Public Finance Alert

    June 2010

    On May 26, 2010 the Securities and Exchange Commission (SEC) unanimously approved amendments to Rule 15c2-12 (Rule) (see SEC Release No. 34-62184). These amendments were adopted substantially as proposed in July 2009 with only a few changes. The compliance date of the amendments is December 1, 2010. The Rule will now:

    1. Require material event notices to be provided within 10 business days of the occurrence of the event;
    2. Require disclosure of certain events without regard to materiality;
    3. Add additional events to the list of events that must be disclosed; and
    4. Eliminate the exemption from the Rule for certain variable rate demand obligations (VRDOs).

    The amendments to the Rule apply to continuing disclosure agreements entered into on or after the compliance date (December 1, 2010). The proposed amendments also would have made certain outstanding VRDOs subject to the Rule if they were remarketed in a “primary offering” after the compliance date. However, the amendments “grandfather” VRDOs outstanding on November 30, 2010, as further described below.

    The following is a brief summary of the amendments.

    Material Events Notices Must be Filed Within 10 Business Days After Occurrence of the Event

    The Rule requires notices of "material events" to be filed within 10 business days after the occurrence of the event, without regard to knowledge by the issuers or obligated parties. Issuers and obligated persons must now consider whether additional internal procedures should be established in order to be in a position to report the occurrence of these events on a timely basis. Many comments were received by the SEC regarding the added time and expense to issuers, especially smaller issuers, that would be involved in complying with this timing requirement. However, the SEC believes the benefit to investors in receiving these notices within the set time period outweighs the burden to issuers.

    Required Disclosure of Certain Events Whether Material or Not

    The amendments to the Rule remove the threshold determination by an issuer or obligated person of materiality in connection with the required disclosure of certain events. According to the SEC, some events are so important to investors and others that the events should be disclosed without regard to materiality. The events that no longer will be subject to a determination of materiality are:

    1. Principal and interest payment delinquencies;
    2. Unscheduled draws on a debt service reserve fund reflecting financial difficulty;
    3. Unscheduled draws on credit enhancements reflecting financial difficulty;
    4. Substitution of credit or liquidity providers or a performance failure on the part of such a provider;
    5. Defeasances; and
    6. Ratings changes.

    Additional Events Required to be Disclosed Regardless of Materiality

    The amendments modify the list of required events that must be disclosed, regardless of materiality, to include the following:

    1. Tender offers;
    2. Bankruptcy, insolvency, receivership or similar event of the issuer or obligated person; and
    3. Certain events affecting the tax status of the security and other material notices or determinations with respect to the tax status of the security, or other events affecting the tax status of the security.

    The adopted amendments use the term “tax status” as opposed to “tax-exempt status,” responding to comments received by the SEC regarding the applicability of this event disclosure requirement to taxable municipal securities such as Build America Bonds.

    Additional Events Required to be Disclosed if Material

    The adopted amendments to the Rule include two additional events requiring disclosure, subject to a determination of materiality:

    1. Merger, consolidation or acquisition involving the sale of all or substantially all of its assets (other than in the ordinary course of business) or the entry into or termination of an agreement relating to such actions, if material; and
    2. Appointment of a successor or additional trustee or change in name of a trustee with respect to the related securities, if material.

    Elimination of Exemption for Variable Rate Demand Obligations

    The amendments to the Rule also eliminate the current exemption from the annual and material events disclosure requirements of the Rule for bonds that can be tendered to the issuer, at the option of the holder, at least as frequently as every nine months. VRDOs in most cases would have qualified for this exemption under the Rule prior to the amendments.

    However, the amendments do not apply to certain VRDOs outstanding on November 30, 2010 for so long as they continuously remain in authorized denominations of $100,000 or more and may, at the option of the holder thereof, be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent.