-12 (``2010 Amendments'').\54\ The 2010 Amendments (a) require 
Participating Underwriters to reasonably determine that an issuer or 
obligated person has agreed to provide event notices in a timely manner 
not in excess of ten business days after the event's occurrence; (b) 
include new events \55\ for which a notice is to be provided; (c) 
modify the events that are subject to a materiality determination 
before triggering a requirement to provide notice to the MSRB; \56\ and 
(d) revise an exemption for certain offerings of municipal securities 
with put features.\57\
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    \54\ See Exchange Act Release No. 34-62184A (May 26, 2010), 75 
FR 33100 (June 10, 2010) (``2010 Amendments Adopting Release'').
    \55\ The amendments added the following events to paragraph 
(b)(5)(i)(C) of Rule 15c2-12: (a) Tender offers; (b) bankruptcy, 
insolvency, receivership or similar event of the issuer or obligated 
person; (c) the consummation of a merger, consolidation, or 
acquisition involving an obligated person or the sale of all or 
substantially all of the assets of the obligated person, other than 
in the ordinary course of business, the entry into a definitive 
agreement to undertake such an action or the termination of a 
definitive agreement relating to any such actions, other than 
pursuant to its terms, if material; and (d) appointment of a 
successor or additional trustee, or the change of name of a trustee, 
if material. Id. at 33102.
    \56\ The amendments removed the materiality determination for 
the following events: (a) Principal and interest payment 
delinquencies with respect to the subject securities; (b) 
unscheduled draws on debt service reserves or on credit enhancements 
for the subject securities reflecting financial difficulties; (c) 
substitution of credit or liquidity providers, or their failure to 
perform; (d) defeasances; (e) rating changes; (f) tender offers; and 
(g) bankruptcy events. The amendments clarified the materiality 
determination for the event notice related to the tax status of the 
subject securities. Id. at 33111-12, 33118-19.
    \57\ Id. at 33100.
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C. Commission's Report on the Municipal Securities Market

    In July 2012, the Commission issued its Report on the Municipal 
Securities Market following a broad review of the municipal securities 
market that included a series of public field hearings and numerous 
meetings with market participants.\58\ The 2012 Municipal Report 
provides an overview of the municipal securities market and addresses 
two key areas of concern: disclosure and market structure.\59\ The 2012 
Municipal Report includes a series of recommendations for potential 
further consideration, including legislative changes, Commission 
rulemaking, MSRB rulemaking, and enhancement of industry best 
practices.\60\ These recommendations were designed to address concerns 
raised by market participants and others and provide avenues to improve 
the municipal securities market, including transparency for municipal 
securities investors.\61\
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    \58\ Securities and Exchange Commission, Report on the Municipal 
Securities Market (July 31, 2012) (``2012 Municipal Report'').
    \59\ Id.
    \60\ Id. at 133-50.
    \61\ Id. at 4.
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    The 2012 Municipal Report states, among other things, that the

[[Page 13933]]

Commission could consider further amendments to Rule 15c2-12 to mandate 
more specific types of secondary market event disclosures, including 
disclosure relating to new indebtedness (whether or not such debt is 
subject to Rule 15c2-12 and whether or not arising as a result of a 
municipal securities issuance).\62\ The Commission further noted that 
market participants raised concerns that issuers and obligated persons 
may not properly disclose the existence or the terms of bank loans, 
particularly when the terms of the bank loans may affect the payment 
priority from revenues in a way that adversely affects bondholders.\63\
---------------------------------------------------------------------------

    \62\ Id. at 139-40.
    \63\ Id. at 66.
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D. Market Developments and the Need for Further Amendments to Rule 
15c2-12

    The municipal securities market is a significant part of the United 
States credit markets, with over $3.83 trillion in principal amount 
outstanding.\64\ At the end of the third quarter 2016, individuals or 
retail investors held, either directly or indirectly through mutual 
funds, money market mutual funds, closed-end funds, and exchange-traded 
funds, approximately $2.545 trillion of outstanding municipal 
securities.\65\ According to the MSRB, approximately $2.42 trillion of 
municipal securities were traded in 2015 in approximately 9.26 million 
trades.\66\ There are approximately 44,000 \67\ state and local issuers 
of municipal securities, ranging from villages, towns, townships, 
cities, counties, territories, and states, as well as special 
districts, such as school districts and water and sewer 
authorities.\68\ Historically, municipal securities have had 
significantly lower rates of default than corporate and foreign 
government bonds.\69\ Nevertheless, issuers and obligated persons have 
defaulted on their municipal bonds, and these defaults may negatively 
impact investors in ways other than non-payment, including delayed 
payments and pricing disruptions in the secondary market.\70\ Since 
2011, the municipal securities market has experienced four of the five 
largest municipal bankruptcy filings in U.S. history,\71\ and some 
issuers and obligated persons continue to experience declining fiscal 
situations and steadily increasing debt burdens.\72\
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    \64\ See Federal Reserve Board, Financial Accounts of the United 
States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic 
Accounts, at 121 Table L.212 (Third Quarter 2016) (Dec. 8, 2016) 
(``Flow of Funds''), available at https://www.federalreserve.gov/releases/z1/current/z1.pdf.
    \65\ Id. As of the third quarter 2016, the amount of municipal 
securities held directly by the household sector was $1.591 trillion 
and mutual funds, money market mutual funds, closed-end funds, and 
exchange-traded funds collectively held $954.5 billion.
    \66\ See MSRB, 2015 Fact Book, at 7-8 (Mar. 3, 2016), available 
at https://www.msrb.org/msrb1/pdfs/msrb-fact-book-2015.pdf.
    \67\ See 2012 Municipal Report, supra note 58, at 1.
    \68\ See Registration of Municipal Advisors, Exchange Act 
Release No. 34-70462 (Sept. 20, 2013), 78 FR 67468, 67472 (Nov. 12, 
2013).
    \69\ See 2012 Municipal Report, supra note 58, at 22-23 & n.113 
(citing Moody's Investors Service (``Moody's''), The U.S. Municipal 
Bond Rating Scale: Mapping to the Global Rating Scale and Assigning 
Global Scale Ratings to Municipal Obligations (Mar. 2007), available 
at https://www.moodys.com/sites/products/DefaultResearch/102249_RM.pdf; and Report to Accompany H.R. 6308, H.R. Rep. No. 110-
835, at Sec.  205 (Feb. 14, 2008), available at https://www.gpo.gov/fdsys/pkg/CRPT-110hrpt835/html/CRPT-110hrpt835.htm).
    \70\ See 2012 Municipal Report, supra note 58, at 23.
    \71\ The five largest municipal bankruptcies, to date, ranked by 
amount of debt, are Detroit, Michigan, in 2013 ($18 billion in 
debt); Jefferson County, Alabama, in 2011 ($4.2 billion in debt); 
Orange County, California, in 1994 ($2.0 billion in debt); Stockton, 
California, in 2012 ($1.0 billion in debt); and San Bernardino, 
California, in 2012 ($492 million in debt). See Detroit's Bankruptcy 
Is the Nation's Largest, N.Y. Times (July 18, 2013), available at 
https://www.nytimes.com/interactive/2013/07/18/us/detroit-bankruptcy-is-the-largest-in-nation.html.
    \72\ For example, the government of Puerto Rico failed to pay 
more than half of more than $1 billion in general obligation bond 
payments due on July 1, 2016, marking the first time that a state or 
territory has failed to pay general obligation bonds since the early 
1930s. See The Commonwealth of Puerto Rico Amended Event Notice 
(July 12, 2016), available at https://emma.msrb.org/ER980533-ER766970-ER1168826.pdf (providing notice of Puerto Rico's first 
default of its general obligation bond payments). See also Heather 
Gillers & Nick Timiraos, Puerto Rico Defaults on Constitutionally 
Guaranteed Debt, Wall St. J. (July 1, 2016), available at https://www.wsj.com/articles/puerto-rico-to-default-on-constitutionally-guaranteed-debt-1467378242.
---------------------------------------------------------------------------

    Beginning in 2009, issuers and obligated persons have increasingly 
used direct placements as alternatives to public offerings of municipal 
securities.\73\ According to the MSRB, direct placements, when used as 
an alternative to public offerings, could provide potential advantages 
for issuers, such as, among other things, lower interest and 
transaction costs, reduced exposure to bank regulatory capital 
requirements, simpler execution process, greater structuring 
flexibility, no requirement for a rating or offering document, and 
direct interaction with the lender instead of multiple bondholders.\74\ 
However, the MSRB and certain market participants have raised concerns 
about lack of secondary market disclosure regarding financial 
obligations that are direct placements, as well as other financial 
obligations.\75\ Numerous market participants, including the MSRB,\76\ 
the Financial

[[Page 13934]]

Industry Regulatory Authority (``FINRA''),\77\ and industry groups \78\ 
have encouraged issuers and obligated persons to voluntarily disclose 
information about certain financial obligations that are not currently 
included in the list of events for which a Participating Underwriter 
must reasonably determine that an issuer or obligated person has 
undertaken in a written agreement or contract to provide notice under 
Rule 15c2-12. The MSRB has suggested that voluntary disclosure 
submissions include the loan or financing agreement or a summary of 
some or all of the features of the debt obligation, including, for 
example, principal amount, maturity and amortization dates, prepayment 
provisions, security for repayment, source of repayment, and events of 
default and remedies.\79\ GFOA, representing more than 18,000 federal, 
state, and local finance officials, has recommended that if municipal 
entities choose to disclose information regarding certain financial 
obligations, those entities should disclose information that may be 
relevant to current or prospective bondholders either by submitting the 
entire financing agreement to EMMA or preparing a summary of material 
terms, including, for example, the loan amount; debt service schedule; 
legal security and/or source of payment; covenants; events of defaults 
and remedies; term-out provisions, acceleration provisions or other 
non-standard payment considerations; and any other information the 
issuer believes to be important.\80\ Moreover, at least one rating 
agency currently requires, and other rating agencies strongly 
encourage, issuers and obligated persons to notify the rating agency of 
the incurrence of certain financial obligations, including direct 
placements, and to provide all relevant documentation related to such 
indebtedness.\81\ Despite continued efforts by market participants to 
encourage disclosure of certain financial obligations, the MSRB has 
stated that the number of actual disclosures made is limited.\82\ In 
response, issuer representatives have indicated that challenges 
associated with posting and locating information about financial 
obligations on EMMA have led to the appearance of under-disclosure by 
issuers.\83\ While the MSRB's estimate of the number of voluntary 
disclosure submissions may understate the actual number of voluntary 
disclosure submissions, the Commission preliminarily believes that a 
rule requiring a Participating Underwriter in an Offering to reasonably 
determine that an issuer or an obligated person has undertaken, in a 
continuing disclosure agreement, to provide to the MSRB within 10 
business days the event notices specified in the proposed rule 
amendments is nevertheless necessary for the reasons discussed 
throughout this proposing release.
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    \73\ See Section I and Considerations Regarding Voluntary 
Secondary Market Disclosure About Bank Loans, supra note 11. See 
also MSRB Bank Loan Notice, infra note 76, at 2. See also Section 
V.A. herein.
    \74\ See MSRB Bank Loan Notice, infra note 76, at 1 n.2.
    \75\ See supra notes 18 and 19. In addition, the ICI 
recommended, in its comment letter addressing the 2010 amendments to 
Rule 15c2-12, that the Commission implement a disclosure requirement 
regarding the creation of any material financial obligation 
(including contingent obligations) whether in the form of direct 
debt, hedge, swap or other derivative instrument, capital lease, 
operating lease or otherwise, because of the implications these 
obligations may have on the credit risk and value of associated 
bonds. See Letter from Karrie McMillan, General Counsel, ICI, to 
Elizabeth Murphy, Secretary, Securities and Exchange Commission 
(Sept. 8, 2009), available at https://www.sec.gov/comments/s7-15-09/s71509-23.pdf.
    \76\ In April 2012, the MSRB published a regulatory notice 
encouraging issuers to voluntarily post information about bank loan 
financings to the MSRB's EMMA Web site. See MSRB Notice 2012-18, 
supra note 20. In January 2015, the MSRB published a regulatory 
notice regarding the importance of voluntary disclosure of bank 
loans, defining bank loans as a direct purchase of a bond directly 
from the issuer or a direct loan or other type of financing 
agreement with the issuer. The MSRB also noted that many of the 
principles described in its notice would be equally applicable to 
other types of indebtedness, including direct loans from other 
investors. The MSRB noted that the availability of timely disclosure 
of additional debt in any form, including debt-like obligations, is 
beneficial to foster market transparency and to ensure a fair and 
efficient market. See MSRB, Bank Loan Disclosure Market Advisory, 
MSRB Notice 2015-03 (Jan. 29, 2015) (``MSRB Bank Loan Notice''), 
available at https://www.msrb.org/~/media/Files/Regulatory-Notices/
Announcements/2015-03.ashx. Also in January 2015, the MSRB submitted 
a comment letter in response to the Commission's request, pursuant 
to the Paperwork Reduction Act of 1995, for comment on the existing 
collection of information provided for in Rule 15c2-12. In this 
letter, the MSRB stated its concern about the lack of disclosure of 
bank loans and other debt and debt-like obligations (e.g., swap 
transactions, guarantees and lease financing arrangements that 
create significant financial obligations). The MSRB stated that bank 
loans or other debt-like obligations could impair the rights of 
existing bondholders or impact the credit or liquidity profile of an 
issuer. See MSRB Letter to SEC CIO, supra note 18. In October 2015, 
in response to a request from the Commission's Office of the 
Investor Advocate to identify products and practices within the 
municipal securities market that may have an adverse impact on 
retail investors, the MSRB submitted a letter that identified the 
lack of bank loan disclosures as an area of particular concern. See 
Letter from Lynnette Kelly, Executive Director, MSRB, to Rick 
Fleming, Investor Advocate, Securities and Exchange Commission (Oct. 
30, 2015) (``MSRB 2015 Letter to SEC's Investor Advocate''), 
available at https://www.msrb.org/msrb1/pdfs/MSRB-Letter-to-Investor-Advocate-October-2015.pdf. In March 2016, the MSRB published a 
request for comment seeking public input on whether and how the MSRB 
could improve disclosure of direct purchases and bank loans entered 
into by issuers of municipal securities. The comment period closed 
on May 27, 2016, and the MSRB received 30 letters in response to the 
request for comment. See MSRB, Request for Comment on a Concept 
Proposal to Improve Disclosure of Direct Purchases and Bank Loans, 
MSRB Notice 2016-11 (Mar. 28, 2016) (``MSRB Request For Comment''), 
available at https://www.msrb.org/~/media/Files/Regulatory-Notices/
RFCs/2016-11.ashx?n=1. Many commenters on the MSRB's proposal to 
require municipal advisors to disclose their municipal issuer 
clients' direct placements noted that the best way to ensure 
disclosure of direct placements is to amend Rule 15c2-12. See MSRB, 
Comment Letters in Response to MSRB Request for Comment (2016) 
(``Comment Letters in Response to MSRB Request for Comment 
(2016)''), available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2016/2016-11.aspx?c=1. See also 
Jack Casey, Why MSRB Is Giving a $5.5M Rebate to Dealers, The Bond 
Buyer (Aug. 1, 2016), available at https://www.bondbuyer.com/news/washington-securities-law/why-msrb-is-giving-a-55m-rebate-to-dealers-1109888-1.html. In August 2016, the MSRB announced that, in 
light of comments received in response to the MSRB Request for 
Comment, it would not pursue a rulemaking at this time. The MSRB, 
however, noted their continuing belief that disclosure of 
alternative financings is important for assessing a municipal 
entity's creditworthiness and evaluating the impact of these 
financings on existing and potential investors. The MSRB further 
stated that they would continue to raise awareness about the issue 
among regulators and market participants, and encourage industry-led 
initiatives that support voluntary disclosure best practices. MSRB, 
MSRB Holds Quarterly Meeting (Aug. 1, 2016), available at https://www.msrb.org/News-and-Events/Press-Releases/2016/MSRB-Holds-Quarterly-Board-Meeting-July-2016.aspx. In November 2016, in 
response to a request from the Commission's Office of the Investor 
Advocate to identify products and practices within the municipal 
securities market that may have an adverse impact on retail 
investors, the MSRB submitted a letter that reemphasized the lack of 
bank loan disclosures as a continuing area of concern. See Letter 
from Lynnette Kelly, Executive Director, MSRB, to Rick Fleming, 
Investor Advocate, Securities and Exchange Commission (Nov. 3, 2016) 
(``MSRB 2016 Letter to SEC's Investor Advocate''), available at 
https://www.msrb.org/msrb1/pdfs/MSRB-Response-to%20Investor-Advocate-November-2016.pdf.
    \77\ In April 2016, the MSRB and FINRA published a joint 
regulatory notice reminding firms of their obligations in connection 
with privately placing municipal securities with a single purchaser 
and the use of bank loans in the municipal securities market. The 
regulatory notice encouraged the voluntary disclosure of bank loans 
in a timely manner. See FINRA, Direct Purchases and Bank Loans as 
Alternatives to Public Financing in the Municipal Securities Market, 
FINRA Regulatory Notice 16-10 (Apr. 2016), available at https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-16-10.pdf.
    \78\ See e.g., GFOA, Best Practice: Understanding Bank Loans 
(Sept. 2013) (``Understanding Bank Loans''), available at https://www.gfoa.org/understanding-bank-loans; NFMA, Recommended Best 
Practices in Disclosure for Direct Purchase Bonds, Bank Loans, and 
Other Bank-Borrower Agreements (June 2015) (``NFMA 2015 Recommended 
Best Practices''), available at https://www.nfma.org/assets/documents/RBP/rbp_bankloans_615.pdf; Considerations Regarding 
Voluntary Secondary Market Disclosure About Bank Loans, supra note 
11.
    \79\ See MSRB Notice 2012-18, supra note 20.
    \80\ See Understanding Bank Loans, supra note 78. See also 
Considerations Regarding Voluntary Secondary Market Disclosure About 
Bank Loans, supra note 11.
    \81\ In 2014, S&P sent letters to approximately 24,000 issuers 
of municipal securities that it rated, citing concerns over hidden 
debt exposure in the municipal securities market and related credit 
implications. S&P informed issuers that to maintain its ratings and 
possibly assign future ratings the rating agency now required 
notification and documentation related to any direct placements, 
including bank loan financings. S&P further stated that it may 
suspend or withdraw its ratings if issuers or obligated persons do 
not provide such notification in a timely manner. See Letter from 
S&P to Clients (May 6, 2014), available at https://cdn.bondbuyer.com/pdfs/SMLetter5-15-14.pdf. Other ratings agencies have articulated 
the importance of the disclosure of direct placements to their 
ability to maintain ratings on an issuer's public debt. See e.g., 
Fitch Ratings, Special Report: Direct Bank Placements Credit 
Implications (Oct. 25, 2011); Moody's, Growth of Bank Loans and 
Private Placements Increases Risk and Reduces Transparency in the 
Municipal Market (Oct. 16, 2014).
    \82\ See MSRB Request for Comment, supra note 76, at 3. In 
footnote 8 of that document, the MSRB describes the search 
methodology it used to identify bank loan disclosures on EMMA. The 
MSRB noted that as of March 28, 2016, a search of EMMA for the term 
``bank loan'' produced 143 results. Of these results, 79 included 
the words ``bank loan'' in the issue description and were filed 
under the subcategory suggested by the MSRB. Another 23 submissions 
included the words ``bank loan'' in the issue description, but the 
document reported under a subcategory other than that suggested by 
the MSRB may not be related to a bank loan. The remaining 41 
results, while including the words ``bank loan'' in the document, 
did not include any document under the subcategory suggested by the 
MSRB.
    \83\ See Jack Casey, Why the Issuer Bank Loan Disclosure System 
Needs an Overhaul, The Bond Buyer (May 22, 2016), available at 
https://www.bondbuyer.com/news/washington-securities-law/why-the-issuer-bank-loan-disclosure-system-needs-an-overhaul-1104388-1.html. 
At a May 2016 GFOA debt committee meeting, an issuer representative 
noted that many issuers do not know where to post, and market 
participants do not know where to find, bank loan disclosure 
information on EMMA. In response to feedback from issuer 
representatives, the MSRB enhanced the bank loan disclosure 
submission process and the display of these documents on EMMA. See 
MSRB, MSRB Improves Bank Loan Disclosure on EMMA Web site (Sept. 26, 
2016), available at https://msrb.org/News-and-Events/Press-Releases/2016/MSRB-Improves-Bank-Loan-Disclosure-on-EMMA-Web site.
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    Rule 15c2-12 is designed to address fraud and manipulation in the 
municipal securities market by prohibiting the underwriting of 
municipal securities and subsequent recommendation of those municipal 
securities by dealers for which adequate information is not available. 
The Commission has long emphasized that, under the antifraud provisions 
of the federal securities laws, a dealer recommending securities to 
investors implies by its recommendation that it has an adequate basis 
for making the recommendation.\84\ The Commission

[[Page 13935]]

has stated that if, based on publicly available information, a dealer 
discovers any factors that indicate the disclosure is inaccurate or 
incomplete or signal the need for further inquiry, a dealer may need to 
obtain additional information or seek to verify existing 
information.\85\ Accordingly, the Commission has stated that when 
dealers make recommendations in the secondary market, they must be 
based on information that is up-to-date and accessible.\86\
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    \84\ See 1988 Proposing Release, supra note 36, at 37787.
    \85\ See Statement of the Commission Regarding Disclosure 
Obligations of Municipal Securities Issuers and Others, Securities 
Act Release No. 33-7049, Exchange Act Release No. 34-33741 (Mar. 9, 
1994), 59 FR 12748, 12758 (Mar. 17, 1994) (``1994 Interpretive 
Release'').
    \86\ See 1994 Amendments Proposing Release, supra note 40, at 
12760.
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    In addition, the MSRB has emphasized that secondary market 
disclosure information publicized by the issuer must be taken into 
account by dealers to meet the investor protection standards imposed by 
the MSRB's investor protection rules (e.g., MSRB Rule G-17 requiring 
dealers to deal fairly with all persons and to not engage in any 
deceptive, dishonest, or unfair practice; MSRB Rule G-19 requiring 
dealers to have a reasonable basis to believe that a recommended 
transaction or investment strategy is suitable for a customer; MSRB 
Rule G-30 requiring dealers to ensure that prices for customer 
transactions are fair and reasonable; and MSRB Rule G-47 requiring 
dealers to provide all material information known about a transaction, 
including material information that is reasonably accessible to the 
market).\87\
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    \87\ See 1994 Amendments Adopting Release, supra note 40, at 
59602. See also MSRB Reminds Firms of their Sales Practice and Due 
Diligence Obligations when Selling Municipal Securities in the 
Secondary Market, MSRB Notice 2010-37 (Sept. 20, 2010), available at 
https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2010/2010-37.aspx.
---------------------------------------------------------------------------

    Under Rule 15c2-12(c), a dealer recommending the purchase or sale 
of a municipal security is required to have procedures in place that 
provide reasonable assurance that it will receive prompt notice of 
event notices. The availability of this information to investors would 
enable them to make more informed investment decisions and should 
reduce the likelihood that investors would be subject to fraud 
facilitated by inadequate disclosure. Furthermore, this information 
would assist dealers in satisfying their obligation to have a 
reasonable basis to recommend municipal securities to investors.
    In keeping with the objectives set forth in the Exchange Act, 
including Section 15(c)(2),\88\ and the antifraud provisions of the 
federal securities laws, the Commission preliminarily believes the 
proposed amendments are reasonably designed to prevent fraudulent, 
deceptive, or manipulative acts or practices in the municipal 
securities market. Accordingly, the Commission proposes to amend Rule 
15c2-12. The Commission believes the proposed amendments to Rule 15c2-
12 are consistent with the limitations set forth in Exchange Act 
Section 15B(d)(1) because the proposed amendments do not require an 
issuer of municipal securities to make any filing with the Commission 
or MSRB prior to the sale of municipal securities.
---------------------------------------------------------------------------

    \88\ 17 CFR 240.15c2-12 was adopted under a number of Exchange 
Act provisions, including Section 15(c); 15 U.S.C. 78o(c).
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III. Description of the Proposed Amendments to Rule 15c2-12

A. Overview of Proposed Amendments

    The Commission proposes to amend paragraph (b)(5)(i)(C) to add 
notices for the proposed events that a Participating Underwriter must 
reasonably determine that the issuer or obligated person has agreed to 
provide in its continuing disclosure agreement. Similar to the other 
events listed in Rule 15c2-12, the proposed events reflect on the 
creditworthiness of the issuer or obligated person and the terms of the 
securities that they issue.\89\ In addition, the Commission proposes an 
amendment to Rule 15c2-12(f) to add a definition for ``financial 
obligation'' and a technical amendment to subparagraph 
(b)(5)(i)(C)(14).
---------------------------------------------------------------------------

    \89\ See e.g., 1994 Interpretive Release, supra note 85; 1994 
Amendments Adopting Release, supra note 40; 2010 Amendments Adopting 
Release, supra note 54.
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1. Incurrence of a Financial Obligation of the Obligated Person, If 
Material, or Agreement to Covenants, Events of Default, Remedies, 
Priority Rights, or Other Similar Terms of a Financial Obligation of 
the Obligated Person, Any of Which Affect Security Holders, If Material
    The Commission proposes to add an event notice for incurrence of a 
financial obligation of the obligated person, if material, or agreement 
to covenants, events of default, remedies, priority rights, or other 
similar terms of a financial obligation of the obligated person, any of 
which affect security holders, if material, to the list of events in 
paragraph (b)(5)(i)(C) of the Rule for which notice is to be provided. 
The actual incurrence of the financial obligation, or agreement to 
covenants, events of default, remedies, priority rights, or other 
similar terms would trigger the obligation to provide the event notice. 
The event notice would be due in a timely manner not in excess of ten 
business days.\90\
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    \90\ See 17 CFR 240.15c2-12(b)(5)(i)(C).
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    The Commission preliminarily believes that including a materiality 
determination would strike an appropriate balance. As proposed, the 
materiality determination applies to the incurrence of a financial 
obligation and each of the agreed upon terms listed (i.e., covenants, 
events of default, remedies, priority rights, or other similar terms). 
For example, an issuer or obligated person may incur a financial 
obligation for an amount that, absent other circumstances, would not 
raise the concerns the proposed amendments are intended to address. On 
the other hand, if an issuer or obligated person agrees to provide a 
counterparty to a financial obligation with a senior position in the 
debt payment priority structure, and that agreement affects existing 
security holders, the event likely does rise to the level of importance 
that it should be disclosed to investors and other market participants.
    As described above, investors and other market participants may not 
have access to disclosure that an issuer or obligated person has 
incurred a material financial obligation, or agreed to certain terms 
that affect security holders, unless or until disclosure is made in the 
issuer's or obligated person's annual financial information or audited 
financial statements or in an official statement in connection with the 
issuer's or obligated person's next primary offering subject to Rule 
15c2-12 that results in the provision of a final official statement to 
EMMA.
    Timely access to disclosure about the incurrence of a material 
financial obligation by an issuer or obligated person would provide 
potentially important information about the current financial condition 
of the issuer or obligated person, including potential impacts to the 
issuer's or obligated person's liquidity and overall creditworthiness. 
A material financial obligation that results in an increase or change 
in the issuer's or obligated person's outstanding debt can weaken the 
measures (e.g., debt service as a percentage of expenditures or debt 
service coverage ratio) used to assess an issuer's or obligated 
person's liquidity and creditworthiness and may result in a 
reevaluation of the issuer's or obligated person's overall credit

[[Page 13936]]

quality.\91\ For example, an increase in outstanding debt could affect 
an issuer's or obligated person's level of debt service as a percent of 
expenditures, which industry commenters view as an important indicator 
of credit quality for general obligation bonds, or such an increase in 
debt could affect the amount of revenues available to pay debt service 
for revenue bonds, which is considered in connection with rate 
covenants or additional bonds tests.\92\ If an issuer's or obligated 
person's liquidity and creditworthiness is impacted, the credit quality 
of the issuer's or obligated person's outstanding municipal securities 
could be adversely affected which could impact an investor's investment 
decision or other market participant's credit analysis.\93\
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    \91\ See NFMA 2015 Recommended Best Practices, supra note 78, at 
6-7; See also Considerations Regarding Voluntary Secondary Market 
Disclosure About Bank Loans, supra note 11.
    \92\ See NFMA 2015 Recommended Best Practices, supra note 78, at 
6-7.
    \93\ See MSRB Bank Loan Notice, supra note 76, at 4 (stating 
that the inability to timely assess a bank loan's impact on an 
issuer's credit profile could inadvertently distort valuation 
related to the buying or selling of an issuer's bonds in both the 
primary and secondary markets). See also Considerations Regarding 
Voluntary Secondary Market Disclosure About Bank Loans, supra note 
11.
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    Timely access to disclosure about a material agreement to 
covenants, events of default, remedies, priority rights, or other 
similar terms of a financial obligation, any of which affect security 
holders, could potentially provide important information about the 
creation of contingent liquidity risk, credit risk, and refinancing 
risk that could impact the issuer's or obligated person's liquidity and 
overall creditworthiness, and affect security holders' rights to assets 
or revenues. If an issuer's or obligated person's liquidity and 
creditworthiness is impacted and/or the rights of security holders are 
affected, the credit quality and price of the issuer's or obligated 
person's outstanding municipal securities could be affected.\94\
---------------------------------------------------------------------------

    \94\ Id.
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    We propose to include in the rule a list of events--specifically, 
covenants, events of default, remedies, priority rights, or other 
similar terms--which are typically agreed to in connection with the 
incurrence of a financial obligation and analyzed by market 
participants.\95\ These terms of a financial obligation could result 
in, among other things, contingent liquidity and credit risks, 
refinancing risk, and reduced security for existing security 
holders.\96\ For example, the issuer or obligated person may agree to 
covenants that are more restrictive than those applicable to the 
issuer's or obligated person's outstanding municipal securities such as 
a requirement to maintain a higher debt service coverage ratio.\97\ The 
more restrictive covenant would potentially trigger an event of default 
more easily and as a result the counterparty to the financial 
obligation would be able to assert remedies prior to existing security 
holders. For further example, the issuer or obligated person may agree 
to events of default that differ from those that are applicable to an 
issuer's or obligated person's outstanding municipal securities such as 
a failure to observe any term of the financial obligation (as opposed 
to specifically identified terms) that would enable the counterparty to 
the financial obligation to assert remedies prior to existing security 
holders. In addition, the issuer or obligated person may agree to 
different remedies than the issuer or obligated person has provided to 
existing security holders. For example, an acceleration provision could 
provide that any unpaid principal becomes immediately due to the 
counterparty upon the occurrence of a specified event of default 
without any grace period, which would effectively prioritize the 
payment of the financial obligation to the counterparty if the security 
holders do not have the benefit of the same provision. By agreeing to 
such a term, the counterparty to the financial obligation could benefit 
by being repaid prior to existing security holders. By agreeing to a 
material covenant, event of default or remedy under the terms of a 
financial obligation, such as the examples provided above, security 
holders could be affected, and the issuer or obligated person may 
create contingent liquidity and credit risks that could potentially 
impact the issuer's or obligated person's liquidity and overall 
creditworthiness.\98\
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    \95\ See e.g., NFMA 2015 Recommended Best Practices, supra note 
78.
    \96\ Id.
    \97\ See MSRB, Glossary of Municipal Securities Terms: Coverage, 
available at https://www.msrb.org/Glossary/Definition/COVERAGE.aspx 
(defining ``coverage'' as the ``ratio of available revenues 
available annually to pay debt service over the annual debt service 
requirement. This ratio is one indication of the availability of 
revenues for payment of debt service.'').
    \98\ See e.g., NFMA 2015 Recommended Best Practices, supra note 
78.
---------------------------------------------------------------------------

    In addition, issuers and obligated persons may agree to material 
priority rights which provide the counterparty with better terms than 
existing security holders and, as a result, adversely affect the rights 
of security holders. For example, an issuer or obligated person may 
agree to provide superior rights to the counterparty in assets or 
revenues that were previously pledged to existing security holders and, 
as a result, reduce security for existing security holders. Lastly, 
there are other material terms similar to covenants, events of default, 
remedies, and priority rights that an issuer or obligated person may 
agree to that could, among other things, create liquidity, credit, or 
refinancing risks that could affect the liquidity and creditworthiness 
of an issuer or obligated person or the terms of the securities they 
issue. For example, an investor may make an investment decision without 
knowing the issuer or obligated person has entered into a financial 
obligation structured with a balloon payment at maturity creating 
refinancing risk that could compromise the issuer or obligated person's 
liquidity and creditworthiness and their ability to repay their 
outstanding municipal securities.\99\ The provision requiring the 
balloon payment may not be typically identified as a covenant, event of 
default, remedy, or priority right, however, such a term could 
potentially impact the issuer's or obligated person's liquidity and 
overall creditworthiness and adversely affect security holders.
---------------------------------------------------------------------------

    \99\ Id.
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    Lack of access or delay in access to continuing disclosure 
information about material financial obligations means that there are 
more opportunities for investors to make investment decisions, and 
other market participants to undertake credit analyses, without access 
to this important information. Timely access to information about the 
incurrence of a material financial obligation of the issuer or 
obligated person would allow investors and other market participants to 
learn important information about the current financial condition of 
the issuer or obligated person, including potential impacts to the 
issuer's or obligated person's liquidity and overall creditworthiness. 
Timely access to information about the agreement to covenants, events 
of default, remedies, priority rights, or other similar terms of a 
financial obligation of the issuer or obligated person, any of which 
affect security holders, if material, would allow investors and other 
market participants to learn important information about the creation 
of contingent liquidity risk, credit risk, and refinancing risk, 
including these risks' potential impact to the issuer's or obligated 
person's liquidity and overall creditworthiness, and whether security 
holders have been affected. Timely access to this information would 
help reduce the likelihood that market participants would have 
insufficient information to make informed investment decisions

[[Page 13937]]

and to undertake informed credit analyses and would enhance investor 
protection.
    The MSRB and certain market participants have been focused on the 
potential negative impacts associated with the lack of secondary market 
disclosure regarding debt obligations that are direct placements, as 
well as other financial obligations,\100\ and certain of the examples 
discussed above are focused on the potential adverse effects to an 
issuer's or obligated person's liquidity and creditworthiness and 
valuation of their municipal securities. However, the Commission 
recognizes that the information disclosed about financial obligations 
may have a positive impact on an issuer's or obligated person's 
liquidity and creditworthiness, and the credit quality of the issuer's 
or obligated person's outstanding municipal securities could be 
positively affected.
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    \100\ See supra notes 76, 77, and 78.
---------------------------------------------------------------------------

    The Commission believes the proposed amendments would facilitate 
investor access to important information in a timely manner and help to 
enhance transparency. If an issuer or obligated person provides an 
event notice to the MSRB, it would be displayed on the MSRB's EMMA Web 
site. EMMA provides free public access to continuing disclosure 
documents, including event notices. In addition, EMMA includes a 
feature that allows market participants to sign up to receive automatic 
alerts from EMMA when information becomes available with respect to 
individual or groups of municipal securities, including notice of the 
submission of an event notice with respect to such individual or groups 
of municipal securities. The Commission further preliminarily believes 
that the event notice generally should include a description of the 
material terms of the financial obligation. Examples of some material 
terms may be the date of incurrence, principal amount, maturity and 
amortization, interest rate, if fixed, or method of computation, if 
variable (and any default rates); other terms may be appropriate as 
well, depending on the circumstances. A description of the material 
terms would help further the availability of information in a timely 
manner to assist investors in making more informed investment 
decisions.
    The Commission requests comment regarding all aspects of the 
proposed addition of subparagraph (b)(5)(i)(C)(15) concerning the event 
notice for the incurrence of a financial obligation of the issuer or 
obligated person, if material, or agreement to covenants, events of 
default, remedies, priority rights, or other similar terms of a 
financial obligation of the issuer or obligated person, any of which 
affect security holders, if material. When responding to the requests 
for comment, please explain your reasoning.
     The Commission requests comment relating to the frequency 
of such event and the utility of this information by investors and 
other market participants in the secondary market.
     Is the triggering of the obligation to provide the event 
notice clear?
     Should the rule or guidance explicitly address where an 
issuer or obligated person incurs a series of related financial 
obligations, where a single incurrence may not be material but in the 
aggregate the incurrences would be material? In such a scenario, when 
should the trigger of the obligation to provide the event notice occur?
     Are there other events that should be included in 
subparagraph (b)(5)(i)(C)(15) of the Rule? Should any of the events 
proposed to be included be eliminated or modified?
     The Commission further requests comment as to whether the 
materiality conditions are appropriate conditions for subparagraph 
(b)(5)(i)(C)(15) of the Rule. Should any or all of the items included 
in the proposed rule text not be subject to the proposed materiality 
condition?
     Are there any events that should be added to subparagraph 
(b)(5)(i)(C)(15) of the Rule, but should not be subject to a 
materiality condition?
     The Commission further requests comment as to whether 
``any of which affect security holders'' is an appropriate condition to 
include with respect to ``agreement to covenants, events of default, 
remedies, priority rights, or other similar terms of a financial 
obligation of the issuer or obligated person'' in subparagraph 
(b)(5)(i)(C)(15) of the Rule. Should any of the items included in the 
proposed rule text not be subject to the ``any of which affect security 
holders'' condition? Should the proposed condition be modified to only 
capture events which adversely affect security holders?
     Should the Commission provide additional guidance on the 
types of information issuers and obligated persons should consider in 
drafting event notices?
     The Commission also requests comment regarding the 
benefits and costs of adding this proposed event.
i. Definition of a Financial Obligation
    The Commission proposes to amend Rule 15c2-12(f) to add a 
definition for ``financial obligation.'' Under the proposed definition, 
the term financial obligation means a debt obligation, lease, 
guarantee, derivative instrument, or monetary obligation resulting from 
a judicial, administrative, or arbitration proceeding. The term 
financial obligation does not include municipal securities as to which 
a final official statement has been provided to the MSRB consistent 
with Rule 15c2-12.
    As discussed above, some market participants are concerned not only 
about the lack of access or delay in access to disclosure regarding 
financial obligations that are direct placements, but also about the 
lack of access or delay in access to disclosure of the existence of 
other financial obligations. Similar to the concerns that market 
participants raised about financial obligations that are direct 
placements, an issuer's or obligated person's incurrence of other 
financial obligations could impair the rights of existing security 
holders, including the seniority status of such security holders, or 
impact the creditworthiness of an issuer or obligated person.\101\ For 
example, the MSRB is concerned about other financial obligations that 
are lease financing arrangements, guarantees, and swap 
transactions.\102\ Additionally, the Commission understands that there 
are instances where monetary obligations resulting from judicial, 
administrative, or arbitration proceedings created significant 
financial obligations for issuers and obligated persons.\103\ The 
proposed definition of financial obligation includes an issuer's or 
obligated person's debt obligations, leases, guarantees, derivative 
instruments, and monetary obligations resulting from judicial, 
administrative, or arbitration proceedings.
---------------------------------------------------------------------------

    \101\ See e.g., MSRB Letter to SEC CIO, supra note 18.
    \102\ Id.
    \103\ See infra note 111.
---------------------------------------------------------------------------

    As proposed, the term debt obligation is intended to capture short-
term and long-term debt obligations of an issuer or obligated person 
under the terms of an indenture, loan agreement, or similar contract 
that will be repaid over time. Under the proposed amendments, for 
example, a direct purchase of municipal securities by an investor and a 
direct loan by a bank would be debt obligations of the issuer or 
obligated person. As proposed, the term lease is intended to capture a 
lease that is entered into by an issuer or obligated person, including 
an operating or capital lease. Under the proposed amendments, for 
example, if an issuer or obligated person enters into a lease-

[[Page 13938]]

purchase agreement to acquire an office building or an operating lease 
to lease an office building for a stated period of time, both would be 
a lease under the proposed amendments. Debt obligations and leases are 
included in the proposed definition of financial obligation because the 
incurrence of a material debt obligation or lease and agreement to the 
material terms of a debt obligation or lease, which affect security 
holders, and the occurrence of a default, event of acceleration, 
termination event, modification of terms, or other similar events under 
the terms of a debt obligation or lease, any of which reflect financial 
difficulties, could provide important information about the current 
financial condition of the issuer or obligated person, including 
potential impacts to the issuer's or obligated person's liquidity and 
overall creditworthiness, and whether security holders could be 
affected.
    The term guarantee \104\ is intended to capture a contingent 
financial obligation of the issuer or obligated person to secure 
obligations of a third party or obligations of the issuer or obligated 
person. Under certain circumstances, in order to facilitate a financing 
by a third party, an issuer or obligated person may provide a guarantee 
to reduce risks to the provider of the financing and lower the cost of 
borrowing for the third party. That guarantee may assume different 
forms including a payment guarantee or other arrangement that could 
expose the issuer or obligated person to a contingent financial 
obligation. For example, an issuer that is a county could agree to 
guarantee the repayment of municipal securities issued by a town 
located in the county. In this instance, the county could be required 
to use its own funds to repay the town's municipal securities. 
Furthermore, an issuer or obligated person may provide a guarantee with 
respect to its own financial obligation. For example, an issuer or 
obligated person could, in connection with the issuance of variable 
rate demand obligations, agree to repurchase, with its own capital, 
bonds that have been tendered but are unable to be remarketed. In this 
instance, the issuer or obligated person uses its own funds to purchase 
the bonds instead of a third party liquidity facility. A guarantee 
provided for the benefit of a third party or a self-liquidity facility 
or other contingent arrangement would be a guarantee under the proposed 
amendments. Like debt obligations and leases, guarantees are included 
in the proposed definition because the incurrence of such material 
guarantees and the agreements to the material terms of such guarantees, 
which affect security holders, and the occurrence of a default, event 
of acceleration, termination event, modification of terms, or other 
similar events under the terms of a guarantee, any of which reflect 
financial difficulties, could provide important information about the 
current financial condition of the issuer or obligated person, 
including potential impacts to the issuer's or obligated person's 
liquidity and overall creditworthiness, and whether security holders 
have been affected.
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    \104\ The description of a ``guarantee'' set forth in this 
proposing release is solely for purposes of the Rule.
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    As proposed, the term derivative instrument is intended to capture 
any swap, security-based swap, futures contract, forward contract, 
option, any combination of the foregoing, or any similar instrument to 
which an issuer or obligated person is a counterparty.\105\ The 
Commission preliminarily believes that the proposed definition should 
include derivative instruments that would be entered into by an issuer 
or obligated person because a derivative instrument could impact the 
issuer's or obligated person's liquidity and overall creditworthiness 
or the terms may affect security holders. For example, a common 
derivative instrument that issuers and obligated persons may enter into 
is an interest rate swap (i.e., a swap used to hedge interest rate 
risk), which allows issuers and obligated persons to fix all or part of 
their exposure to variable interest rates. The use of a derivative 
instrument, such as a swap or security-based swap, can provide issuers 
and obligated persons with benefits, including the ability to reduce 
borrowing costs and/or manage interest rate risk. However, the use of a 
derivative instrument can also expose the issuer or obligated person to 
a variety of risks, some of which may be significant.\106\ The 
agreement to material terms of a derivative instrument, which affect 
security holders, and the occurrence of a default, event of 
acceleration, termination event, modification of terms, or other 
similar events under the terms of a derivative instrument, any of which 
reflect financial difficulties, could adversely impact the issuer's or 
obligated person's liquidity and overall creditworthiness or adversely 
affect security holders.\107\ For example, if an issuer or obligated 
person enters into a derivative instrument with terms that may create 
contingent liquidity risk for the issuer or obligated person, such as a 
requirement to post collateral or pay a termination fee upon the 
occurrence of certain events, then such terms could adversely impact 
the issuer or obligated person's overall liquidity and overall 
creditworthiness.\108\ Further, for example, the occurrence of a 
termination event under the terms of a derivative instrument reflecting 
financial difficulties could adversely impact the issuer's or obligated 
person's overall creditworthiness. Accordingly, the incurrence of a 
material derivative instrument or the agreement to material terms of a 
derivative instrument, which affect security holders, and the 
occurrence of a default, event of acceleration, termination event, 
modification of terms, or other similar events under the terms of a 
derivative instrument, any of which reflect financial difficulties, 
could provide important information about the current financial 
condition of the issuer or obligated person, including potential 
adverse impacts to the issuer's or obligated person's liquidity and 
overall creditworthiness, and whether security holders have been 
affected.
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    \105\ The Commission recognizes that certain of the items 
intended to be captured under the term derivative instrument may not 
currently be used by many issuers and obligated persons. However, 
this list is intended to be sufficiently comprehensive to cover the 
use of derivative instruments that may develop in the future.
    \106\ See e.g., Yvette Shields, Chicago's Market Foray Triggers 
Bleak Disclosures, The Bond Buyer (May 12, 2015), available at 
https://www.bondbuyer.com/news/regionalnews/chicagos-market-foray-triggers-bleak-disclosures-1073129-1.html (discussing the City of 
Chicago's payment of $31 million in termination fees to get out of 
certain interest rate swaps). See also Elizabeth Campbell, Chicago 
Settling $390 Million Tab When City Can Least Afford It, Bloomberg 
(Mar. 17, 2016), available at https://www.bloomberg.com/news/articles/2016-03-17/chicago-settling-390-million-tab-when-city-can-least-afford-it (stating that the City of Chicago had already paid 
about $290 million to exit various swaps and was planning to spend 
$100 million more).
    \107\ See 2012 Municipal Report, supra note 58, at 91-92.
    \108\ See e.g., NFMA 2015 Recommended Best Practices, supra note 
78.
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    Monetary obligations resulting from a judicial, administrative, or 
arbitration proceeding are included in the proposed definition \109\ 
because the requirement to pay \110\ such an obligation could adversely 
impact the issuer's or obligated person's overall creditworthiness and 
liquidity and adversely affect security holders. For example, a 
monetary obligation

[[Page 13939]]

resulting from a judicial, administrative, or arbitration proceeding 
could be imposed upon an issuer or obligated person that could 
immediately and adversely impact an issuer's or obligated person's 
creditworthiness, including its ability to repay its outstanding 
municipal securities, because of its overall financial condition.\111\ 
While information about monetary obligations resulting from judicial, 
administrative, or arbitration proceedings may be publicly available, 
having this information available on EMMA would help provide investors 
and other market participants with ready and prompt access to this 
information in an electronic format and in one central location. 
Further, while information about a monetary obligation resulting from 
judicial, administrative, or arbitration proceedings may be 
disseminated through the media or otherwise in the issuer's or 
obligated person's immediate community, such information may not be 
circulated to investors and other market participants who reside 
outside of the issuer's or obligated person's locality. Accordingly, 
the material incurrence of a monetary obligation resulting from 
judicial, administrative, or arbitration proceedings and the agreements 
to the material terms of such obligation, which affect security 
holders, and the occurrence of a default, event of acceleration, 
termination event, modification of terms, or other similar events under 
the terms of such obligation, any of which reflect financial 
difficulties, could provide important information about the current 
financial condition of the issuer or obligated person, including 
potential adverse impacts to the issuer's or obligated person's 
liquidity and overall creditworthiness, and whether security holders 
have been affected.
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    \109\ A settlement order or consent decree that includes a 
monetary obligation would be included under this proposed 
definition.
    \110\ The Commission preliminarily believes that notice of the 
incurrence of a monetary obligation resulting from a judicial, 
administrative, or arbitration proceeding, should be provided within 
10 business days of the initial imposition of the monetary 
obligation.
    \111\ In 2012, a court awarded a trucking school an $11.4 
million judgment against the City of Hillview, Kentucky which 
prompted the city of 9,000, which typically brings in less than $3 
million a year in taxes and revenues, to enter into bankruptcy 
proceedings when it was initially unable to negotiate a repayment 
deal. While the City of Hillview posted a notice of the commencement 
of the bankruptcy to EMMA in 2015, the monetary judgment was imposed 
on the city in 2012, leaving investors without timely access to 
important information about the incurrence of a debt obligation that 
affected the city's creditworthiness and terms of the securities 
that they issue. This information may have impacted an investor's 
investment decision regarding the city's municipal securities. See 
Notice: To All Creditors of City of Hillview, Kentucky and Other 
Parties in Interest (Sep. 2, 2015), available at https://emma.msrb.org/EP869434-EP673418-EP1075085.pdf. See also Katy Stech, 
How a $15 Million Legal Bill Put a Kentucky Town in Bankruptcy, Wall 
St. J. (Sep. 30, 2015), available at https://blogs.wsj.com/bankruptcy/2015/09/30/how-a-15-million-legal-bill-put-a-kentucky-town-in-bankruptcy/. See also Katy Stech, Bankrupt Kentucky City 
Reaches Repayment Deal, Wall St. J. (Mar. 30, 2016), available at 
https://www.wsj.com/articles/bankrupt-kentucky-city-reaches-repayment-deal-1459366153. For further example, in 2008, a court 
awarded a developer a $43 million judgment against the Town of 
Mammoth Lakes, California. The judgment, which was three times the 
size of the town's operating budget, prompted the town to enter into 
bankruptcy when it was initially unable to negotiate a settlement 
with the developer. While the town posted notice of the commencement 
of the bankruptcy to EMMA in 2012, the monetary judgment was imposed 
on the town in 2008, leaving investors without timely access to 
important information about the incurrence of a debt obligation that 
affected the town's creditworthiness and terms of the securities 
they issue. This information may have impacted an investor's 
investment decision regarding the town's municipal securities. See 
Notice of Commencement of Case and Objection Deadline (July 19, 
2012), available at https://emma.msrb.org/EP670581-EP522435-EP923717.pdf. See also Louis Sahagun, Mammoth Lakes Files for 
Bankruptcy Over $43 Million Judgment, L.A. Times (July 2, 2012), 
available at https://articles.latimes.com/2012/jul/02/local/la-me-mammoth-lakes-20120703. See also Robert Holmes, Mammoth Lakes: Back 
From the Brink, Urban Land (June 10, 2013), available at https://urbanland.uli.org/industry-sectors/mammoth-lakes-back-from-the-brink/. See also Dakota Smith, L.A. Needs to Borrow Millions to 
Cover Legal Payouts, City Report Says, L.A. Times (Jan. 9, 2017), 
available at https://www.latimes.com/local/lanow/la-me-ln-legal-payouts-20170109-story.html; Jessica DiNapoli, Hillview's Bankruptcy 
Negative for Small Town Government--Moody's, Reuters (Aug. 31, 
2015), available at https://www.reuters.com/article/usa-kentucky-hillview-idUSL1N1112RP20150831.
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    The proposed definition would help improve the timely availability 
of important information to investors and other market participants 
regarding financial obligations and provide investors the ability to 
take such information into account when making investment decisions and 
other market participants the ability to take such information into 
account when undertaking credit analyses.
    The Commission requests comment regarding all aspects of the 
proposed definition of financial obligation. When responding to the 
requests for comment, please explain your reasoning.
     Are there any more appropriate alternative definitions? 
For example, would it be more appropriate to include a definition that 
does not identify each type of financial obligation?
     Should each type of financial obligation included in the 
proposed definition be defined? Or is there an existing definition of 
financial obligation that the Commission could instead use?
     Are there any financial obligations that would not be 
covered in the proposed definition that should be?
     Should other contracts that create future payment 
obligations (e.g., a contract for waste disposal services) be included 
in the proposed definition?
     Should any of the terms included in the definition be 
modified? Should any terms be added to the definition to achieve the 
stated goal?
     Comment is also requested on whether including a 
definition in the Rule is necessary.
2. Default, Event of Acceleration, Termination Event, Modification of 
Terms, or Other Similar Events Under the Terms of a Financial 
Obligation of the Obligated Person, Any of Which Reflect Financial 
Difficulties
    The Commission proposes to add an event notice for the occurrence 
of a default, event of acceleration, termination event, modification of 
terms, or other similar events under the terms of a financial 
obligation of the issuer or obligated person, provided the occurrence 
reflects financial difficulties, to the list of events in paragraph 
(b)(5)(i)(C) of the Rule. As with the other event notice, a 
Participating Underwriter would need to reasonably determine that the 
issuer or obligated person has agreed to provide notice of such events 
in its continuing disclosure agreement.
    The Commission preliminarily believes that qualifying the event 
notice trigger with ``any of which reflect financial difficulties,'' 
would strike an appropriate balance. As proposed, the term ``any of 
which reflect financial difficulties'' applies to all of the events 
listed in the proposed event notice (i.e., a default, event of 
acceleration, termination event, modification of terms, or other 
similar events). For example, an issuer or obligated person may 
covenant to provide the counterparty with notice of change in its 
address and may not promptly comply with the covenant. A failure to 
comply with such a covenant may not reflect financial difficulties; 
therefore, absent other circumstances, this event likely does not raise 
the concerns the proposed amendments are intended to address. On the 
other hand an issuer or obligated person could agree to replenish a 
debt service reserve fund if draws have been made on such fund. In this 
example, if an issuer or obligated person fails to comply with such 
covenant, then such an event likely should be disclosed to investors 
and other market participants. The concept of ``reflecting financial 
difficulties'' has been used since the adoption of Rule 15c2-12 in 
paragraph (b)(5)(i)(C)(3) and in paragraph (b)(5)(i)(C)(4), and, as 
such, market participants should be familiar with the concept as it 
relates to the operation of Rule 15c2-12.\112\
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    \112\ See 1994 Amendments Proposing Release, supra note 40; 1994 
Amendments Adopting Release, supra note 40; See also Securities and 
Exchange Act Release No. 34-60332 (July 17, 2009), 74 FR 36832 (July 
24, 2009); 2010 Amendments Adopting Release, supra note 54.

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[[Page 13940]]

    As described above, investors and other market participants may not 
have any access or timely access to disclosure regarding the occurrence 
of a default, event of acceleration, termination event, modification of 
terms, or other similar events under the terms of a financial 
obligation of the obligated person, and any of which reflect financial 
difficulties. For example, if an issuer or obligated person defaults 
and such default reflects financial difficulties, investors either may 
not ever become aware of the default or may not become aware of the 
default in a timely manner. In both these cases, investors could be 
making investment decisions, and other market participants could be 
undertaking credit analyses, without important information regarding 
the current financial condition of the issuer or obligated person that 
could potentially adversely impact the issuer's or obligated person's 
liquidity and overall creditworthiness. If an issuer's or obligated 
person's liquidity and creditworthiness are adversely impacted, the 
credit quality and price of the issuer's or obligated person's 
outstanding municipal securities could be affected which could impact 
an investor's investment decision or a market participant's credit 
analysis.
    A default could be a monetary default, where an issuer or obligated 
person fails to pay principal, interest, or other funds due, or a non-
payment related default, which occurs when the issuer or obligated 
person fails to comply with specified covenants.\113\ Generally, under 
standard contract terms, if a monetary default occurs, or a non-payment 
related default is not cured within a specified period, such default 
becomes an ``event of default'' and the trustee or counterparty to the 
financial obligation may exercise legally available rights and remedies 
for enforcement, including an event of acceleration. An event of 
acceleration typically provides the outstanding balance becomes 
immediately due and payable upon the occurrence of one or more 
specified events of default.\114\ Both the occurrence of a default and 
an event of acceleration if reflecting financial difficulties are 
included in the proposed amendments because both types of events 
provide current information regarding the financial condition of the 
issuer or obligated person and the occurrence of either event could 
adversely impact an issuer's or obligated person's liquidity and 
overall creditworthiness.\115\ For example, the occurrence of a 
monetary default caused by the issuer or obligated person's failure to 
make a payment due likely would be relevant to evaluating the current 
financial condition of the issuer or obligated person. Further, for 
example, an event of acceleration of the financial obligation and the 
issuer or obligated person's obligation to pay the outstanding balance 
of the financial obligation immediately could have an impact on the 
issuer's or obligated person's liquidity and overall creditworthiness. 
Investors could be making investment decisions, and other market 
participants could be undertaking credit analyses, without important 
information about these types of events.
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    \113\ See, e.g., MSRB, Glossary of Municipal Securities Terms: 
Default, available at https://www.msrb.org/Glossary/Definition/DEFAULT.aspx.
    \114\ See, e.g., MSRB, Glossary of Municipal Securities Terms: 
Acceleration, available at https://www.msrb.org/Glossary/Definition/ACCELERATION.aspx.
    \115\ See NFMA 2015 Recommended Best Practices, supra note 78.
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    A termination event typically allows either party to a financial 
obligation to terminate the agreement subject to certain conditions, 
including in some cases payment of a termination fee by the issuer or 
obligated person.\116\ Industry commenters have noted that the 
occurrence of a termination event, that results in an increase in 
outstanding debt, could affect an issuer's or obligated person's level 
of debt service as a percent of expenditures, which is an important 
indicator of credit quality for general obligation bonds, or such 
increase in debt could affect the amount of available revenues to pay 
debt service for revenue bonds which is considered in connection with 
rate covenants or additional bonds tests. If an issuer's or obligated 
person's liquidity and overall creditworthiness is impacted, the credit 
quality and price of the issuer's or obligated person's outstanding 
municipal securities could be affected, which could impact an 
investor's investment decision.\117\ For example, if the terms of a 
derivative instrument such as a swap require, upon the occurrence of a 
termination event (e.g., a credit rating downgrade), that an issuer or 
obligated person pay a termination fee, such termination event may have 
an immediate impact on the issuer's or obligated person's liquidity and 
creditworthiness and may cause investors to reevaluate their investment 
decisions and other market participants to reevaluate their credit 
analyses.
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    \116\ See, e.g., Liz Farmer, Cities Paying Millions to Get Out 
of Bad Bank Deals, Governing (Mar. 6, 2015), available at https://www.governing.com/topics/finance/gov-chicago-paying-millions-bad-swap-deals.html (discussing payments of termination fees by several 
municipalities and municipal entities to exit unfavorable interest 
rate swaps).
    \117\ See NFMA 2015 Recommended Best Practices, supra note 78.
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    A modification of terms of a financial obligation may occur when an 
issuer or obligated person is in a distressed financial situation. For 
example, there may be circumstances where an issuer or obligated 
person, due to financial difficulties, anticipates not meeting the 
terms of a financial obligation, such as a covenant to maintain a 
specified debt service coverage ratio,\118\ and the issuer or obligated 
person is able to negotiate the modification of the terms of the 
financial obligation with the counterparty. Furthermore, in addition to 
negotiating a change to certain covenants in the financial obligation 
with the counterparty to avoid default under the terms of the financial 
obligation, the issuer or obligated person could agree to new terms 
including providing the counterparty with superior rights to assets or 
revenues that were previously pledged to existing security holders. 
Modifications agreed to could provide important information about the 
current financial condition of the issuer or obligated person, 
including potential impacts to the issuer's or obligated person's 
liquidity and overall creditworthiness, and whether security holders 
have been affected.
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    \118\ See supra note 97.
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    Other similar events under the terms of a financial obligation of 
the obligated person reflecting financial difficulties share similar 
characteristics to one of the listed events (a default, event of 
acceleration, termination event, or modification of terms). An issuer 
or obligated person could fail to perform a covenant not related to 
payment required under a financial obligation that does not result in 
the occurrence of a default, but the occurrence of this other event 
does reflect financial difficulties of the issuer or obligated person. 
For example, an issuer could fail to meet a construction deadline with 
respect to a facility being financed by the proceeds of a financial 
obligation due to financial difficulties. As a result of the failure to 
meet this deadline, a default does not occur, but the lender is 
entitled to take possession of the facility and complete construction. 
Like the events described above, the occurrence of the failure to meet 
a performance covenant reflecting financial difficulties could provide 
information relevant in making an assessment of the current financial 
condition of the issuer or obligated person, including potential

[[Page 13941]]

adverse impacts to the issuer's or obligated person's liquidity and 
overall creditworthiness, and whether security holders have been 
affected.
    Although the occurrence of defaults \119\ and other events under 
the terms of a financial obligation of the obligated person reflecting 
financial difficulties listed in proposed subparagraph (b)(5)(i)(C)(16) 
may not be common in the municipal market, the Commission notes that 
the occurrence of such events can significantly and adversely impact 
the value of an issuer's or obligated person's outstanding municipal 
securities. The Commission also believes the proposed amendments would 
facilitate investor access to important information in a timely manner 
and help to enhance transparency in the municipal securities market and 
enhance investor protection. If an issuer or obligated person provides 
an event notice to the MSRB, it would be displayed on the MSRB's EMMA 
Web site and the public would be provided with free public access to 
the event notice and, if wanted, automatic alerts from EMMA regarding 
the occurrence of the event. In order to apprise investors of 
information, the Commission further preliminarily believes an event 
notice for the occurrence of a default, event of acceleration, 
termination event, modification of terms, or other similar events under 
the terms of a financial obligation of the issuer or obligated person, 
any of which reflect financial difficulties, generally should include a 
description of the event and the consequences of the event, if any. A 
description of the event and the consequences of the event, if any, 
would help further the availability of information in a timely manner 
to further assist investors in making more informed investment 
decisions.
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    \119\ According to Moody's, between 1970 and 2014, 95 municipal 
issuers rated by Moody's have defaulted on their bonded debt or 
related guarantees. In particular, only eight general obligation 
bond issuers, including cities, counties, and other districts, 
defaulted during this 45-year period. However, Moody's notes that 
municipal issuers can experience financial distress without 
triggering a default. For example, they state that there were no 
Moody's rated municipal defaults in 2014 despite a sharp 
deterioration in credit quality by a number of public finance 
credits. See Moody's, U.S. Municipal Bond Defaults and Recoveries, 
1970-2014 (July 24, 2015).
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    The Commission requests comment regarding all aspects of the 
proposed addition of subparagraph (b)(5)(i)(C)(16) concerning the event 
notice for an occurrence of a default, event of acceleration, 
termination event, modification of terms, or other similar events under 
the terms of a financial obligation of the issuer or obligated person, 
any of which reflect financial difficulties. When responding to the 
requests for comment, please explain your reasoning.
     Are there additional events that should be specified in 
the rule text? Is ``other similar event'' broad enough to capture all 
events that upon their occurrence may reflect that an issuer or 
obligated person is in financial difficulty? Are there events included 
in the proposed rule text that should be omitted?
     The Commission further requests comment as to whether the 
qualification ``reflecting financial difficulties'' is appropriate for 
subparagraph (b)(5)(i)(C)(16) of the Rule. Should any or all of the 
items included in the proposed rule text not be subject to the proposed 
qualification? Although the concept of ``reflecting financial 
difficulties'' has been used since the adoption of Rule 15c2-12, the 
Commission asks whether it should provide guidance regarding the use of 
this concept in the context of these proposed amendments to Rule 15c2-
12.
     In addition, commenters should address the benefits and 
costs of this aspect of the proposed amendments.

B. Technical Amendment

    The Commission proposes a technical amendment to paragraph 
(b)(5)(i)(C)(14) of the Rule to remove the term ``and'' since new 
events are proposed to be added to paragraph (b)(5)(i)(C) of the Rule.

C. Compliance Date and Transition

    If the Commission adopts the proposed amendments to Rule 15c2-12, 
they would apply to continuing disclosure agreements that are entered 
into in connection with primary offerings occurring on or after the 
compliance date of such proposed amendments. The Commission recognizes 
that continuing disclosure agreements entered into prior to the 
compliance date of any final amendments likely would not reflect 
changes made to the Rule by such amendments. As a result, event items 
covered by a continuing disclosure agreement entered into prior to the 
compliance date of any amendments may be different from those event 
items covered by a continuing disclosure agreement entered into on or 
after the compliance date.
    The Commission preliminarily believes that if the proposed 
amendments to Rule 15c2-12 were adopted it would be preferable to 
implement them expeditiously. If the Commission were to approve the 
proposed amendments, the Commission preliminarily is considering a 
compliance date that would be three months after any final adoption of 
the proposed amendments to allow sufficient time for the MSRB to make 
necessary modifications to the EMMA system, and for Participating 
Underwriters to comply with the new Rule.\120\ The Commission requests 
comment on such a compliance date and whether another compliance date 
might be preferable. In particular, comment is requested regarding any 
transition issues with respect to the proposed amendments, such as 
whether there would be any conflicts with respect to terms in existing 
continuing disclosure agreements.
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    \120\ The 2010 Amendments became effective on August 9, 2010, 
six months after Commission approval, with the exception of the 
Commission interpretive guidance (Part 241) which became effective 
June 10, 2010. Due to the limited scope of the proposed amendments 
as compared to the 2010 Amendments, the Commission proposes that the 
compliance date of the proposed amendments discussed herein would be 
no earlier than three months after any final approval of the 
proposed amendments, should the Commission adopt these proposed rule 
amendments.
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    The Commission notes that currently under paragraph (c) of the 
Rule, a dealer cannot recommend the purchase or sale of a municipal 
security unless such dealer has procedures in place that provide 
reasonable assurance that it will receive prompt notice of any event 
disclosed pursuant to paragraphs (b)(5)(i)(C) and (D) and paragraph 
(d)(2)(ii)(B) of the Rule with respect to the security. In the case of 
municipal securities subject to a continuing disclosure agreement 
entered into prior to the compliance date of any final amendments, the 
recommending dealer would receive notice solely of those events covered 
by that continuing disclosure agreement, namely, the events specified 
in the Rule when the continuing disclosure agreement was entered into. 
Because, in such case, the continuing disclosure agreement likely would 
not cover any of the items proposed to be added to the Rule, the 
recommending dealer would not be required to have procedures in place 
that provide reasonable assurance that it would receive prompt notice 
of events proposed to be added to the Rule.\121\
---------------------------------------------------------------------------

    \121\ 17 CFR 240.15c2-12(c) requires a dealer to have procedures 
in place that provide reasonable assurance that the dealer will 
receive prompt notice of any event that the Rule requires to be 
disclosed. Dealers are also required to comply with MSRB fair 
practice rules (i.e., rules that relate primarily to customer 
protection, fair dealing and supervision), including, for example, 
MSRB Rule G-47 that requires dealers transacting in municipal 
securities to provide all material information known about the 
transaction, including material information about the security that 
is reasonably accessible to the market.

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[[Page 13942]]

    The Commission requests comment on the impact of the proposed 
amendments with respect to dealers that recommend the purchase or sale 
of municipal securities. The Commission also requests comment on what 
changes, if any, dealers would have to make to their procedures in 
connection with any final amendments that the Commission may adopt 
relating to the receipt of event notices. The Commission further seeks 
comment on any other transition issues in connection with the proposed 
amendments to Rule 15c2-12.

D. Request for Comment

    The Commission seeks comment on all aspects of the proposed 
amendments to the Rule. In addition to the comments requested 
throughout this proposing release, comment is requested on whether the 
proposed amendments would further enhance the availability of important 
information to investors, and whether the proposed amendments would 
help facilitate investors' ability to obtain such information. Further, 
the Commission seeks comment regarding the impact of the proposed 
amendments on Participating Underwriters, dealers, issuers, obligated 
persons, investors, the MSRB, information vendors, and others that may 
be affected by the proposed amendments. In addition, the Commission 
seeks comment on whether there are alternative approaches or 
modifications to the Commission's proposed approach to achieve our 
objectives with regard to the two events proposed here to be included 
in Rule 15c2-12(b)(5)(i)(C). Commenters are requested to indicate their 
views and to provide any other suggestions that they may have.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to the Rule contain 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\122\ In accordance with 44 
U.S.C. 3507 and 5 CFR 1320.11, the Commission has submitted revisions 
to the currently approved collection of information titled ``Municipal 
Securities Disclosure'' (17 CFR 240.15c2-12) (OMB Control No. 3235-
0372) to the Office of Management and Budget (``OMB''). An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
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    \122\ 44 U.S.C. 3501 et. seq.
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A. Summary of Collection of Information

    Under paragraph (b) of Rule 15c2-12, a Participating Underwriter 
currently is required: (1) To obtain and review an official statement 
deemed final by an issuer of the securities, except for the omission of 
specified information, prior to making a bid, purchase, offer, or sale 
of municipal securities; (2) in non-competitively bid offerings, to 
send, upon request, a copy of the most recent preliminary official 
statement (if one exists) to potential customers; (3) to contract with 
the issuer to receive, within a specified time, sufficient copies of 
the final official statement to comply with the Rule's delivery 
requirement, and the requirements of the rules of the MSRB; (4) to 
send, upon request, a copy of the final official statement to potential 
customers for a specified period of time; and (5) before purchasing or 
selling municipal securities in connection with an offering, to 
reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide annual filings, event 
notices, and failure to file notices (i.e., continuing disclosure 
documents) to the MSRB in an electronic format as prescribed by the 
MSRB.\123\ In addition, under paragraph (c) of the Rule, a dealer that 
recommends the purchase or sale of a municipal security must have 
procedures in place that provide reasonable assurance that it will 
receive prompt notice of any event specified in paragraph (b)(5)(i)(C) 
of the Rule and any failure to file annual financial information 
regarding the security.\124\
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    \123\ 17 CFR 240.15c2-12(b).
    \124\ 17 CFR 240.15c2-12(c).
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    Under paragraph (b)(5)(i)(C) of the Rule, Participating 
Underwriters are required to reasonably determine that the issuer or 
obligated person has undertaken in a continuing disclosure agreement to 
provide event notices to the MSRB, in an electronic format as 
prescribed by the MSRB, in a timely manner not in excess of ten 
business days, when any of the following events with respect to the 
securities being offered in an offering occurs: (1) Principal and 
interest payment delinquencies; (2) non-payment related defaults, if 
material; (3) unscheduled draws on debt service reserves reflecting 
financial difficulties; (4) unscheduled draws on credit enhancements 
reflecting financial difficulties; (5) substitution of credit or 
liquidity providers, or their failure to perform; (6) adverse tax 
opinions, the issuance by the I.R.S. of proposed or final 
determinations of taxability, Notices of Proposed Issue 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; (7) modifications to rights of security holders, if material; 
(8) bond calls, if material, and tender offers; (9) defeasances; (10) 
release, substitution, or sale of property securing repayment of 
securities, if material; (11) rating changes; (12) bankruptcy, 
insolvency, receivership or similar event of the obligated person; (13) 
the consummation of a merger, consolidation, or acquisition involving 
an obligated person or the sale of all or substantially all of the 
assets of the obligated person, other than in the ordinary course of 
business, the entry into a definitive agreement to undertake such an 
action or the termination of a definitive agreement relating to any 
such actions, other than pursuant to its terms, if material; and (14) 
appointment of a successor or additional trustee or the change of a 
name of a trustee, if material.\125\
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    \125\ 17 CFR 240.15c2-12(b)(5)(i)(C).
---------------------------------------------------------------------------

    Under the proposed amendments, the Commission proposes to add two 
additional event notices that a Participating Underwriter in an 
Offering must reasonably determine that an issuer or an obligated 
person has undertaken, in a written agreement or contract for the 
benefit of holders of the municipal securities, to provide to the MSRB. 
Specifically, the proposed amendments would amend the list of events 
for which notice is to be provided to include the proposed events.
    For purposes of the proposed amendments, the Commission is 
proposing to define the term ``financial obligation'' to mean a (i) 
debt obligation, (ii) lease, (iii) guarantee, (iv) derivative 
instrument, or (v) monetary obligation resulting from a judicial, 
administrative, or arbitration proceeding. As proposed to be defined, 
the term financial obligation does not include municipal securities as 
to which a final official statement has been provided to the MSRB 
consistent with Rule 15c2-12.

B. Proposed Use of Information

    The proposed amendments would provide dealers with timely access to 
important information about municipal securities that they can use to 
carry out their obligations under the securities laws, thereby reducing 
the likelihood of antifraud violations. This information could be used 
by individual and

[[Page 13943]]

institutional investors; underwriters of municipal securities; other 
market participants, including dealers; analysts; municipal securities 
issuers; the MSRB; vendors of information regarding municipal 
securities; the Commission and its staff; and the public 
generally.\126\ The proposed amendments would enable market 
participants and the public to be better informed about material events 
that occur with respect to municipal securities and their issuers and 
would assist investors in making decisions about whether to buy, hold 
or sell municipal securities.
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    \126\ See supra, Section II.B.
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C. Respondents

    In November 2015, OMB approved an extension without change of a 
currently approved collection of information associated with the Rule. 
The currently approved paperwork collection associated with Rule 15c2-
12 applies to dealers, issuers of municipal securities, and the MSRB. 
The paperwork collection associated with these proposed amendments 
would apply to the same respondents.
    The proposal would add two additional event disclosure items that a 
Participating Underwriter in an Offering is required to reasonably 
determine that the issuer or an obligated person has undertaken in a 
continuing disclosure agreement to submit event notices to the MSRB in 
a timely manner not in excess of ten business days of their occurrence. 
The Commission gathered updated information regarding the paperwork 
burden associated with Rule 15c2-12 in connection with the 2015 
extension of its currently approved collection and is using these 
estimates in preparing the paperwork collection estimates associated 
with its current proposal because it believes they continue to be 
reasonable estimates as of the date of this proposal. In 2015, the 
Commission estimated that the number of respondents impacted by the 
paperwork collection associated with the Rule consists of approximately 
250 dealers and 20,000 issuers.\127\ The Commission expects that the 
proposed amendments would not change the number of dealer respondents 
described in the currently approved PRA collection. The Commission also 
expects that the proposed amendments would not change the number of 
issuer respondents in comparison to the Rule's currently approved PRA 
collection. The number of respondents would not change because the 
proposed amendments would not expand the types of securities covered 
under subparagraphs (b)(5) and (c) of the Rule, and thus would not 
increase the number of dealers or issuers having a paperwork burden. 
The Commission's currently approved PRA collection included a paperwork 
collection burden for the MSRB and, for purposes of the proposed 
amendments, the Commission expects that the MSRB also would be a 
respondent.
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    \127\ See Submission for OMB Review; Comment Request (Extension: 
Rule 15c2-12, SEC File No. 270-330, OMB Control No. 3235-0372), 80 
FR 9758 (Feb. 24, 2015) (``PRA Notice''). The number of issuers in 
the estimate reflects those issuers that are subject to a continuing 
disclosure agreement.
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D. Total Annual Reporting and Recordkeeping Burden

    In the currently approved PRA collection, the Commission included 
estimates for the hourly burdens that the Rule imposes upon dealers, 
issuers of municipal securities, and the MSRB. Because the proposed 
amendments do not change the structure of the rule or who it applies 
to, the Commission has relied on these estimates to prepare the 
analysis discussed below for each of the aforementioned entities.
    The Commission estimates the aggregate information collection 
burden for the amended Rule would consist of the following:
1. Dealers
    Consistent with the Commission's estimates in 2015, the Commission 
estimates that approximately 250 dealers potentially could serve as 
Participating Underwriters in an offering of municipal securities. 
Therefore, the Commission estimates that, under the proposed 
amendments, the maximum number of dealer respondents would be 250.
    Under the current Rule, the Commission has estimated that the total 
annual burden on all 250 dealers is 22,500 hours. This estimate 
includes an estimate of (1) 2,500 hours per year for 250 dealers (10 
hours per year per dealer) to reasonably determine that the issuer or 
obligated person has undertaken, in a written agreement or contract, 
for the benefit of holders of such municipal securities, to provide 
continuing disclosure documents to the MSRB, and (2) 20,000 hours per 
year for 250 dealers (80 hours per year per dealer) serving as 
Participating Underwriters to determine whether issuers or obligated 
persons have failed to comply, in all material respects, with any 
previous undertakings in a written contract or agreement specified in 
paragraph (b)(5)(i) of the Rule.\128\
---------------------------------------------------------------------------

    \128\ Id.
---------------------------------------------------------------------------

i. Proposed Amendments to Events To Be Disclosed Under a Continuing 
Disclosure Agreement
    Under the current Rule, the Commission has estimated that 250 
dealers would spend an average of 10 hours per year per dealer to 
reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide continuing disclosure 
documents to the MSRB. The proposed amendments to paragraph 
(b)(5)(i)(C) of the Rule would not alter a dealer's obligation to 
reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide continuing disclosure 
documents to the MSRB.
    The Commission does not believe that the proposed amendments would 
change the number of issuers with municipal securities offerings that 
are subject to the Rule. The proposed changes to the Rule would result 
in a need for issuers to make changes to certain provisions of their 
continuing disclosure agreements,\129\ and a need for dealers to 
reasonably determine that the issuer or obligated person in an offering 
subject to the Rule has undertaken, in a written agreement or contract 
that includes the changes required by the proposed amendments, for the 
benefit of holders of such municipal securities, to provide continuing 
disclosure documents to the MSRB. Because the continuing disclosure 
agreements that are reviewed by dealers as part of their obligation 
under the Rule tend to be standard form agreements and the proposed 
amendments would require targeted changes to those agreements to 
incorporate the proposed events, the Commission does not believe that 
the proposed amendments would increase the annual hourly burden for 
dealers to reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide continuing disclosure 
documents to the MSRB.\130\
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    \129\ See infra, Section IV.D.2. for a discussion of issuers' 
reporting and recordkeeping burden and Section IV.E.2. for a 
discussion of issuers' total annual cost, including the one-time 
costs for issuers to update their standard form continuing 
disclosure agreements to reflect the proposed amendments.
    \130\ See infra, Section IV.E.1. for a discussion of dealers' 
total annual cost associated with the proposed amendments.
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    Thus, the Commission estimates that pursuant to the Rule as 
proposed to be amended, 250 dealers would continue to incur an 
estimated average burden of

[[Page 13944]]

2,500 hours per year (10 hours per year per dealer) to reasonably 
determine that the issuer or obligated person has undertaken, in a 
written agreement or contract, for the benefit of holders of such 
municipal securities, to provide continuing disclosure documents to the 
MSRB.
    Under the current Rule, the Commission has also estimated that each 
of the 250 dealers serving as a Participating Underwriter will expend 
an average of 80 hours per year per dealer to determine whether issuers 
or obligated persons have failed to comply, in all material respects, 
with any previous undertakings in a written contract or agreement 
specified in paragraph (b)(5)(i) of the Rule. Determining whether an 
issuer or obligated person has filed continuing disclosure documents 
will usually include an examination of the filings made over a five-
year period on the MSRB's EMMA system. An underwriter may also ask 
questions of an issuer, and, where, appropriate, obtain certifications 
from an issuer, obligated person, or other appropriate party about 
facts such as the occurrence of specific events listed in paragraph 
(b)(5)(i)(C) of the Rule and the timely filing of annual filings and 
any required event notices or failure to file notices.
    The Commission does not believe that the proposed amendments would 
change the number of Participating Underwriters that are subject to the 
Rule. However, the Commission has estimated that the amendments to the 
Rule would result in an average expenditure of an additional 10 hours 
per year per dealer for each dealer to determine whether issuers or 
obligated persons have failed to comply, in all material respects, with 
any previous undertakings in a written contract or agreement specified 
in paragraph (b)(5)(i) of the Rule.
    Accordingly, including the additional hourly burden resulting from 
the proposed amendments, the Commission estimates that 250 dealers 
would incur an estimated average burden of 25,000 hours per year to 
comply with the Rule, as proposed to be amended.\131\
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    \131\ (22,500 hours (total estimated annual hourly burden for 
all dealers under the current Rule) + 2,500 hours (total estimated 
additional annual hourly burden for all dealers under the proposed 
amendments to the Rule) = 25,000 hours.
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ii. One-Time Paperwork Burden
    The Commission estimates that a dealer would incur a one-time 
paperwork burden to have its internal compliance attorney prepare and 
issue a notice advising its employees about the proposed revisions to 
Rule 15c2-12, including any updates to policies and procedures affected 
by the proposed amendments. In the 2010 Amendments Adopting Release, 
the Commission estimated that it would take a dealer's internal 
compliance attorney approximately 30 minutes to prepare and issue a 
notice describing the dealer's obligations in light of the 2010 
Amendments to the Rule.\132\ The Commission believes that this 30 
minute estimate to prepare a notice is also a reasonable estimate of 
the amount of time required for a dealer's internal compliance attorney 
to prepare such a notice for these proposed amendments to the Rule 
because the types of changes that would be necessitated by the proposed 
amendments are similar to the types of changes necessitated by the 2010 
Amendments. The Commission believes that the task of preparing and 
issuing a notice advising the dealer's employees about the proposed 
amendments, including any updates to policies and procedures affected 
by the proposed amendments, is consistent with the type of compliance 
work that a dealer typically handles internally. Accordingly, the 
Commission estimates that 250 dealers would each incur a one-time, 
first-year burden of 30 minutes to prepare and issue a notice to its 
employees regarding the dealer's new obligations under the proposed 
amendments, including any updates to policies and procedures affected 
by the proposed amendments, for a total one-time, first-year burden of 
125 hours.
---------------------------------------------------------------------------

