44700 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–83885; File No. S7–01–17] 

RIN 3235–AL97 

Amendments to Municipal Securities 

Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

is adopting amendments to the 

Municipal Securities Disclosure Rule 

under the Securities Exchange Act of 

1934 (‘‘Exchange Act’’). The 

amendments add transparency to the 

municipal securities market by 

increasing the amount of information 

that is publicly disclosed about material 

financial obligations incurred by issuers 

and obligated persons. Specifically, the 

amendments revise the list of event 

notices that a broker, dealer, or 

municipal securities dealer (each a 

‘‘dealer,’’ and collectively, ‘‘dealers’’) 

acting as an underwriter (‘‘Participating 

Underwriter’’) in a primary offering of 

municipal securities with an aggregate 

principal amount of $1,000,000 or more 

(subject to certain exemptions set forth 

in the Rule) (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 Municipal 

Securities Rulemaking Board (‘‘MSRB’’). 

DATES: 

Effective Date: October 30, 2018. 

Compliance Date: February 27, 2019. 

FOR FURTHER INFORMATION CONTACT: 

Rebecca Olsen, Acting Director; Ahmed 

Abonamah, Senior Counsel to the 

Director; Mary Simpkins, Senior Special 

Counsel; Hillary Phelps, Senior 

Counsel; or William Miller, AttorneyAdviser; 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 adopting amendments to 

17 CFR 240.15c2–12 (‘‘Rule 15c2–12’’ or 

‘‘Rule’’) under the Securities Exchange 

Act of 1934. The amendments (a) amend 

the list of events for which notice is to 

be provided 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 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; 

and (b) define the term ‘‘financial 

obligation’’ to mean a (i) debt obligation; 

(ii) derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation; or (iii) a 

guarantee of (i) or (ii). 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. 

I. Executive Summary 

II. Background 

III. Description of the Amendments to Rule 

15c2–12 

A. Introduction 

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. Materiality 

a. Use of Materiality Standard 

b. Guidance 

c. Burden of Materiality Determinations 

d. Materiality and a Series of Related 

Financial Obligations 

ii. Incurrence of a Financial Obligation 

iii. Form of Event Notice 

2. ‘‘Financial Obligation’’ 

i. Debt Obligation 

ii. Derivative Instrument Entered Into in 

Connection With, or Pledged as Security 

or a Source of Payment for, an Existing 

or Planned Debt Obligation 

iii. Guarantee of a Debt Obligation or a 

Derivative Entered Into in Connection 

With, or Pledged as Security or a Source 

of Payment for, an Existing or Planned 

Debt Obligation 

iv. Monetary Obligation Resulting From a 

Judicial, Administrative, or Arbitration 

Proceeding 

v. Exclusion of Municipal Securities as to 

Which a Final Official Statement Has 

Been Provided to the MSRB Consistent 

With Rule 15c2–12 From Definition of 

‘‘Financial Obligation’’ 

3. 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 

i. Default 

ii. Modification of Terms 

iii. Other Similar Events 

iv. Reflect Financial Difficulties 

v. Scope of Financial Obligations Subject 

to Paragraph (b)(5)(i)(C)(16) 

B. Technical Amendment 

C. Compliance Date and Transition 

IV. Paperwork Reduction Act 

A. Summary of Collection of Information 

1. Collection of Information Prior to 

Amendments 

2. Proposed Amendments to Rule 15c2–12 

3. Adopted Amendments to Rule 15c2–12 

B. Use of Information 

C. Respondents 

D. Total Annual Reporting and 

Recordkeeping Burden 

1. Dealers 

i. Amendments to Events To Be Disclosed 

Under a Continuing Disclosure 

Agreement 

a. Estimates in Proposing Release 

b. Comments Received 

c. Revised Estimates of Burden 

ii. One-Time Paperwork Burden 

iii. Total Annual Burden for Dealers 

2. Issuers 

i. Amendments to Event Notice Provisions 

of the Rule 

ii. Total Burden on Issuers for 

Amendments to Event Notices 

iii. Comments Related to Estimated 

Paperwork Burden on Issuers 

iv. Total Burden for Issuers 

3. MSRB 

4. Total Burden for Dealers Effecting 

Transactions in the Secondary Market 

5. Annual Aggregate Burden for 

Amendments to Rule 15c2–12 

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 Kept Confidential 

V. Economic Analysis 

A. Introduction 

B. Economic Baseline 

1. The Current Municipal Securities 

Market 

2. Rule 15c2–12 

3. MSRB Rules 

4. GASB Statement No. 88 

5. Federal Tax Law Changes 

6. Existing State of Efficiency, Competition, 

and Capital Formation 

C. Benefits, Costs and Effects on Efficiency, 

Competition, and Capital Formation 

1. Anticipated Benefits of Rule 15c2–12 

Amendments 

i. Benefits to Investors 

ii. Benefits to Issuers or Obligated Persons 

iii. Benefits to Rating Agencies and 

Municipal Analysts 

2. Anticipated Costs of the Rule 15c2–12 

Amendments 

i. Costs to Issuers and Obligated Persons 

ii. Costs to Dealers 

iii. Costs to Lenders 

iv. Costs to the MSRB 

3. Effects on Efficiency, Competition, and 

Capital Formation 

D. Alternative Approaches 

1. Voluntary Disclosures 

2. Alternative Timeline 

3. Relief for Small Issuers and Obligated 

Persons 

4. Adopt as Proposed, the Broader 

Definition of Financial Obligation 

VI. Regulatory Flexibility Certification 

VII. Statutory Authority 

Text of Rule Amendments 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44701 

1See 17 CFR 240.15c2–12(a), (b)(5)(i), (b)(5)(i)(C). 

2Other market participants include dealers, 

analysts, and vendors of information regarding 

municipal securities. Though investors and dealers 

are the intended beneficiaries of improved access to 

information about the financial obligations of 

issuers and obligated persons, the Commission 

expects that both groups will also benefit indirectly 

due to the improved ability of analysts and vendors 

of information regarding municipal securities to 

access this information. 

3See Exchange Act Release No. 80130 (Mar. 1, 

2017), 82 FR 13928 (Mar. 15, 2017) (‘‘Proposing 

Release’’). The comment period for the proposed 

amendments expired on May 15, 2017. 

4The Commission proposed a technical 

amendment to paragraph (b)(5)(i)(C)(14) of the Rule 

to remove the term ‘‘and’’ since new events were 

proposed to be added to paragraph (b)(5)(i)(C) of the 

Rule. 

5See SEC Comments on Proposed Rule: Proposed 

Amendments to Exchange Act Rule 15c2–12, 

available at https://www.sec.gov/comments/s7-01- 

17/s70117.htm. 

6SEC Investor Advisory Committee, 

Recommendation of Market Structure 

Subcommittee of IAC: Select Enhancements to 

Protect Retail Investors in Municipal and Corporate 

Bonds (June 5, 2018) (‘‘IAC Recommendation’’) 

(adopted by the IAC on June 14, 2018), available at 

https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061418-market-structuresubcommittee-recommendation.pdf. 

7 15 U.S.C. 78o(c). 

8See Exchange Act Release No. 34–26985 (June 

28, 1989), 54 FR 28799 (July 10, 1989) (‘‘1989 

Adopting Release’’). For additional information 

relating to the history of the Rule, see Exchange Act 

Release No. 34–34961 (Nov. 10, 1994), 59 FR 59590 

(Nov. 17, 1994) (‘‘1994 Amendments Adopting 

Release’’), Exchange Act Release No. 34–59062 

(Dec. 5, 2008), 73 FR 76104 (Dec. 15, 2008) (‘‘2008 

Amendments Adopting Release’’), and Exchange 

Act Release No. 34–62184A (May 27, 2010), 75 FR 

33100 (June 10, 2010) (‘‘2010 Amendments 

Adopting Release’’). 

9See 1989 Adopting Release, supra note 8. 

10See 17 CFR 240.15c2–12(b). 

11See 1994 Amendments Adopting Release, 

supra note 8. 

12See 2008 Amendments Adopting Release, 

supra note 8. 

13See 2010 Amendments Adopting Release, 

supra note 8. 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 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; and (d) revise an exemption for certain 

offerings of municipal securities with put features. 

The Commission also provided interpretive 

guidance on Participating Underwriter 

responsibilities under the antifraud provisions of 

the federal securities laws in response to market 

participants’ concerns that some issuers and 

obligated persons were not consistently submitting 

continuing disclosure documents in accordance 

with the undertakings made in their continuing 

disclosure agreements. 

14The term ‘‘obligated person’’ means any 

person, including an issuer of municipal securities, 

who is either generally or through an enterprise 

Continued 

I. Executive Summary 

In March 2017, the Commission 

published for comment proposed 

amendments to Exchange Act Rule 

15c2–12 1 designed to facilitate 

investors’ and other market 

participants’ 2 access to important 

information in a timely manner, help 

enhance transparency in the municipal 

securities market, and improve investor 

protection.3 The proposed amendments 

would have amended the list of event 

notices that a dealer acting as 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 (‘‘continuing 

disclosure agreement’’), to provide to 

the MSRB. Specifically, the proposed 

amendments would have amended the 

list of events for which notice is to be 

provided 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 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. 

In addition, the Commission proposed 

a definition of the term ‘‘financial 

obligation.’’ As proposed, the term 

financial obligation would have meant a 

(i) debt obligation; (ii) lease; (iii) 

guarantee; (iv) derivative instrument; 

and (v) monetary obligation resulting 

from a judicial, administrative, or 

arbitration proceeding. The term 

financial obligation would not have 

included municipal securities as to 

which a final official statement has been 

provided to the Municipal Securities 

Rulemaking Board consistent with this 

rule. 

The Commission also proposed a 

technical amendment to paragraph 

(b)(5)(i)(C)(14) of the Rule.4

A wide range of commenters sent 

comment letters 5 to the Commission in 

response to the proposed amendments. 

Commenters included issuers, dealer 

associations, investor associations, 

attorneys, organizations representing 

industry participants, the SEC Investor 

Advisory Committee (‘‘IAC’’), the 

MSRB, and others. While commenters 

generally supported enhanced 

transparency in the municipal securities 

market, many encouraged the 

Commission to consider narrowing the 

scope of the proposed amendments to 

avoid overburdening market 

participants. Common themes raised in 

the comment letters include: (i) The 

perceived vague meaning and overly 

broad scope of the term ‘‘financial 

obligation’’; (ii) the desire for additional 

guidance with respect to the materiality 

qualifier in paragraph (b)(5)(i)(C)(15) of 

the Rule; and (iii) the anticipated 

burdens and costs associated with 

complying with the proposed 

amendments. In addition, the IAC stated 

its support for the central purpose of the 

proposed amendments to Rule 15c2–12 

and encouraged the Commission to 

work toward passage of the amendments 

after considering comments received.6

The Commission has carefully 

considered all of the comments and, as 

discussed below, is adopting the 

amendments substantially as proposed, 

with some modifications to address 

issues raised by commenters. 

The amendments address the need for 

timely disclosure of important 

information related to an issuer’s or 

obligated person’s financial obligations. 

The Commission believes that the 

amendments will facilitate investors’ 

and other market participants’ access to 

important information in a timely 

manner, enhance transparency in the 

municipal securities market, and 

improve investor protection. For the 

reasons discussed in this Adopting 

Release, the Commission believes that 

the amendments are consistent with the 

Commission’s mandate to, among other 

things, adopt rules reasonably designed 

to prevent fraudulent, deceptive, or 

manipulative acts or practices in the 

municipal securities market.7

II. Background 

Rule 15c2–12 is designed to address 

fraud by enhancing disclosure in the 

municipal securities market by 

establishing standards for obtaining, 

reviewing, and disseminating 

information about municipal securities 

by their underwriters.8 In 1989, the 

Commission adopted paragraphs (a) and 

(b)(1) through (4) of Rule 15c2–12 9 to 

require dealers acting as Participating 

Underwriters in Offerings to obtain, 

review, and distribute to potential 

customers copies of the issuer’s official 

statement.10 In 1994, the Commission 

adopted paragraph (b)(5) of the Rule,11

which became effective in 1995, and 

was amended in 2008 12 and 2010.13

Paragraph (b)(5) of the Rule prohibits a 

Participating Underwriter from 

purchasing or selling municipal 

securities covered by the Rule in an 

Offering unless the Participating 

Underwriter has reasonably determined 

that an issuer or obligated person 14 of 


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fund, or account of such person committed by 

contract or other arrangements to support payment 

of all, or part of the obligations of the municipal 

securities to be sold in the Offering (other than 

providers of municipal bond insurance, letters of 

credit, or other liquidity facilities). 17 CFR 

240.15c2–12(f)(10). 

15On December 5, 2008, the Commission adopted 

amendments to Rule 15c2–12 to provide for the 

Electronic Municipal Market Access (‘‘EMMA’’) 

system. EMMA is established and maintained by 

the MSRB and provides free public access to 

disclosure documents. The 2008 Amendments 

designated the EMMA system as the single 

centralized repository for the electronic collection 

and availability of continuing disclosure 

information about municipal securities. 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. See 2008 

Amendments Adopting Release, supra note 8. See 

also Exchange Act Release No. 34–58255 (July 30, 

2008), 73 FR 46138 (Aug. 7, 2008) (‘‘2008 Proposing 

Release’’). The 2008 Amendments became effective 

on July 1, 2009. 

16See 17 CFR 240.15c2–12(b)(5)(i)(A) and (B). 

17See 17 CFR 240.15c2–12(b)(5)(i)(C). Under the 

Rule prior to these amendments, 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). 

18See 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.’’ 

19See Securities and Exchange Commission, 

Report on the Municipal Securities Market (July 31, 

2012) (‘‘2012 Municipal Report’’), available at 

https://www.sec.gov/news/studies/2012/munireport

073112.pdf. 

20 Id. 

21 Id. 

22See Federal Reserve Board, Financial Accounts 

of the United States: Flow of Funds, Balance Sheets, 

and Integrated Macroeconomic Accounts (First 

Quarter 2018) (June 7, 2018), available at https:// 

www.federalreserve.gov/releases/z1/20180308/ 

z1.pdf. 

23See id. As of the first quarter of 2018, the 

amount of municipal securities held directly by the 

household sector was $1.64 trillion and mutual 

funds, money market funds, closed-end funds, and 

exchange-traded funds collectively held $946.4 

billion. 

24See MSRB, 2017 Fact Book (Mar. 18, 2018), 

available at http://www.msrb.org/∼/media/Files/ 

Resources/MSRB-Fact-Book-2017.ashx?la=en. 

25See MSRB, Self-Regulation and the Municipal 

Securities Market (Jan. 2018), available at http://

www.msrb.org/Market-Topics/∼/media/ 

8059A52FBF15407FA8A8568E3F4A10CD.ashx. 26See Registration of Municipal Advisors, 

Exchange Act Release No. 34–70462 (Sept. 20, 

2013), 78 FR 67468 (Nov. 12, 2013). 27See 2012 Municipal Report, supra note 19 

(citing 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 section 205 (Feb. 

14, 2008), available at https://www.gpo.gov/fdsys/ 

pkg/CRPT-110hrpt835/html/CRPT110hrpt835.htm). 

28The six largest municipal bankruptcies, ranked 

by amount of debt, are Puerto Rico, in 2017 ($73 

billion in debt); 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 http://

www.nytimes.com/interactive/2013/07/18/us/ 

detroit-bankruptcy-is-the-largest-in-nation.html; see 

also Mary Williams Walsh, Puerto Rico Declares a 

Form of Bankruptcy, N.Y. Times (May 3, 2017), 

available at https://www.nytimes.com/2017/05/03/ 

business/dealbook/puerto-rico-debt.html. 

29E.g., City of Hartford, Connecticut. See Jenna 

Carlesso, State Leaders: Hartford Bailout Imminent, 

Hartford Courant (Feb. 9, 2018), available at http:// 

www.courant.com/community/hartford/hc-newshartford-oversight-board-20180208-story.html. 

30See 2012 Municipal Report, supra note 19. 

31For example, an investor purchasing a 

municipal security directly from an issuer or 

obligated person. 

32For example, a lender entering into a bank loan, 

loan agreement, or other type of financing 

agreement with an issuer or obligated person. 

33See Proposing Release, supra note 3, 82 FR at 

13929. 

municipal securities has undertaken in 

a continuing disclosure agreement to 

provide specified information to the 

MSRB in an electronic format as 

prescribed by the MSRB.15 The 

information to be provided consists of: 

(i) Certain annual financial and 

operating information and audited 

financial statements, if available 

(‘‘annual filings’’); 16 (ii) timely notices 

of the occurrence of certain events 

(‘‘event notices’’); 17 and (iii) timely 

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’’).18

In July 2012, the Commission issued 

a 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.19 The 2012 

Municipal Report states, among other 

things, that the 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).20 The Commission 

further stated 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.21

Currently, the municipal securities 

market has over $3.844 trillion in 

principal outstanding.22 At the end of 

the first quarter of 2018, individuals 

held, either directly or indirectly 

through mutual funds, money market 

funds, closed-end funds, and exchangetraded funds, approximately $2.587 

trillion of outstanding municipal 

securities (over 65 percent of the total 

amount outstanding).23 According to the 

MSRB, approximately $2.98 trillion of 

municipal securities were traded in 

2017 in approximately 9.89 million 

trades.24 There are approximately 

50,000 25 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.26 Municipal securities 

defaults historically have been rarer 

than those involving corporate and 

foreign government bonds.27

Nevertheless, six of the seven largest 

municipal bankruptcy filings in U.S. 

