SEC Adopts Changes to Continuing Disclosure Requirements

On May 26, 2010, the Securities and Exchange Commission approved changes to the continuing disclosure provisions of its Rule 15c2-12 (the "Rule") in an effort to improve perceived deficiencies in the quality and timeliness of disclosure regarding municipal securities. The amendments will be effective for continuing disclosure agreements/certificates executed on or after December 1, 2010. The amendments will not affect existing continuing disclosure undertakings.

Most municipal bonds issued since 1996 are subject to the Rule, which requires the issuer (or another "obligated person", such as a conduit borrower) to enter into a continuing disclosure undertaking at the time the bonds are issued. The issuer (or other obligated person) must agree to provide audits and regularly updated financial information to the marketplace, as well as to file a "Material Event Notice" if certain listed events occur.

The changes to the Rule cover two primary areas: (1) Material Event Notices, including the types of events that require the filing of a Material Event Notice and the timing of when a Material Event Notice must be filed; and (2) the application of the Rule to short-term variable rate demand obligations ("VRDOs").

Changes to Material Events; Timing of Material Event Notice Filings. Under the current Rule, a Material Event Notice must be filed in a timely manner if any of eleven listed events occur, if those events are material. The amended Rule requires that notices be filed within 10 business days of the occurrence of the applicable event. Material Event Notices (as well as regular annual continuing disclosure reports) must be filed with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system, or EMMA.

In addition, the amended Rule adds four new events to be reported, and modifies seven of the original eleven events. Most notably, seven of the original eleven events must now be reported without regard to whether they are material.

The following chart lists all fifteen events and describes the Rule's requirements for each event, both before and after the Rule changes. In addition, the chart lists the existing Rule's additional requirement that issuers (or obligated persons) file a notice if required annual information disclosures are not filed in a timely manner.

No.	"Material" Event	Current Requirements	New Requirements
1	Principal and interest payment delinquency	Report only if material	Report without regard to materiality
2	Non-payment related defaults	Report only if material	No change
3	Unscheduled draws on debt service reserves reflecting financial difficulties	Report only if material	Report without regard to materiality
4	Unscheduled draws on credit enhancements reflecting financial difficulties	Report only if material	Report without regard to materiality
5	Substitution of credit or liquidity providers, or their failure to perform	Report only if material	Report without regard to materiality
6	Tax-exemption issues	Report the following, only if material: adverse tax opinions or events affecting the tax-exempt status of the security.	Report any of the following: adverse tax opinions, the issuance by the IRS of proposed or final determinations of taxability, notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the security, or other events affecting the tax status of the security (including Build America Bonds)
7	Modifications to rights of security holders	Report only if material	No change
8	Bond calls	Report only if material	No change
9	Defeasances	Report only if material	Report without regard to materiality
10	Release, substitution, or sale of property securing repayment of the securities	Report only if material	No change
11	Rating changes	Report only if material	Report without regard to materiality
12	Tender offers	n/a	Report without regard to materiality
13	Bankruptcy, insolvency, receivership or similar event of the obligated person	n/a	Report without regard to materiality
14	Consummation of a merger, consolidation, or acquisition involving an obligated person, or the sale of all or substantially all the assets of the obligated person, other than in the ordinary course of business, the entry of 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	n/a	Report if material
15	Appointment of a successor or additional trustee or the change of name of a trustee	n/a	Report if material
16	Failure to file continuing annual information disclosures by deadline (1)	Report without regard to materiality	No change

(1) This event is not within the list of material events in the Rule, but elsewhere in the text the Rule requires that notice be filed for this event.

Variable Rate Bonds. The amended Rule states that VRDOs are generally subject to the Rule. VRDOs, generally, are short-term obligations that bear interest at a variable rate that is reset periodically (usually weekly). VRDOs are commonly secured by a letter of credit from a bank; some VRDO structures require the bank to pay debt service on the bonds directly and others act as standby payors of debt service. Investors generally are able to sell the VRDOs back to the issuer, at specified times, for their full value. Currently, VRDOs with remarketing modes of 9 months or less are not subject to the Rule. Beginning December 1, 2010, underwriters will require issuers of VRDOs with remarketing modes of 9 months or less to enter into undertakings. This new requirement will not apply to VRDOs outstanding on November 30, 2010, even for remarketings which occur on or after December 1, 2010.

Note that the existing exemption in the Rule for bonds that mature in 9 months or less has not been amended. Thus, short-term obligations, such as commercial paper, remain exempt from the continuing disclosure requirements of the Rule.

The text of the amended Rule 15c2-12 can be found here.

If you have any questions regarding this amendment or its possible impact on your activities and operations, please contact your Sherman & Howard L.L.C. attorney or one of the attorneys in our Public Finance Group.

If you have any questions regarding this article or its possible impact on your activities and operations, please contact your Sherman & Howard attorney or one of the attorneys in our Public Finance Group.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.

© 2010 Sherman & Howard L.L.C. June 15, 2010