    \132\ See 2010 Amendments Adopting Release, supra note 54, at 
33128.
---------------------------------------------------------------------------

iii. Total Annual Burden for Dealers
    Under the proposed amendments, the total burden on dealers would be 
25,125 hours for the first year \133\ and 25,000 hours for each 
subsequent year.\134\
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    \133\ (250 (dealers impacted by the proposed amendments to the 
Rule) x 100 hours (10 hours + 80 hours + 10 hours)) + (250 (dealers 
impacted by the proposed amendments to the Rule) x .5 hour (estimate 
for one-time burden to issue notice regarding dealer's obligations 
under the proposed amendments to the Rule)) = 25,125 hours.
    \134\ 250 (dealers impacted by the proposed amendments to the 
Rule) x 100 hours = 25,000 hours.
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2. Issuers
    The proposed amendments would result in a paperwork burden on 
issuers of municipal securities. For this purpose, issuers include 
issuers of municipal securities described in paragraph (f)(4) of the 
Rule and obligated persons described in paragraph (f)(10) of the Rule.
    In its currently approved collection, the Commission estimates that 
approximately 20,000 issuers will annually submit to the MSRB 
approximately 62,596 annual filings, 73,480 event notices, and 7,063 
failure to file notices.\135\
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    \135\ See PRA Notice, supra note 127.
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i. Proposed Amendments to Event Notice Provisions of the Rule
    The Commission proposes to modify paragraph (b)(5)(i)(C) of the 
Rule, which presently requires Participating Underwriters in an 
Offering to reasonably determine that an issuer or obligated person has 
entered into a continuing disclosure agreement that, among other 
things, contemplates the submission of an event notice to the MSRB in 
an electronic format upon the occurrence of any events set forth in the 
Rule. The current Rule contains fourteen such events. The proposed 
amendments to this paragraph of the Rule would add two new event 
disclosure items. In 2015, the Commission estimated that approximately 
20,000 issuers of municipal securities with continuing disclosure 
agreements would prepare and submit approximately 73,480 event notices 
annually. The Commission believes that the proposed amendments to 
paragraphs (b)(5)(i)(C) of the Rule would increase the current annual 
paperwork burden for issuers because they would result in an increase 
in the number of event notices to be prepared and submitted.
    Under the proposed amendments, subparagraph (b)(5)(i)(C)(15) would 
be added to the Rule and would contain a new disclosure event in the 
case of the incurrence of a financial obligation of the obligated 
person, if material, or agreement to covenants, events of default, 
remedies, priority rights, or other similar terms of a financial 
obligation of the obligated person, any of which affect security 
holders, if material. The proposed addition to the Rule would expand 
the circumstances in which issuers would submit an event notice to the 
MSRB. The Commission estimates that the proposed amendment in 
subparagraph (b)(5)(i)(C)(15) of the Rule would increase the total 
number of event notices submitted by issuers annually by approximately 
2,100 notices.\136\
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    \136\ The Commission based its estimate on the number of events 
that would result from an incurrence of a financial obligation of 
the obligated person, if material, on the following: (i) Estimates 
of the size of the municipal bank loan market vary, but range as 
high as $80 billion per year. See Jack Casey, How the SEC Could Help 
with Issuer Bank Loan Disclosure, The Bond Buyer (May 25, 2016) 
(``How the SEC Could Help''), available at https://www.bondbuyer.com/news/washington-securities-law/how-the-sec-could-help-with-issuer-bank-loan-disclosure-1104508-1.html (``How the SEC Could Help''); 
(ii) In 2015, S&P evaluated 126 bank loans totaling $5.2 billion. 
See Martin Z. Braun, Regulators Warn Banks about Compliance Risks 
for Muni Bank Loans, Bloomberg (Apr. 4, 2016), available at https://www.bloomberg.com/news/articles/2016-04-04/regulators-warn-banks-about-compliance-risks-for-muni-bank-loans (bank loans reviewed by 
S&P in 2015 averaged approximately $41.3 million); and (iii) $80 
billion (estimated size of annual municipal bank loan market)/$40 
million average loan size of loans = 2,000 loans. In Section III.A. 
of this proposing release, the Commission notes that a particular 
municipal bank loan may not be material because of the bank loan's 
relative size or other factors. However, to provide an estimate for 
the paperwork burden that would not be under-inclusive the 
Commission has elected to use this estimate. In addition, the 
Commission estimates that up to 100 additional notices per year may 
be attributable to the incurrence of other types of financial 
obligations. For example, two derivative or other transactions were 
reported to the MSRB's EMMA system during 2015 and three derivative 
or other transactions were reported to the MSRB's EMMA system during 
the first half of 2016. However, the Commission believes that many 
non-bank financial obligations of obligated persons currently are 
not reported to the MSRB and that many may not be made public at 
all. Therefore, 2,000 events related to material bank loans annually 
+ 100 other types of material financial obligations annually = 2,100 
total events annually for the incurrence of a material financial 
obligation of the obligated person.

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[[Page 13945]]

    Under the proposed amendments, subparagraph (b)(5)(i)(C)(16) of the 
Rule would be amended to include default, event of acceleration, 
termination event, modification of terms, or other similar events under 
the terms of a financial obligation of the issuer or obligated person, 
any of which reflect financial difficulties. The inclusion of such 
event in this subparagraph of the Rule would result in an expansion of 
the circumstances in which issuers would submit an event notice to the 
MSRB. The Commission estimates that proposed amendments to subparagraph 
(b)(5)(i)(C)(16) of the Rule would increase the total number of event 
notices to be submitted by issuers annually by approximately 100 
notices.\137\
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    \137\ The Commission based this estimate on the following: (i) 
420 principal/interest payment delinquencies and non-payment related 
defaults were reported to the MSRB's EMMA system in 2015; (ii) The 
bank loan market may be as much as 20 percent of the municipal 
securities market (see How the SEC Could Help, supra note 136); 
(iii) 420 x .2 = 84; and (iv) some bank loans may not be material to 
securities subject to Rule 15c2-12. Based on these factors and 
industry sources, the Commission has estimated that there would 
typically be no more than 100 events annually. The Commission 
preliminarily believes that the actual number of events annually may 
be significantly less than 100 because defaults and other events 
reflecting financial difficulties are generally a rare occurrence in 
the municipal securities market. However, to provide an estimate for 
the paperwork burden that would not be under-inclusive the 
Commission has elected to use a higher estimate with respect to the 
number of events that occur each year.
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ii. Total Burden on Issuers for Proposed Amendments to Event Notices
    In 2015, the Commission estimated that the process for an issuer to 
prepare and submit event notices to the MSRB in an electronic format, 
including time to actively monitor the need for filing, would require 
an average of approximately two hours per filing. The Commission 
estimates that time required for an issuer to prepare and submit the 
proposed two additional types of event notices to the MSRB in an 
electronic format, including time to actively monitor the need for 
filing, would also require an average of approximately two hours per 
filing, because the two proposed types of event notices would require 
substantially the same amount of time to prepare as those prepared for 
existing events. The Commission considered the hourly burdens placed on 
both issuers that use designated agents to submit continuing disclosure 
filings to the MSRB and the burdens placed on issuers that do not use 
designated agents in computing this overall average. Under the proposed 
amendments to paragraph (b)(5)(i)(C) of the Rule, the Commission 
estimates that the 20,000 issuers of municipal securities with 
continuing disclosure agreements would prepare an additional 2,200 
event notices annually,\138\ raising the total number of event notices 
prepared by issuers annually to approximately 75,680.\139\ This 
increase in the number of event notices would result in an increase of 
4,400 hours in the annual paperwork burden for issuers to submit event 
notices.\140\ This increase would result in an annual paperwork burden 
for issuers to submit event notices of approximately 151,360 hours 
(146,960 hours + 4,400 hours).
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    \138\ 2,100 (estimated number of incurrence of a financial 
obligation event notices under proposed amendments) + 100 (estimated 
number of event notices reflecting financial difficulties under 
proposed amendments) = 2,200 (total number of additional event 
notices that would be prepared under the proposed amendments to the 
event notice provisions of the Rule).
    \139\ 73,480 (current estimated number of annual event notices) 
+ 2,200 (total number of additional event notices that would be 
prepared under the proposed amendments to the event notice 
provisions of the Rule) = 75,680 annual event notices. The 
Commission is therefore estimating that the proposed amendments 
would increase the number of issuers' annual event notices by 
approximately three percent. 2,200 (estimated additional annual 
event notices)/73,480 (estimated current annual event notices) = 
.299 = approximately three percent. The proposed amendments to the 
event notice provisions of the Rule would increase total filings 
submitted by approximately 1.5%: 2,200 (estimated additional event 
notices under the proposed event notice amendments)/143,139 
(estimated number of continuing disclosure documents submitted under 
current Rule (73,480 (event notices) + 62,596 (annual filings) + 
7,063 (failure to file notices) = 143,139)) = .015 = approximately 
1.5%.
    \140\ 2,200 (total number of additional event notices that would 
be prepared under the proposed amendments to the event notice 
provisions of the Rule) x 2 hours (estimated time to prepare an 
event notice under 2015 PRA Notice) = 4,400 hours.
---------------------------------------------------------------------------

iii. Total Burden for Issuers
    Accordingly, under the proposed amendments, the total burden on 
issuers to submit continuing disclosure documents would be 603,658 
hours.\141\
---------------------------------------------------------------------------

    \141\ 438,172 hours (current estimated burden for issuers to 
submit annual filings) + 151,360 hours (estimated annual burden for 
issuers to submit event notices under the proposed amendments) + 
14,126 hours (current estimated annual burden for issuers to submit 
failure to file notices) = 603,658 hours.
---------------------------------------------------------------------------

3. MSRB
    In its currently approved collection, the Commission estimated that 
the MSRB incurred an annual burden of approximately 12,699 hours to 
collect, index, store, retrieve, and make available the pertinent 
documents under the Rule.\142\ The Commission staff understands from 
MSRB staff that MSRB staff currently estimates that 12,699 hours is 
still a reasonable estimate with respect to operating the primary 
market and continuing disclosure submission platform, managing those 
submissions securely and deploying educational resources and other 
tools that make the submissions meaningful and useful. The Commission 
estimates, based on preliminary consultations between Commission staff 
and MSRB staff, that it would require approximately 1,162 hours for the 
MSRB to implement the necessary modifications to EMMA to reflect the 
additional mandatory disclosures under Rule 15c2-12 in the proposed 
amendments. Thus, the Commission estimates that the total burden on the 
MSRB to collect, store, retrieve, and make available the disclosure 
documents covered by the proposed amendments to the Rule would be 
13,861 hours for the first year,\143\ and 12,699 hours for each 
subsequent year.
---------------------------------------------------------------------------

    \142\ See 2015 PRA Notice, supra note 127.
    \143\ First-year burden for MSRB: 12,699 hours (annual burden 
under currently approved collection) + 1,162 hours (estimate for 
one-time burden to implement the proposed amendments) = 13,861 
hours.
---------------------------------------------------------------------------

4. Annual Aggregate Burden for Proposed Amendments
    The Commission estimates that the ongoing annual aggregate 
information collection burden for the Rule after giving effect to the 
proposed

[[Page 13946]]

amendments would be 641,357 hours.\144\
---------------------------------------------------------------------------

    \144\ 25,000 hours (total estimated annual burden for dealers) + 
603,658 hours (total estimated annual burden for issuers) + 12,699 
hours (total estimated annual burden for MSRB) = 641,357 total 
estimated annual burden hours. The initial first-year burden would 
be 642,644 hours: 25,125 hours (total estimated burden for dealers 
in the first year) + 603,658 hours (total estimated burden for 
issuers) + 13,861 hours (total estimated burden for MSRB in the 
first year) = 642,644 hours.
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E. Total Annual Cost

1. Dealers and the MSRB
    The Commission does not expect dealers to incur any additional 
external costs associated with the proposed amendments to the Rule 
because the proposed amendments do not change the obligation of dealers 
under the Rule to reasonably determine that the issuer or obligated 
person has undertaken, in a written agreement or contract, for the 
benefit of holders of such municipal securities, to provide continuing 
disclosure documents to the MSRB, and to determine whether the issuer 
or obligated person has failed to comply with such undertakings in all 
material respects. As previously noted, the Commission believes that 
the task of preparing and issuing a notice advising the dealer's 
employees about the proposed amendments is consistent with the type of 
compliance work that a dealer typically handles internally,\145\ so 
that the Commission does not expect that dealers would incur any 
additional external costs.
---------------------------------------------------------------------------

    \145\ See infra Section IV.D.1.(ii).
---------------------------------------------------------------------------

    The Commission does not expect the MSRB to incur any additional 
external costs associated with the proposed amendments to the Rule. In 
its currently approved collection, the Commission estimated that the 
MSRB would expend approximately $10,000 annually in hardware and 
software costs for the MSRB's EMMA system.\146\ The Commission believes 
that the MSRB would not incur additional external costs specifically 
associated with modifying the indexing system to accommodate the 
proposed changes to the Rule because the Commission expects that the 
MSRB would implement these changes internally; these internal costs 
have been accounted for in the hourly burden section in Section IV.D.3.
---------------------------------------------------------------------------

    \146\ See PRA Notice, supra note 127.
---------------------------------------------------------------------------

2. Issuers
    The Commission believes that issuers generally will not incur 
external costs associated with the preparation of event notices filed 
under these proposed amendments because issuers will generally prepare 
the information contained in the continuing disclosures internally; 
these internal costs have been accounted for in the hourly burden 
section in Section IV.D.2.ii.
    The Commission also expects that some issuers could be subject to 
some costs associated with the proposed amendments to the Rule if they 
pay third parties to assist them with their continuing disclosure 
responsibilities. In its currently approved collection, the Commission 
estimated that up to 65% of issuers may use designated agents to submit 
some or all of their continuing disclosure documents to the MSRB for a 
fee estimated to range from $0 to $1,500 per year depending on the 
designated agent an issuer uses.\147\ The Commission estimated that the 
average total annual cost that would be incurred by issuers that use 
the services of a designated agent would be $9,750,000.\148\
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    \147\ See 2015 PRA Notice, supra note 127.
    \148\ Id. 20,000 (number of issuers) x .65 (percentage of 
issuers that may use designated agents) x $750 (estimated average 
annual cost for issuer's use of designated agent) = $9,750,000.
---------------------------------------------------------------------------

    The Commission believes this estimate is still reasonable. In 2015, 
the Commission estimated that issuers would submit 62,596 annual 
filings, 73,480 event notices, and 7,063 failure to file notices, for a 
total of 143,139 continuing disclosure documents submitted annually. 
Under the proposed amendments to the Rule, some issuers would need to 
prepare additional event notices for submission to the MSRB. Some 
issuers could use the services of a designated agent to submit these 
additional event notices to the MSRB. Under the proposed amendments to 
the Rule, the Commission estimates that a high-end estimate of the 
number of additional event notices that issuers would need to submit 
annually under the proposed amendments would be 2,200.\149\ The two 
proposed event disclosure items also would result in the submission of 
information regarding each event. The Commission believes that issuers 
that use the services of a designated agent for submission of event 
notices to the MSRB could incur additional costs of approximately six 
percent \150\ associated with the proposed amendments to the Rule, so 
that the average total annual cost that would be incurred by issuers 
that use the services of a designated agent under the Rule as proposed 
to be amended would be $10,335,000.\151\
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    \149\ See supra note 138.
    \150\ The Commission is estimating that the proposed amendments 
would increase the number of issuers' annual event filings by 
approximately three percent, and would increase the number of 
issuers' total annual filings by approximately 1.5 percent. See 
supra note 139. The six percent estimate for additional costs 
reflects these estimated increases in filings as well as an 
estimated reimbursement of approximately 4.5 percent of costs by 
issuers to designated agents for the agents' costs of making 
necessary changes to their systems.
    \151\ 20,000 (number of issuers) x .65 (percentage of issuers 
that may use designated agents) x $795 ($750 x 1.06) (estimated 
average annual cost for issuer's use of designated agent under the 
proposed amendments to the Rule) = $10,335,000.
---------------------------------------------------------------------------

    There likely would also be some costs incurred by issuers to revise 
their current template for continuing disclosure agreements to reflect 
the proposed amendments to the Rule. The Commission understands that 
models currently exist for continuing disclosure agreements that are 
relied upon by legal counsel to issuers and, accordingly, these 
documents would likely be updated by outside attorneys to reflect the 
proposed amendments. Based on a review of industry sources, the 
Commission believes that continuing disclosure agreements tend to be 
standard form agreements. In the 2010 Amendments Adopting Release, the 
Commission estimated that it would take an outside attorney 
approximately 15 minutes to revise the template for continuing 
disclosure agreements for an issuer in light of the 2010 Amendments to 
the Rule.\152\ The Commission preliminarily believes that this 15 
minute estimate to prepare a revised continuing disclosure agreement is 
also a reasonable estimate of the average amount of time required for 
an outside attorney to revise the template for continuing disclosure 
agreements for the proposed amendments to the Rule, because the 
proposed amendments would require changes similar to the types of 
changes necessitated by the 2010 Amendments. Thus, the Commission 
estimates that the approximate average cost of revising a continuing 
disclosure agreement to reflect the proposed amendments for each issuer 
would be approximately $100,\153\ for a one-time total cost of 
$2,000,000\154\ for all issuers, if an outside counsel were used by 
each

[[Page 13947]]

issuer to revise the continuing disclosure agreement.
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    \152\ See 2010 Amendments Adopting Release, supra note 54, at 
33137.
    \153\ 1 (continuing disclosure agreement) x $400 (hourly wage 
for an outside attorney) x .25 hours (estimated time for outside 
attorney to revise a continuing disclosure document in accordance 
with the proposed amendments to the Rule) = $100. The Commission 
recognizes that the costs of retaining outside professionals may 
vary depending on the nature of the professional services, but for 
purposes of this PRA analysis we estimate that costs for outside 
counsel would be an average of $400 per hour.
    \154\ $100 (estimated cost to revise a continuing disclosure 
agreement in accordance with the proposed amendments to the Rule) x 
20,000 (number of issuers) = $2,000,000.
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F. Retention Period of Recordkeeping Requirements

    As an SRO subject to Rule 17a-1 under the Exchange Act,\155\ the 
MSRB is required to retain records of the collection of information for 
a period of not less than five years, the first two years in an easily 
accessible place. Broker-dealers registered pursuant to Exchange Act 
Section 15 are required to comply with the books and records 
requirements of Exchange Act Rules 17a-3 and 17a-4.\156\ Participating 
Underwriters and dealers transacting business in municipal securities 
are subject to existing recordkeeping requirements of the MSRB.\157\ 
The proposed amendments to the Rule would contain no recordkeeping 
requirements for any other persons.
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    \155\ 17 CFR 240.17a-1.
    \156\ 17 CFR 240.17a-3, 17a-4.
    \157\ See MSRB Rules G-8, G-9. Exchange Act Rules 17a-3 and 17a-
4 state that, for purposes of transactions in municipal securities 
by municipal securities brokers and municipal securities dealers, 
such entities will be deemed in compliance with Exchange Act Rules 
17a-3 and 17a-4 if they are in compliance with MSRB Rules G-8 and G-
9, respectively.
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G. Collection of Information Is Mandatory

    Any collection of information pursuant to the proposed amendments 
to the Rule would be a mandatory collection of information.

H. Responses to Collection of Information Will Not Be Kept Confidential

    The collection of information pursuant to the proposed amendments 
to the Rule would not be confidential and would be publicly 
available.\158\ Specifically, the collection of information that would 
be provided pursuant to the continuing disclosure documents under the 
proposed amendments would be accessible through the MSRB's EMMA system 
and would be publicly available via the Internet.
---------------------------------------------------------------------------

    \158\ Continuing disclosure agreements may not be available if 
they are not subject to state Freedom of Information Act 
requirements. Internal dealer notices would not generally be 
publicly available but may be available to the Commission, the MSRB 
and FINRA.
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I. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2), the Commission solicits comments 
regarding: (1) Whether the proposed collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility; (2) the 
accuracy of the Commission's estimate of the burden of the revised 
collections of information; (3) whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; (4) 
whether there are ways to minimize the burden of the collection of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology; and (5) whether there are cost savings associated with the 
collection of information that have not been identified in this 
proposal.
    The Commission has submitted to OMB for approval the proposed 
revisions to the current collection of information titled ``Municipal 
Securities Disclosure.'' Persons submitting comments on the collection 
of information requirements should direct them to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should also send a copy of their comments to 
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090, with reference to File No. S7-
01-17, and be submitted to the Securities and Exchange Commission, 
Public Reference Room, 100 F Street NE., Washington, DC 20549. As OMB 
is required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication. Requests for materials submitted to OMB by the Commission 
with regard to this collection of information should be in writing, 
should refer to File No. S7-01-17, and be submitted to the Securities 
and Exchange Commission, Public Reference Room, 100 F Street NE., 
Washington, DC 20549.

V. Economic Analysis

A. Introduction

    As discussed above, the Commission is proposing amendments to Rule 
15c2-12 under the Exchange Act relating to municipal securities 
disclosure. The proposed amendments would amend the list of event 
notices the Participating Underwriter must reasonably determine that an 
issuer or obligated person has agreed to provide to the MSRB in its 
continuing disclosure agreement to include the proposed events. In 
addition, the Commission proposes an amendment to Rule 15c2-12(f) to 
add a definition for ``financial obligation'' and a technical amendment 
to subparagraph (b)(5)(i)(C)(14).\159\ The Commission believes the 
proposed amendments would facilitate investors' and other market 
participants' access to more timely and informative disclosure and help 
to enhance transparency in the municipal securities market.
---------------------------------------------------------------------------

    \159\ See supra Section III.
---------------------------------------------------------------------------

    As discussed in Section II.D., the need for more timely disclosure 
of information in the municipal securities market about financial 
obligations is highlighted by market developments beginning in 2009 
which feature the increasing use of direct placements by issuers and 
obligated persons as financing alternatives to public offerings of 
municipal securities. According to FDIC Call Report data, the dollar 
amount of commercial bank loans to state and local governments has more 
than doubled since the financial crisis, increasing from $66.5 billion 
as of the end of 2010 to $153.3 billion by the end of 2015.\160\ In 
comparison, the dollar amount of municipal securities outstanding 
remained relatively flat over the same time period.\161\
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    \160\ The dollar amount of commercial bank loans to state and 
local governments is computed using Call Report data, available at 
https://cdr.ffiec.gov/public/. The dollar amount is the sum of item 
RCON2107, ``OBLIGATIONS (OTHER THAN SECURITIES AND LEASES) OF STATES 
AND POLITICAL SUBDIVISIONS IN THE U.S,'' across all the depository 
institutions for the stated time period. See Federal Reserve Board, 
Micro Data Reference Manual (July 1, 2016) (``MDRM''), available at 
https://www.federalreserve.gov/apps/mdrm/data-dictionary (includes 
detailed variable definition).
    \161\ As of the end of 2010, the dollar amount of municipal 
securities outstanding was $3.77 trillion. As of the end of 2015, 
the dollar amount of municipal securities outstanding was $3.72 
trillion. See Federal Reserve Board, Financial Accounts of the 
United States: Historical Data, Annual 2005 to 2015, at 114 Table 
L.212 (``Historical Flow of Funds''), available at https://www.federalreserve.gov/releases/z1/current/annuals/a2005-2015.pdf.
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    The use of direct placements, as well as other financial 
obligations, may benefit issuers and obligated persons in the form of 
convenience or lower borrowing costs relative to a public offering of 
municipal securities. For example, there is typically no requirement to 
prepare an offering document or obtain a credit rating, liquidity 
facility, or bond insurance for a direct placement or other financial 
obligation.\162\ However, benefits to issuers and obligated persons 
from raising capital through direct placements and other financial

[[Page 13948]]

obligations may negatively affect investors who have previously 
invested in the issuer's or obligated person's outstanding municipal 
securities. For instance, the incurrence of a financial obligation, 
such as a direct placement, if material, could substantially impact an 
issuer's or obligated person's overall indebtedness and 
creditworthiness and thereby the value of the municipal securities held 
by investors. In addition, an issuer or obligated person may agree to 
covenants of a financial obligation that alter the debt payment 
priority structure of the issuer's or obligated person's outstanding 
securities, and the new debt payment priority structure may negatively 
affect existing security holders. Events such as a default, event of 
acceleration, termination event, modification of terms, or other 
similar events under the terms of a financial obligation of the issuer 
or obligated person, any of which reflect financial difficulties could 
also impact the value of municipal securities held by investors.\163\
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    \162\ See Daniel Bergstresser & Peter Orr, Direct Bank 
Investment in Municipal Debt, 35 Mun. Fin. J. 1, 3 (2014) 
(``Bergstresser & Orr''); California Debt and Investment Advisory 
Commission, New Frontiers in Public Finance: A Return to Direct 
Lending (Oct. 3, 2012), available at https://www.treasurer.ca.gov/cdiac/webinars/2012/20121003/presentation.pdf.
    \163\ Although historically, municipal securities have had 
significantly lower rates of default than corporate and foreign 
government bonds, as mentioned in Section II.D., defaults by issuers 
and obligated persons have occurred in the past. Since 2011, the 
municipal securities market has experienced four of the five largest 
municipal bankruptcy filings in U.S. history. See supra note 71.
---------------------------------------------------------------------------

    However, under the current regulatory framework, investors and 
other market participants may not have any access or timely access to 
information related to the incurrence of financial obligations and 
other events proposed to be included, despite their potential impact on 
investors in municipal securities. More specifically, investors and 
other market participants may not have any access to disclosure of the 
proposed events if the issuer or obligated person does not provide 
annual financial information or audited financial statements to EMMA, 
or does not, subsequent to the occurrence of the proposed events, issue 
debt in a primary offering subject to Rule 15c2-12 that results in the 
provision of a final official statement to EMMA. Further, even if 
investors and other market participants have access to information 
about the proposed events, such access may not be timely if, for 
example, the issuer or obligated person has not submitted annual 
financial information or audited financial statements in a timely 
manner or does not often issue debt that results in an official 
statement being submitted to EMMA. As discussed earlier, such annual 
financial information and audited financial statements may not be 
available until several months or up to a year after the end of the 
issuer's or obligated person's fiscal year, and a significant amount of 
time could pass before the issuer's or obligated person's next primary 
offering subject to Rule 15c2-12. As a result, investors could be 
making investment decisions on whether to buy, sell or hold municipal 
securities without the current information about an issuer's or 
obligated person's outstanding debt; and other market participants 
could also be undertaking credit analyses without such information. 
Moreover, even when investors and other market participants do have 
access to information about such events in the issuer's or obligated 
person's annual financial information or audited financial statements 
or in a subsequent official statement, the disclosure typically is 
limited.
    Numerous market participants, including the MSRB, FINRA, academics 
and industry groups, have encouraged issuers and obligated persons to 
voluntarily disclose information about certain financial 
obligations.\164\ In particular, the MSRB has noted its concern that 
the lack of disclosure of direct placements may hinder an investor's 
ability to understand the risks of an investment, and has published 
several regulatory notices encouraging voluntary disclosure of 
information about certain financial obligations, including bank loan 
financings.\165\ However, despite these ongoing efforts, few issuers or 
obligated persons have made voluntary disclosures of financial 
obligations, including direct placements, to the MSRB.\166\
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    \164\ See supra notes 76, 77, and 82. See also Bergstresser & 
Orr, supra note 162.
    \165\ See supra note 76.
    \166\ See supra Section II.D.
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    The Commission is mindful of the costs imposed by and benefits 
obtained from its rules. The following economic analysis seeks to 
identify and consider the likely benefits and costs that would result 
from the proposed amendments, including their effects on efficiency, 
competition, and capital formation. Overall, the Commission 
preliminarily believes that the proposed amendments to Rule 15c2-12 
would facilitate investors' and other market participants' access to 
more timely and informative disclosure in the secondary market about 
financial obligations of issuers and obligated persons, provide 
information that could be used to make more informed investment 
decisions or produce more informed analyses, and enhance investor 
protection. The discussion below elaborates on the likely costs and 
benefits of the proposed amendments and their potential impact on 
efficiency, competition, and capital formation.
    Where possible, the Commission has attempted to quantify the costs, 
benefits, and effects on efficiency, competition, and capital formation 
that may result from the proposed rule amendments. However, the 
Commission is unable to quantify some of the economic effects. For 
example, because most municipal securities trade infrequently, recent 
trade prices are generally not available to estimate the value of these 
securities.\167\ Even when recent trade information is available, 
prices may nevertheless deviate from the fundamental value of these 
securities given the existence of an information asymmetry between 
issuers or obligated persons and other market participants. In 
addition, the current municipal securities disclosures could be delayed 
or inadequately informative. Accordingly, information about the terms 
of a financial obligation, such as the interest rate paid by the issuer 
or obligated person, or how a financial obligation changes the priority 
structure of an issuer's or obligated person's outstanding municipal 
securities, is of limited availability. Therefore, we are limited in 
the extent to which we can reasonably estimate the value of the 
municipal securities and the scope of the potential improvement in 
pricing of municipal securities under the proposed amendments. Further, 
information about some of the factors that could affect borrowing 
costs, such as the nature of the relationship between lenders and 
issuers or obligated persons, including the length of the relationship, 
and the number of lenders from which the issuers or obligated persons 
borrow is not readily available.\168\ Therefore, we are unable to 
provide a reasonable estimate of the potential change in borrowing 
costs issuers or obligated persons may experience, or any costs that 
lenders may incur. We are requesting comment on all aspects of our 
analysis and estimates, and also request any information or data that 
would enable such quantification.
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    \167\ See 2012 Municipal Report supra note 58.
    \168\ Academic research shows that lending relationship could 
affect borrowing costs. See infra note 196.
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B. Economic Baseline

    To assess the economic impact of the proposed amendments to Rule 
15c2-12, we are using as our baseline the existing regulatory framework 
for municipal securities disclosure, including current Rule 15c2-12, 
and current relevant MSRB rules.

[[Page 13949]]

1. The Current Municipal Securities Market
    As discussed earlier, the need for more timely and informative 
disclosure of the municipal securities is highlighted by market 
developments beginning in 2009, which feature the increasing use of 
direct placements by issuers and obligated persons as financing 
alternatives to public offerings of municipal securities. As a starting 
point of our baseline analysis, we provide an overview of the current 
state of the municipal securities market and issuers' and obligated 
persons' use of direct placements based on data from the Federal 
Reserve Board's Flow of Funds data,\169\ and Call Report data from the 
FDIC.\170\
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    \169\ Municipal securities are defined in the table description 
for the Flow of Funds data as follows. ``Municipal securities are 
obligations issued by state and local governments, nonprofit 
organizations, and nonfinancial corporate businesses. State and 
local governments are the primary issuers; detail on both long and 
short-term (original maturity of 13 months or less) debt is shown. 
This instrument excludes trade debt of, and U.S. government loans 
to, state and local governments. Debt issued by nonprofit 
organizations includes nonprofit hospital bonds and issuance to 
finance activities such as lending to students. Debt issued by the 
nonfinancial corporate business sector includes industrial revenue 
bonds. Most municipal debt is tax-exempt; that is, the interest 
earned on holdings is exempt from federal income tax. Since 1986, 
however, some of the debt issued has been taxable, including the 
Build America Bonds authorized under the American Recovery and 
Reinvestment Act of 2009.'' See Federal Reserve Board, Financial 
Accounts of the United States: All Table Descriptions, at 30-31 
(Dec. 8, 2016) available at https://www.federalreserve.gov/apps/fof/Guide/z1_tables_description.pdf.
    \170\ Commercial banks report their individual lending to 
municipalities in call report. The data item used in the analysis is 
item 2107, OBLIGATIONS (OTHER THAN SECURITIES AND LEASES) OF STATES 
AND POLITICAL SUBDIVISIONS IN THE U.S. It includes all obligations 
of states and political subdivisions in the United States (including 
those secured by real estate), other than leases and other than 
those obligations reported as securities issued by such entities in 
``Securities Issued by States Political Subdivision in the U.S. 
(8496, 8497, 8498, and 8499)'' or ``Mortgage-backed securities 
(8500, 8501, 8502, and 8503). It excludes all such obligations held 
for trading. States and political subdivisions in the U.S. includes: 
(1) The fifty states of the United States and the District of 
Columbia and their counties, municipalities, school districts, 
irrigation districts, and drainage and sewer districts; and (2) the 
governments of Puerto Rico and of the U.S. territories and 
possessions and their political subdivisions. See MDRM, supra note 
160.
---------------------------------------------------------------------------

    According to Flow of Funds data, the notional amount of the total 
municipal securities outstanding in the U.S. was $3.83 trillion as of 
the end of the third quarter 2016.\171\ Prior to (and during) the 2008 
financial crisis, the amount of municipal securities outstanding was 
increasing steadily, growing from $2.82 trillion in 2004 to a post-
crisis peak of $3.77 trillion in 2010.\172\ Since 2010, the overall 
size of the municipal securities market has remained flat.\173\
---------------------------------------------------------------------------

    \171\ Flow of Funds, supra note 64, at 121 Table L. 212.
    \172\ Historical Flow of Funds, supra note 161, at 114 Table L. 
212.
    \173\ Id.
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    However, the involvement of commercial banks in the municipal 
capital markets has increased dramatically in terms of purchases of 
municipal securities and extensions of loans to state and local 
governments and their instrumentalities.\174\ U.S. chartered depository 
institutions' holdings of outstanding municipal securities have grown 
rapidly, from 6.75% of the total outstanding (or $254.6 billion) in 
2010 to 13.43% of the total outstanding (or $498.9 billion) in 2015, a 
near two-fold increase.\175\ The fastest growth has been in direct 
lending to state and local governments and their instrumentalities. As 
discussed above, the dollar amount of bank loans to state and local 
governments has more than doubled since the 2008 financial crisis, 
increasing from $66.5 billion as of the end of 2010 to $153.3 billion 
by the end of 2015, or equivalently, an increase from 1.76% of total 
municipal securities outstanding to 4.13%.\176\
---------------------------------------------------------------------------

    \174\ See Bergstresser & Orr, supra note 162, at 1-2.
    \175\ Historical Flow of Funds, supra note 161, at 121 Table L. 
212.
    \176\ See MDRM, supra note 160.
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    The use of direct placements and other financial obligations can 
result in an increase in the issuer's or obligated person's outstanding 
debt, and negatively impact the liquidity and creditworthiness of the 
issuer or obligated person and the prices of their outstanding 
municipal securities. However, currently, there is a lack of secondary 
market disclosure about these financial obligations which has been 
discussed by the MSRB, certain market participants and academics.\177\ 
As a result, investors and other market participants may not have 
timely access to information regarding financial obligations, and such 
information may not be incorporated in the prices of issuers' or 
obligated persons' outstanding municipal securities. Recognizing the 
credit implications of direct placements and other financial 
obligations, at least one rating agency, now requires issuers and 
obligated persons to notify them of the incurrence of certain financial 
obligations, including direct placements, and to provide all relevant 
documentation related to such indebtedness, and the Commission 
understands that other rating agencies strongly encourage this practice 
as well.\178\ This rating agency also stated it may suspend or withdraw 
its ratings should issuers and obligated persons fail to provide such 
notification in a timely manner.\179\ However, while such voluntary 
measures may help mitigate mispricing, they are unlikely to completely 
eliminate all potential mispricing in the municipal securities market 
that is related to a lack of information about direct placements or 
other financial obligations if the measures are costly or difficult to 
enforce.
---------------------------------------------------------------------------

    \177\ See MSRB Letter to SEC CIO, supra note 18, NFMA letter to 
the Commission's Chair, supra note 19. See also Bergstresser & Orr, 
supra note 162, at 2-3.
    \178\ See supra note 81.
    \179\ Id.
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2. Rule 15c2-12
    As discussed above, the Commission first adopted Rule 15c2-12 in 
1989 as a means reasonably designed to prevent fraud in the municipal 
securities market by enhancing the quality, timing, and dissemination 
of disclosure in the municipal securities primary market.\180\ 
Currently, Rule 15c2-12, most recently amended in 2010, prohibits the 
Participating Underwriter from purchasing or selling municipal 
securities in connection with an Offering unless the Participating 
Underwriter reasonably determines that the issuer or obligated person 
has undertaken in a continuing disclosure agreement to provide the MSRB 
with: (1) Certain annual financial and operating information and 
audited financial statements, if available; (2) notices of the 
occurrence of any 14 specific events; and (3) notices of the failure of 
an issuer or obligated person to make a timely annual filing, on or 
before the date specified in the continuing disclosure agreement. The 
current Rule does not impose on a Participating Underwriter any 
obligation to reasonably determine that an issuer or obligated person 
has undertaken in its continuing disclosure agreement to disclose the 
proposed events. As discussed in Section I., investors and other market 
participants may not have any access or timely access to disclosure 
about the proposed events. Investors and other market participants may 
not have access to such information because the issuer or obligated 
person may not provide annual financial information or audited 
financial statements to EMMA, or does not, subsequent to the occurrence 
of the proposed events, issue debt in a primary offering subject to 
Rule 15c2-12 that requires provision of a final official statement to 
EMMA. Even if investors and other market

[[Page 13950]]

participants have access to disclosure about the proposed events, such 
access may not be timely if the issuer or obligated person has not 
submitted annual financial information or audited financial statements 
to EMMA in a timely manner or does not issue debt that requires an 
official statement be provided to EMMA for an extended period of time. 
Typically, investors and other market participants do not have access 
to an issuer's or obligated person's annual financial information or 
audited financial statements until several months or up to a year after 
the end of the issuer's or obligated person's applicable fiscal year, 
and a significant amount of time could pass before an issuer's or 
obligated person's next primary offering subject to Rule 15c2-12.\181\
---------------------------------------------------------------------------

    \180\ See supra Section II.B.
    \181\ See supra note 14.
---------------------------------------------------------------------------

    Furthermore, even if it is accessible to investors and other market 
participants, the disclosure of the information about the proposed 
events in an issuer's or obligated person's official statement, annual 
financial information, or audited financial statements may not include 
certain details about the financial obligations. Specifically, 
disclosure of a financial obligation in an issuer's or obligated 
person's financial statements may be a line item about the amount of 
the financial obligation, and may not provide investors and other 
market participants with information relating to an issuer's or 
obligated person's agreement to covenants, events of default, remedies, 
priority rights, or other similar terms of a financial obligation, any 
of which affect security holders, if material.
3. MSRB Rules
    MSRB rules do not address the disclosure of the events listed in 
Rule 15c2-12. However, as described above, the MSRB has highlighted the 
increased use of direct placements as a financing alternative.\182\ The 
MSRB has encouraged issuers to voluntarily disclose direct placements 
on EMMA,\183\ including providing instructions to issuers on how they 
may provide such disclosures using EMMA. Despite the MSRB's efforts to 
encourage voluntary disclosure, the number of disclosures made using 
EMMA has been limited.
---------------------------------------------------------------------------

    \182\ See supra note 76.
    \183\ See MSRB Notice 2012-18, supra note 20.
---------------------------------------------------------------------------

    In March 2016, the MSRB published a regulatory notice requesting 
comment on a concept proposal to require municipal advisors to disclose 
information regarding the direct placements of their municipal entity 
clients to EMMA.\184\ On August 1, 2016, the MSRB announced that it had 
decided not to pursue the ideas set forth in the MSRB Request for 
Comment. Many who commented on the MSRB's Request for Comment noted 
that the best way to ensure disclosure of direct placements is to amend 
Rule 15c2-12.\185\
---------------------------------------------------------------------------

    \184\ See MSRB Request for Comment, supra note 76.
    \185\ See Comment Letters in Response to MSRB Request for 
Comment, supra note 76.
---------------------------------------------------------------------------

4. Existing State of Efficiency, Competition, and Capital Formation
    Under current rules, certain inefficiencies may arise in the 
municipal securities market as a result of the lack of timely 
disclosure of information on important credit events. In particular, 
because the proposed events need not be included in the issuer's and 
obligated person's continuing disclosure agreements, the impact of such 
events may not be learned by market participants in a timely manner. 
The lack of timely disclosure may cause the prices of certain municipal 
securities to not reflect fundamental value.
    As discussed above, there exists an information asymmetry between 
lenders and municipal securities investors under the current Rule 15c2-
12. The terms of a financial obligation incurred by an issuer or 
obligated person may include covenants that give the lender or 
counterparty priority rights over existing security holders. Existing 
security holders may be unaware of the change in priority structure of 
the issuer's or obligated person's municipal securities for an extended 
period of time, and future investors may buy the securities at inflated 
prices which do not reflect the change in priority structure. Existing 
investors may also be unaware of the occurrence of certain events under 
the terms of a financial obligation, such as a default, where the 
lender might have renegotiated the terms of lending agreement and which 
may reflect the worsened financial condition of the issuer or obligated 
person. The information asymmetry between lenders and municipal 
securities investors could place investors in a disadvantageous 
position relative to lenders when making municipal securities 
investment decisions.\186\
---------------------------------------------------------------------------

    \186\ For discussion of the implications of asymmetric 
information for market efficiency see infra note 203.
---------------------------------------------------------------------------

    The price inefficiencies in the municipal securities market and the 
disparity in available information for different types of investors 
could result in obstacles for the efficient allocation of capital. For 
example, while some investors may overinvest in municipal securities 
due to incomplete information about the amount and priority structure 
of an issuer's or obligated person's debt obligations, other municipal 
securities investors who are aware of the possible information 
asymmetry may underinvest because of a perceived information 
disadvantage relative to issuers or obligated persons or risks 
associated with making investment decisions.

C. Benefits, Costs and Effects on Efficiency, Competition, and Capital 
Formation

    The Commission has considered the potential costs and benefits 
associated with the proposed amendments.\187\ The Commission believes 
that the primary economic benefits of the proposed amendments stem from 
the potential improvement in the timeliness and informativeness of 
municipal securities disclosure. In particular, the Commission believes 
that the proposed Rule 15c2-12 amendments would provide investors with 
more timely access to information that could be used to make more 
informed investment decisions, and enhance investor protection. In 
addition, improved disclosure would assist other market participants 
including rating agencies and municipal securities analysts in 
providing more accurate credit ratings and credit analysis as they 
would have more timely access to information regarding an issuer's or 
obligated person's outstanding debt.\188\ The disclosure produced by 
the issuer or obligated person would become more informative under the 
proposed amendments, because it would include not only the existence of 
the financial obligation that the issuer or obligated person has 
incurred, but also specified material terms of the financial 
obligations that can affect security holders, including affecting their 
priority rights. Disclosure that is both

[[Page 13951]]

more timely and informative can positively affect efficiency, 
competition, and capital formation. The Commission also notes that the 
proposed amendments would introduce costs to other parties, including 
issuers, obligated persons, underwriters and lenders, as the 
alternative financing option (e.g., direct placements) becomes more 
expensive. We discuss the economic costs and benefits of the proposed 
amendments in more detail below as well as the effects of proposed 
amendments on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \187\ The Commission understands that it is possible that the 
issuer or obligated person may not comply with its previous 
continuing disclosure undertakings and may not provide the MSRB with 
notice of the proposed events pursuant to proposed Rule 15c2-12 
amendments, in which case, the actual costs and benefits of the 
proposed amendments would depend on the issuer or obligated person's 
commitment to disclosure.
    \188\ As discussed above, at least one credit rating agency 
currently is requiring disclosure of information about bank loans. 
The benefit to rating agencies of the proposed increased disclosure 
exists only to the extent that the proposed amendments provide new 
information that the rating agencies are not already collecting as 
part of rating a bond issue.
---------------------------------------------------------------------------

1. Anticipated Benefits of the Proposed Rule 15c2-12 Amendments
i. Benefits to Investors
    The Commission preliminarily believes that the proposed Rule 15c2-
12 amendments would potentially yield several benefits to municipal 
securities investors. First, the proposed amendments would provide 
investors with access to more timely and informative disclosure about 
an issuer's or obligated person's financial condition, both of which 
can assist them in making more informed investment decisions when 
trading in the secondary market.
    As discussed in Section III.A., the information regarding the 
proposed events is relevant for investors' investment decision making. 
The incurrence of a financial obligation can result in an increase in 
the issuer's or obligated person's outstanding debt; agreement to a 
covenant, event of default or remedy under the terms of a financial 
obligation of the issuer or obligated person may create contingent 
liquidity and credit risk that could also potentially impact the 
issuer's or obligated person's liquidity and overall creditworthiness. 
The occurrence of a default, event of acceleration, termination event, 
modification of terms, or other similar event under terms of a 
financial obligation of the issuer or obligated person, any of which 
reflect financial difficulties, could provide relevant information 
regarding whether the financial condition of the issuer or the 
obligated person has changed or worsened, and if the issuer or 
obligated person has agreed to new terms that would provide the 
counterparty with superior rights to assets or revenues that were 
previously pledged to existing security holders. All these pieces of 
information contain relevant information about the cash flows investors 
may expect to receive, and can therefore impact the prices of municipal 
securities. Without this information, prices of municipal securities 
could be distorted from fundamental value in both the primary and 
secondary markets.
    However, currently, notice of these events may not be available to 
the public at all, because the issuer or obligated person may not 
provide annual financial information or audited financial statements to 
EMMA, and a Participating Underwriter in an Offering is not currently 
required under Rule 15c2-12 to reasonably determine that an issuer or 
obligated person has undertaken to provide notices of these events. If 
an issuer or obligated person provides such information in their annual 
financial information or audited financial statements, this information 
may not become available until several months or up to a year after the 
end of the issuer's or obligated person's applicable fiscal year, and a 
significant amount of time could pass before the issuer or obligated 
person's next primary offering subject to Rule 15c2-12. Moreover, the 
disclosure information may not include all the proposed events. For 
example, the disclosure may include only the existence of the financial 
obligation that the issuer or obligated person has incurred, but not 
specified material terms of the financial obligations that can affect 
security holders, including those terms that, for example, affect 
security holders' priority rights. Therefore, investors could be making 
investment decisions without knowing that their contractual rights have 
been adversely impacted. As such, the current level of disclosure 
regarding the proposed events is neither timely nor adequately 
informative about the issuer's or obligated person's creditworthiness.
    To the extent that investors in the municipal securities market 
rely on credit ratings as a meaningful indicator of credit risk, the 
recent efforts of certain credit rating agencies to collect information 
from issuers and obligated persons about the incurrence of direct 
placements may help improve the accuracy of credit ratings and mitigate 
potential mispricing in the municipal securities market.\189\ However, 
because not all credit rating agencies require information on direct 
placements to provide a rating, and there are other undisclosed 
financial obligations and significant events (such as defaults) that 
may affect the issuers' and obligated persons' creditworthiness besides 
the incurrence of financial obligations, such efforts alone are 
unlikely to remove all potential mispricing related to direct 
placements.
---------------------------------------------------------------------------

    \189\ See supra note 81 for examples of credit rating agency 
initiatives. For academic evidence on pricing effect of credit 
rating agencies' actions, see John R.M. Hand, Robert W. Holthausen, 
& Richard Leftwich, The Effect of Bond Rating Agency Announcements 
on Bond and Stock Prices, 47 J. Fin. 733, 733-752 (1992).
---------------------------------------------------------------------------

    Under the proposed amendments to Rule 15c2-12, Participating 
Underwriters would be required to reasonably determine that an issuer 
or obligated person had agreed in its continuing disclosure agreement 
to provide notices for the proposed events within 10 business days. 
Consequently, pursuant to the proposed amendments, municipal securities 
investors and other market participants would potentially have access 
to the disclosure within 10 business days as opposed to waiting for the 
issuer's or obligated person's next primary offering subject to Rule 
15c2-12, or until the release of annual financial information or 
audited financial statements, or not receive any information at all. 
Therefore, the proposed amendments would provide investors access to 
information regarding the issuer's or obligated person's financial 
obligations in a more timely manner. In addition, the proposed notices 
would include agreement to covenants, events of default, remedies, 
priority rights or other similar terms of a direct or contingent 
financial obligation of the issuer or obligated person that affect 
security holders, so the disclosures provided to MSRB would be 
informative about not just the existence of the incurred financial 
obligation, but also how they may impact security holders. Overall, the 
proposed amendments would provide information investors could use to 
better assess the risks involved with an investment in a municipal 
security, and therefore make more informed investment decisions.
    Second, improvement in municipal disclosure may reduce information 
asymmetries between investors and other more informed parties such as 
issuers, obligated persons, counterparties and lenders, and therefore 
enhance investor protection. As discussed above, for example, the terms 
of a financial obligation may include covenants that give lenders or 
counterparties priority rights over existing security holders. 
Specifically, for example, a bank loan agreement could give the lender 
a lien on assets or revenues that also secure the repayment of an 
issuer's or obligated person's outstanding municipal securities which 
could adversely affect the rights of existing security holders. If 
disclosure is not available to security holders about such events, they 
will be unable to take any actions they would have taken had they been 
informed, such as exiting

[[Page 13952]]

their position. In this situation, the direct lenders enjoy an 
information advantage over investors. More timely and informative 
disclosure of the proposed events could reduce investors' disadvantage 
by providing them with a means to obtain information in a timely manner 
if their contractual rights have been negatively impacted and take 
appropriate actions.
ii. Benefits to the Issuers or Obligated Persons
    Issuers and obligated persons may also experience a decrease in 
borrowing costs that are related to public offerings of municipal 
securities under the proposed amendments because of the increased level 
of disclosure. For example, in the context of corporate issuers, 
economic theories suggest that information asymmetry can lead to an 
adverse selection problem and therefore reduced the level of liquidity 
for firms' equity.\190\ In an asymmetric information environment, 
investors recognize that issuers may take advantage of their position 
by issuing securities at a price that is higher than justified by the 
issuer's fundamental value. As a result, investors demand a discount to 
compensate themselves for the risk of adverse selection. This discount 
translates into a higher cost of capital. By committing to increased 
levels of disclosure, the firm can reduce the risk of adverse selection 
faced by investors, reducing the discount they demand and ultimately 
decreasing the firm's cost of capital. The theory of adverse selection 
applies broadly to financial markets, or any market that involves 
asymmetric information between the participants. Therefore, the 
Commission preliminarily believes that a similar analysis can be 
applied to municipal securities. As the proposed rule amendments would 
result in municipal securities disclosures that provide more 
information that is relevant to investors, the costs of raising capital 
may decrease for issuers and obligated persons.
---------------------------------------------------------------------------

    \190\ See Douglas W. Diamond & Robert E. Verrecchia, Disclosure, 
Liquidity, and the Cost of Capital, 46 J. Fin. 1325, 1325-1359 
(1991).
---------------------------------------------------------------------------

    Currently, the Commission is unable to provide reasonable estimates 
of the potential change in borrowing costs. Such costs may vary 
significantly depending on a number of factors, including the 
characteristics of the issuer or obligated person (e.g., size, credit 
ratings, etc.), and possible changes in their borrowing behavior.
iii. Benefits to Rating Agencies and Municipal Analysts
    The proposed Rule 15c2-12 amendments would help rating agencies and 
municipal analysts gain access to more updated information about the 
issuer's and obligated person's credit and financial position at a 
lower cost. As rating agencies and municipal analysts have stated on a 
number of occasions, direct placements can have credit implications for 
ratings on an issuer's or obligated person's outstanding municipal 
securities.\191\ Rating agencies must expend resources to collect 
information about financial obligations including direct placements to 
provide more accurate ratings. A certain rating agency stated that it 
would suspend or withdraw ratings if issuers or obligated persons do 
not provide such notification in a timely manner. The process for 
suspending or withdrawing ratings could also be costly for a rating 
agency. \192\ The proposed amendments may reduce the need for rating 
agencies or analysts to separately implement a process to gain more 
timely access to the information regarding proposed events. Therefore, 
under the proposed amendments, rating agencies and municipal analysts 
may have access to information they need to produce more accurate 
credit ratings and analyses at a cost lower than the baseline scenario. 
A portion of any cost savings may be passed through to investors and 
represent a benefit to them depending on how much they rely on rating 
agencies for information.
---------------------------------------------------------------------------

    \191\ See Moody's, Special Comment: Direct Bank Loans Carry 
Credit Risks Similar to Variable Rate Demand Bonds for Public 
Finance Issuers (Sept. 15, 2011); see also supra note 81.
    \192\ See supra note 81.
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2. Anticipated Costs of the Proposed Rule 15c2-12 Amendments
i. Costs to Issuers and Obligated Persons
    The Commission expects that, under the proposed amendments, issuers 
and obligated persons would experience an increase in administrative 
costs from undertaking in their continuing disclosure agreements to 
produce the proposed notices. As discussed above,\193\ an advantage of 
a direct placement versus a public offering of municipal securities is 
the lower costs due to, among other things, no requirement to prepare a 
public offering document for the borrowing transaction. Under the 
proposed amendments, Participating Underwriters would be required to 
reasonably determine that issuers or obligated persons have undertaken 
in a continuing disclosure agreement to submit event notices to the 
MSRB within 10 days of the events. Issuers and obligated persons 
providing notice consistent with the proposed amendments would incur a 
cost to do so. As discussed earlier, the Commission assesses that the 
increase in the number of event notices would result in an increase of 
4,400 hours in the annual paperwork burden for all issuers to submit 
event notices. As discussed above in Section IV.E.2., the Commission 
has estimated that these hours spent preparing event notices would be 
done internally, for an estimated cost of $1,513,600.\194\ The 
Commission also believes issuers would incur an additional estimated 
cost of $585,000 in fees for designated agents to assist in the 
submission of event notices.\195\
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    \193\ See supra Section V.A.
    \194\ This estimate reflects an assumption that issuers perform 
this internal work through internal counsel. 4400 hours (estimated 
increase in hours for issuers to prepare event notices under the 
proposed amendments to the Rule) x $344 (average rate for an 
internal compliance attorney) = $1,513,600. The $344 per hour 
estimate for an internal compliance attorney is from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified by Commission staff to account for an 1,800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, and adjusted for inflation.
    \195\ See supra Section IV.E.2. See also supra notes 148, 150, 
151. As discussed above, the Commission has estimated that 65% of 
issuers may use designated agents to submit some or all of their 
continuing disclosure documents to the MSRB, and that the average 
total annual cost that would be incurred by issuers that use the 
services of a designated agent would be $9,750,000. The Commission 
has estimated that the two proposed amendments would cause issuers 
that use the services of a designated agent to incur additional 
costs of six percent, or $585,000 ($9,750,000 x 6% = $585,000). See 
supra note 150.
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    Borrowing costs also could potentially increase for issuers and 
obligated persons compared to the baseline scenario as lenders might be 
less willing to continue engaging in direct placements or other types 
of alternative financings in their current form under the proposed 
amendments because lenders may be less able to profit from their 
information advantage over other investors. Currently, an issuer or 
obligated person may agree to provide superior rights to the 
counterparty in assets or revenues that were previously pledged to 
existing security holders when they enter into a financial obligation 
without disclosing the information to the public. Lenders might be 
willing to offer lower rates to issuers and obligated persons in return 
for the superior rights. A public disclosure of such arrangements under 
the proposed amendments, therefore, could potentially reduce 
opportunities for lenders to move ahead in the priority queue either 
because issuers and

[[Page 13953]]

obligated persons are discouraged from providing lenders with priority 
at the current level, or because investors demand covenants which 
prevent issuers and obligated persons from doing so and reduce the 
benefits lenders currently enjoy. Currently, while investors may also 
claim their rights under the covenants, they may not be aware that 
their rights have been affected without the disclosures, and therefore 
may fail to make such claims. Therefore, borrowing costs that are 
related to financial obligations may rise for the issuers or obligated 
persons.\196\
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    \196\ There is also likelihood that lenders' private information 
about the borrowers developed over the course of their lending 
relationship with the borrowers could be eroded as a result of a 
detailed disclosure by the issuers and obligated persons, which 
could impact lenders incentives to continue lending, developing 
proprietary information and maintain long-term relationships with 
borrowers, and borrowing costs thereby. However, such an impact 
would depend upon the level of the disclosure provided by the 
issuers and obligated persons in their notices. Lenders generally 
develop proprietary information about the borrower during a lending 
relationship because they actively engage in information gathering 
and monitoring. Lenders and borrowers tend to form stable 
relationships. Such stability provides economies of scale for the 
lenders to offset the costly information production and monitoring, 
and it benefits the borrowers by increasing the availability of 
financing and lowering overall borrowing costs. See Mitchell A. 
Petersen & Raghuram G. Rajan, The Benefits of Lending Relationships: 
Evidence from Small Business Data, 49 J. Fin. 3, 3-37 (1994).
---------------------------------------------------------------------------

    Currently, the Commission is unable to provide reasonable estimates 
of the potential change in borrowing costs related to direct 
placements, as well as other financial obligations. Similarly, as 
discussed earlier, such costs may vary significantly depending on a 
number of factors, including both the characteristics of the issuer or 
obligated person (e.g., size, credit ratings, etc.) and the level of 
the disclosure issuers or obligated persons committed themselves to 
provide under their continuing disclosure agreements In addition, as 
discussed earlier, since borrowing costs related to municipal 
securities might also decrease as disclosure increases, the opposite 
effects might neutralize the proposed amendments' ultimate impact on 
borrowing costs when viewed in totality.
ii. Costs to Dealers
    Pursuant to Rule 15c2-12, a dealer acting as a Participating 
Underwriter in an Offering has an existing obligation to contract to 
receive the final official statement.\197\ The final official statement 
includes, among other things, a description of any instances in the 
previous five years in which the issuer or obligated person failed to 
comply, in all material respects, with any previous undertakings in a 
written contract or agreement to provide certain continuing 
disclosures.\198\ Dealers acting as Participating Underwriters in an 
Offering also have an existing obligation under Rule 15c2-12 to 
reasonably determine that an issuer or obligated person has undertaken 
in its continuing disclosure agreement for the benefit of holders of 
the municipal securities to provide notice to the MSRB of specified 
events. In addition, dealers are prohibited under Rule 15c2-12 from 
recommending the purchase or sale of municipal securities unless they 
have procedures in place that provide reasonable assurance that they 
will receive promptly event notices and failure to file notices with 
respect to the recommended security. Dealers typically use EMMA or 
other third party vendors to satisfy this existing obligation.
---------------------------------------------------------------------------

    \197\ 17 CFR 240.15c2-12(a) and (b)(3).
    \198\ 17 CFR 240.15c2-12(f)(3).
---------------------------------------------------------------------------

    As a practical matter, dealers' obligations under the proposed Rule 
15c2-12 amendments would include verifying that the continuing 
disclosure agreement contains an undertaking by the issuer or obligated 
person to provide the proposed new event notices to the MSRB, verifying 
whether the issuer or obligated person has complied with their prior 
undertakings, and verifying whether the final official statement 
includes, among other things, an accurate description of the issuer's 
or obligated person's prior compliance with continuing disclosure 
obligations. Because the proposed Rule 15c2-12 amendments would not 
significantly alter existing dealer obligations, dealers should not be 
subject to significant costs. As discussed earlier, the Commission has 
estimated that 250 dealers would each incur a one-time, first-year 
burden of 30 minutes to prepare and issue a notice to its employees 
regarding the dealer's new obligations under the proposed amendments, 
and that the proposed amendments would result in an average expenditure 
of an additional 10 hours per year per dealer for each dealer to 
determine whether issuers or obligated person have failed to comply 
with any previous undertakings in a written contract or agreement. 
Therefore, under the proposed amendments, the total burden on dealers 
would increase 125 hours for the first year and 2500 hours on an annual 
basis.\199\ However, as discussed in Section IV.E.1., the Commission 
does not believe dealers will incur any additional external costs 
associated with the proposed amendments to the Rule because the 
proposed amendments do not change the obligation of dealers under the 
Rule to reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide continuing disclosure 
documents to the MSRB. Specifically, the Commission believes that the 
task of preparing and issuing a notice advising the dealer's employees 
about the proposed amendments is consistent with the type of compliance 
work that a dealer typically handles internally. Thus, dealers would 
incur an annual internal compliance cost of $903,000 for the first 
year, and $860,000 in subsequent years.\200\
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    \199\ See Section IV.D.1.
    \200\ First year costs: 125 hours (first year burden on dealers) 
x $344 (average hourly cost of internal compliance attorney) + 2500 
hours (annual hourly burden on dealers) x $344 (average hourly cost 
of internal compliance attorney) = $903,000. Subsequent annual 
costs: 2500 hours (annual hourly burden on dealers) hours x $344 
average hourly cost of internal compliance attorney = $860,000.
---------------------------------------------------------------------------

iii. Costs to Lenders
    Under the proposed amendments, lenders may incur a cost from the 
disclosure about financial obligations and the terms of the agreements 
creating such obligations. The increased level of disclosure may reduce 
lenders' information advantage over other investors. As discussed 
above, lenders may enjoy certain priority rights in these financial 
arrangements, which may not be publicly disclosed, or reflected in the 
price of the issuer's or obligated person's outstanding municipal 
securities. To the extent that such benefits may be reduced by the 
disclosure, lenders would incur a cost. In addition, lenders might have 
reduced incentives to provide financing to issuers or obligated 
persons, or may only be willing to lend at an increased interest rate, 
one that better reflects the risks underlying an issuer's or obligated 
person's entire portfolio of issuances and borrowings, both of which 
could potentially lead to a loss of investment opportunities and hence 
a cost to lenders.\201\ However, as noted above, under the baseline 
scenario, benefits of direct placements and other financial obligations 
accrue to lenders, as well as issuers and obligated persons, at the 
expense of investors in municipal securities. The Commission

[[Page 13954]]

preliminarily believes that any loss of investment opportunities or 
other costs to lenders as described in this section translate into 
benefits to investors such as those described above.
---------------------------------------------------------------------------

    \201\ Lenders' information advantage could also be impacted if 
their private information about the borrowers developed over the 
course of their lending relationship with the borrowers were eroded 
as a result of a detailed disclosure by the issuers and obligated 
persons. However, such an impact would depend upon the disclosure 
provided by the issuers and obligated persons in their notices.
---------------------------------------------------------------------------

    The Commission is unable to quantify the potential cost to lenders 
at this time. Whether the existing lending relationship between lenders 
and issuers or obligated persons would be affected and how large the 
impact might be would depend on the level of the disclosure and the 
nature of the lending relationship, such as the length of the 
relationship and the number of banks/lenders from who the issuers or 
obligated persons borrow. However, how much issuers or obligated 
persons would change in terms of their disclosure behavior, and how 
much lenders would change in their lending behavior in response to the 
proposed amendment is not predictable. Without such data, the 
Commission is unable to provide reasonable estimates of the potential 
cost to lenders.
iv. Costs to Municipal Securities Rulemaking Board
    The proposed Rule 15c2-12 amendments would increase the type of 
event notices submitted to the MSRB which may result in the MSRB 
incurring costs associated with such additional notices. As discussed 
earlier, the Commission estimates, based on preliminary consultations 
with MSRB staff, that it would require approximately 1,162 hours to 
implement the necessary modifications to EMMA to reflect the additional 
disclosures under Rule 15c2-12 in the proposed amendments. Accordingly, 
the total estimated one-time cost to the MSRB of updating EMMA would be 
$373,002.\202\
---------------------------------------------------------------------------

    \202\ See supra Section IV.D.3. Estimates are calculated as 
follows: 1,162 hours x $321 (hourly rate for Senior Database 
Administrator). $321 per hour figure for a Senior Database 
Administrator is from SIFMA's Management & Professional Earnings in 
the Securities Industry 2013, modified by Commission staff to 
account for an 1,800-hour work-year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead, and 
adjusted for inflation.
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3. Effects on Efficiency, Competition, and Capital Formation
    The proposed Rule 15c2-12 amendments have the potential to affect 
efficiency, competition, and capital formation by improving the 
timeliness and informativeness of disclosure to investors, reducing 
information asymmetry among market participants, and enhancing 
transparency about issuers' and obligated persons' debt structures. As 
described above, lack of disclosure can lead to information asymmetries 
among different types of investors (i.e., investors in publicly offered 
municipal securities and direct lenders), and between investors and 
issuers and obligated persons, which can result in securities prices 
that do not reflect market value.\203\ The proposed amendments would 
require a Participating Underwriter to reasonably determine that an 
issuer or obligated person has undertaken in a continuing disclosure 
agreement to provide notice to the MSRB of the proposed events. Such 
disclosures could provide an investor engaged in investment decision-
making, and ratings agencies and municipal analysts undertaking a 
ratings review or credit analysis, with more timely access to 
information about the issuer's or obligated person's credit profile and 
financial condition, reduce mispricing of municipal securities, and 
therefore enhance the efficiency of the municipal securities market.
---------------------------------------------------------------------------

    \203\ Specifically, when there is asymmetric information about 
material risks, investors may not be able to distinguish low-risk 
securities from high-risk securities. In such cases, market 
participants will only value securities as if they bear an average 
level of risk, undervaluing low-risk securities and overvaluing 
high-risk securities. Such mispricing can harm market efficiency and 
distort capital allocation. See, e.g., Paul M. Healy & Krishna G. 
Palepu, Information Asymmetry, Corporate Disclosure, and the Capital 
Markets: A Review of the Empirical Disclosure Literature, 31 J. 
Acct. & Econ. 405, 405-40 (2001).
---------------------------------------------------------------------------

    As discussed above, at least one credit rating agency currently 
requires issuers and obligated persons to provide notification and 
documentation of the incurrence of certain financial obligations 
including direct placements in order to maintain their credit ratings, 
a process that may involve duplicative costs, because each rating 
agency would have to implement similar process to collect the same 
information, and issuers and obligated persons would have to provide 
identical responses multiple times.\204\ The proposed amendments may 
improve efficiency in the disclosure process by eliminating such 
potential duplicative costs. By potentially reducing information 
asymmetries between municipal securities investors and other more-
informed market participants, including issuers, obligated persons and 
lenders, the proposed Rule 15c2-12 amendments could promote competition 
among municipal capital market participants. As discussed earlier, by 
allowing lenders to enjoy an information advantage about the proposed 
events, existing rules may provide certain lenders with a competitive 
advantage over the municipal securities investors because lenders could 
be in better position to compete with municipal securities investors 
for investment opportunities. Currently, for example, the terms of a 
financial obligation incurred by an issuer or obligated person may 
include covenants that give the lender or counterparty priority rights 
over existing security holders. As a result, for example, the lender or 
counterparty may have a senior lien on assets or revenues that were 
previously pledged to secure repayment of an issuer's or obligated 
person's outstanding municipal securities. Unless an issuer or 
obligated person voluntarily discloses this information, existing 
investors may be unaware that an issuer's or obligated person's 
outstanding debt amount and priority structure has changed. Under the 
current Rule, existing investors may also be unaware of the occurrence 
of an event such as a default, where the lender might have renegotiated 
the terms of lending agreement reflecting financial difficulties of the 
issuer or obligated person. In both these scenarios, municipal security 
investors are disadvantaged, existing security holders may continue to 
hold the municipal securities without learning that the credit quality 
of the municipal securities has deteriorated, and future investors may 
buy the securities at inflated prices. Therefore, more timely and 
informative disclosure of the proposed events by issuers' and obligated 
persons' could help reduce the information gap between the lenders and 
municipal securities investors, leveling the playing field for market 
participants looking for investment opportunities in the municipal 
capital market.
---------------------------------------------------------------------------

    \204\ See supra note 81.
---------------------------------------------------------------------------

    The proposed amendments to Rule 15c2-12 may also promote 
competition among issuers and obligated persons looking for funding. 
Under the current rule, issuers or obligated persons who are not 
engaged in alternative financings such as direct placements might be 
competing for capital in a relatively disadvantaged position--all else 
equal, they should be at least as creditworthy as their counterparts 
who have incurred undisclosed material financial obligations. However, 
the market could be pricing these issues identically, placing more 
creditworthy issuers and obligated persons at a competitive 
disadvantage. Since the proposed amendments could improve pricing 
efficiency and increase the likelihood that prices reflect credit risk, 
the proposed amendments may also promote competition for capital among 
issuers and obligated persons.
    The proposed Rule 15c2-12 amendments may also positively affect

[[Page 13955]]

efficiency by providing issuers and obligated persons with incentives 
to make management decisions that promote an efficient market for 
municipal securities. For example, when issuers or obligated persons 
are considering a direct placement versus a public municipal securities 
offering, they may weigh, among other things, the benefits of lower 
borrowing costs against future liquidity risk considerations. That is, 
issuers and obligated persons might choose financial obligations over a 
public offering of municipal securities if, among other things, the 
value of lower borrowing costs exceeds the costs of future liquidity 
concerns associated with the financial obligations. However, to the 
extent that borrowing costs may be priced incorrectly under the 
baseline scenario due to information asymmetries, issuers and obligated 
persons might be making decisions that, while optimal for themselves 
based on available pricing information, do not necessarily take into 
account the costs that financial obligations may impose on other 
creditors. Moreover, they may have incentives to exploit the mispricing 
should it yield lower borrowing costs, which may sustain or even 
amplify the market inefficiency. If issuers and obligated persons were 
to increase financial obligations and such information was not 
incorporated in the market in a timely fashion as is the case under the 
baseline, mispricing of municipal securities would also likely 
increase. Such concerns might be reduced under the proposed amendments, 
which aim to reduce information asymmetries that may lead issuers and 
obligated persons to favor direct placements and other financial 
obligations over public offerings. To the extent that this reduces the 
incentive to exploit mispricing, price inefficiencies in the municipal 
securities market may diminish.
    The proposed Rule 15c2-12 amendments may also help facilitate 
capital formation. As discussed earlier, under the baseline scenario, 
there may be price inefficiencies in the market for municipal 
securities that result from asymmetric information between different 
sets of municipal securities investors and lenders. By increasing the 
timeliness and informativeness of disclosure, the proposed rules could 
reduce the potential for price inefficiencies, resulting in improved 
allocation of capital. For example, municipal securities investors may 
underinvest because of a perceived disadvantage or make investment 
decisions based on untimely and incomplete information. Under the 
proposed rule amendments, as the municipal securities market becomes 
more efficient and investors make more informed decisions, capital 
would be better deployed at an aggregate level, resulting in more 
efficient capital allocation.
    A more transparent and competitive market could also improve market 
liquidity and facilitate capital formation. According to academic 
research, disclosure policy influences market liquidity because 
uninformed investors concerned about asymmetric information, price 
protect themselves in their securities transactions by offering to sell 
at a premium or buy at a discount. This price protection could be 
manifested in higher bid-ask spreads and reduced market liquidity.\205\ 
Therefore, by reducing information asymmetry in the municipal capital 
market, the proposed amendments can potentially improve liquidity in 
the municipal market. As the municipal securities market becomes more 
transparent, and investors sense stronger protections, they may be more 
likely to participate in the municipal securities market as a result. 
Therefore, to the extent that increased participation in the municipal 
securities market reflects new investment, as opposed to substitution 
away from other securities markets, enhanced disclosure could also 
positively affect capital formation.
---------------------------------------------------------------------------

    \205\ See Michael Welker, Disclosure Policy, Information 
Asymmetry, and Liquidity in Equity Markets, 11 Contemp. Acct. Res. 
801, 801-827 (1995). Welker provides evidence that disclosure policy 
reduces information asymmetry and increases liquidity in equity 
markets. See also Christian Leuz & Robert E. Verrecchia, The 
Economic Consequences of Increased Disclosure, 38 J. Acct. Res. 91, 
91-124 (2000).
---------------------------------------------------------------------------

D. Alternative Approaches

    Instead of the proposed Rule 15c2-12 amendments, the Commission 
could encourage issuers and obligated persons to voluntarily disclose 
on an ongoing basis information about the incurrence of a financial 
obligation of the issuer or obligated person, if material, or agreement 
to covenants, events of default, remedies, priority rights, or other 
similar terms of a financial obligation of the issuer or obligated 
person, any of which affect security holders, if material, and default, 
event of acceleration, termination event, modification of terms, or 
other similar events under the terms of a financial obligation of the 
issuer or obligated person, any of which reflect financial 
difficulties. However, it is unclear whether issuers or obligated 
persons would have sufficient incentives to do so. As discussed above, 
despite previous efforts of municipal securities market participants, 
the MSRB and numerous industry groups \206\ to encourage timely 
voluntary disclosure regarding financial obligations, issuers and 
obligated persons have not consistently disclosed such information. 
Voluntary disclosure likely would be less costly for issuers and 
obligated persons since they may choose to disclose less frequently or 
not at all, but it would fail to yield the same benefits as the 
disclosures proposed in the amendments that require a Participating 
Underwriter to reasonably determine that an issuer or obligated person 
has undertaken in a continuing disclosure agreement to provide to the 
MSRB notice of the proposed events. If issuers and obligated persons 
were to voluntarily disclose at the level set forth in the proposed 
amendments, the costs of the disclosure also would be comparable.
---------------------------------------------------------------------------

    \206\ See Section II.D; see also supra note 76.
---------------------------------------------------------------------------

E. Request for Comment

    To assist the Commission in evaluating the costs and benefits that 
could result from the proposed amendments to the Rule, the Commission 
requests comments on the potential costs and benefits identified in 
this proposal, as well as any other costs or benefits that could result 
from the proposed amendments to the Rule. In addition, the Commission 
also seeks comment on alternative approaches to the proposed amendments 
and the associated costs and benefits of these approaches. 
Specifically, the Commission seeks comment with respect to the 
following questions: Are there any costs and benefits to any entity 
that are not identified or misidentified in the above analysis? Are 
there any effects on efficiency, competition, and capital formation 
that are not identified or misidentified in the above analysis? Please 
be specific and provide analysis and data in support of your views. 
Should the Commission consider any of the alternative approaches 
outlined above instead of the proposed amendments? Which approach and 
why? Are there any other alternative processes to improve municipal 
disclosure related to financial obligations that the Commission should 
consider? If so, what are they and what would be the associated costs 
or benefits of these alternative approaches?

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of

[[Page 13956]]

1996 (``SBREFA''),\207\ the Commission requests comment on the 
potential effect of the proposed amendments on the United States 
economy on an annual basis. The Commission also requests comment on any 
potential increases in costs or prices for consumers or individual 
industries, and any potential effect on competition, investment, or 
innovation.
---------------------------------------------------------------------------

    \207\ Public Law 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

    Under SBREFA, a rule is considered ``major'' where, if adopted, it 
results in or is likely to result in:
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment, or 
innovation.
    Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

VII. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\208\ Section 3(a) \209\ of RFA generally requires the 
Commission to undertake a regulatory flexibility analysis of all 
proposed rules to determine the impact of such rulemaking on small 
entities unless the Commission certifies that the rule amendments, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.\210\ For purposes of Commission rulemaking in 
connection with the RFA,\211\ a small entity includes: (1) A broker-
dealer that had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the date in the prior fiscal year as of which 
its audited financial statements were prepared pursuant to Rule 17a-
5(d) under the Exchange Act,\212\ or, if not required to file such 
statements, a broker-dealer with total capital (net worth plus 
subordinated liabilities) of less than $500,000 on the last day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and is not affiliated with any person (other than a natural 
person) that is not a small business or small organization; \213\ and 
(2) a municipal securities dealer that is a bank (including a 
separately identifiable department or division of a bank) if it has 
total assets of less than $10 million at all times during the preceding 
fiscal year; had an average monthly volume of municipal securities 
transactions in the preceding fiscal year of less than $100,000; and is 
not affiliated with any entity that is not a ``small business.'' \214\
---------------------------------------------------------------------------

    \208\ 5 U.S.C. 601 et seq.
    \209\ 5 U.S.C. 603.
    \210\ 5 U.S.C. 605(b).
    \211\ Although Section 601 of the RFA defines the term ``small 
entity,'' the statute permits agencies to formulate their own 
definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Rule 0-10 under the Exchange 
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (January 
28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
    \212\ 17 CFR 240.17a-5(d).
    \213\ See 17 CFR 240.0-10(c). See also 17 CFR 240.0-10(i) 
(providing that a broker or dealer is affiliated with another person 
if: Such broker or dealer controls, is controlled by, or is under 
common control with such other person; a person shall be deemed to 
control another person if that person has the right to vote 25 
percent or more of the voting securities of such other person or is 
entitled to receive 25 percent or more of the net profits of such 
other person or is otherwise able to direct or cause the direction 
of the management or policies of such other person; or such broker 
or dealer introduces transactions in securities, other than 
registered investment company securities or interests or 
participations in insurance company separate accounts, to such other 
person, or introduces accounts of customers or other brokers or 
dealers, other than accounts that hold only registered investment 
company securities or interests or participations in insurance 
company separate accounts, to such other person that carries such 
accounts on a fully disclosed basis).
    \214\ 17 CFR 240.0-10(f).
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    As discussed above in Section IV, the Commission estimates that 
approximately 250 dealers would be Participating Underwriters within 
the meaning of Rule 15c2-12. The Commission does not believe that any 
Participating Underwriters would be small broker-dealers or municipal 
securities dealers. Accordingly, the Commission certifies that the 
proposed rule amendments would not have a significant economic impact 
on a substantial number of small entities for purposes of the RFA. The 
Commission encourages written comments regarding this certification. 
The Commission solicits comment as to whether the proposed rule 
amendments could have an effect on small entities that has not been 
considered. The Commission requests that commenters describe the nature 
of any impact on small entities and provide empirical data to support 
the extent of such impact.

VIII. Statutory Authority and Text of Proposed Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 2, 3(b), 
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j, 
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is proposing 
amendments to Sec.  240.15c2-12 of Title 17 of the Code of Federal 
Regulations in the manner set forth below.

Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II, of 
the Code of Federal Regulations is proposed to be amended as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

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1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
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2. Section 240.15c2-12 is amended by:
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a. In paragraph (b)(5)(i)(C)(14) removing ``and'';
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b. Adding new paragraphs (b)(5)(i)(C)(15) and (16);
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c. Adding new paragraph (f)(11);
    The additions and revisions read as follows.


Sec.  240.15c2-12  Municipal securities disclosure.

* * * * *
    (b) * * *
    (5) * * *
    (i) * * *
    (C) * * *
    (15) Incurrence of a financial obligation of the obligated person, 
if material, or agreement to covenants, events of default, remedies, 
priority rights, or other similar terms of a financial obligation of 
the obligated person, any of which affect security holders, if 
material; and
    (16) Default, event of acceleration, termination event, 
modification of

[[Page 13957]]

terms, or other similar events under the terms of a financial 
obligation of the obligated person, any of which reflect financial 
difficulties.
* * * * *
    (f) * * *
    (11) The term financial obligation means a (i) debt obligation, 
(ii) lease, (iii) guarantee, (iv) derivative instrument, or (v) 
monetary obligation resulting from a judicial, administrative, or 
arbitration proceeding. The term financial obligation shall not include 
municipal securities as to which a final official statement has been 
provided to the Municipal Securities Rulemaking Board consistent with 
this rule.
* * * * *

    By the Commission.

     Dated: March 1, 2017.
Brent J. Fields,
Secretary.
[FR Doc. 2017-04323 Filed 3-14-17; 8:45 am]
 BILLING CODE 8011-01-P