history have occurred since 2011,28 and 

some issuers and obligated persons 

continue to experience declining fiscal 

situations and steadily increasing debt 

burdens.29 These defaults may 

negatively impact investors in ways 

other than non-payment, including 

delayed payments and pricing 

disruptions in the secondary market.30

As the Commission discussed in the 

Proposing Release, in recent years 

issuers and obligated persons have 

increasingly used direct purchases of 

municipal securities 31 and direct 

loans 32 (collectively, ‘‘direct 

placements’’) as alternatives to public 

offerings of municipal securities.33


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44703 

34 In 2016, the MSRB enhanced EMMA to allow 

submitters of continuing disclosure to efficiently 

identify ‘‘Bank Loan/Alternative Financing Filings’’ 

as the type of filing. See MSRB, MSRB Improves 

Bank Loan Disclosure on EMMA website (Sept. 26, 

2016), available at http://msrb.org/News-andEvents/Press-Releases/2016/MSRB-Improves-BankLoan-Disclosure-on-EMMA-website. In a letter to the 

SEC Investor Advocate in October 2017, the MSRB 

stated its concern that although the number of bank 

loan disclosures made to EMMA had increased 

substantially from prior years, only 1,100 bank loan 

documents were posted to the EMMA website (as 

of October 2017), representing only a small fraction 

of bank loans outstanding. See Letter from Lynnette 

Kelly, Executive Director, MSRB, to Rick Fleming, 

Investor Advocate, Securities and Exchange 

Commission (Oct. 17, 2017), available at http://

www.msrb.org/Market-Topics/∼/media/0E3E9F81

C7BA4EB38EE80857FE378F18.ashx. 

According to information received by 

Commission staff from MSRB staff, the MSRB 

received 648 filings during calendar year 2017 

under the ‘‘Bank Loan/Alternative Financing 

Filing’’ category. 

35See 1989 Adopting Release, supra note 8. 

36 17 CFR 240.15c2–12 was adopted under a 

number of Exchange Act provisions, including 

Section 15(c); 15 U.S.C. 78o(c). 

37See Proposing Release, supra note 3, 82 FR at 

13931. 

38See, e.g., Houston Letter; Denver Letter; DFW 

Letter; GFOA Letter; BDA Letter; MSRB Letter. 

39See, e.g., Arlington SD Letter (stating that its 

audited financial statements contain information 

about financial obligations and state law requires 

disclosure of audited financial statements within 

150 days of the end of the fiscal year); NABL Letter 

(stating that (i) information about financial 

obligations is already available due to state 

sunshine laws and improvements in technology, (ii) 

bond documents prohibit the grant of superior 

interests in the trust estate or such terms are 

permitted by outstanding bond contracts, and the 

risks of such terms are priced into the value of 

outstanding bonds, and (iii) that voluntary 

disclosure initiatives should be allowed to further 

develop); NABL III Letter (stating that Government 

Accounting Standards Board (‘‘GASB’’) Statement 

No. 88—Certain Disclosures Related to Debt, 

including Direct Borrowings and Direct Placement 

(March 2018) (‘‘GASB Statement No. 88’’) requires 

additional information related to debt be disclosed 

in audited financial statements reducing the 

disclosure benefits of the amendments). GASB 

Statement No. 88 is available at http://

www.gasb.org/jsp/GASB/Document_C/ 

DocumentPage?cid=1176170308047&accepted

Disclaimer=true. 

40See Tax Cuts and Jobs Act of 2017, Public Law 

115–97, 131 Stat. 2054 (2017). 

41See NABL III Letter. 

42See Proposing Release, supra note 3, 82 FR at 

13929. 

43 Id. 

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.34 The 

Commission believes that investors and 

other municipal market participants 

should have access to continuing 

disclosure information regarding 

financial obligations to improve their 

ability to analyze their investments and, 

ultimately, make more informed 

investment decisions. Access to 

continuing disclosure information also 

furthers the Commission’s original 

intent behind adopting Rule 15c2–12, 

which was to prevent fraudulent, 

deceptive, or manipulative acts or 

practices in the municipal securities 

market.35 Accordingly, the Commission 

believes that amendments to the 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 ten business days, the event 

notices specified in new paragraphs 

(b)(5)(i)(C)(15) and (16), are necessary. 

As discussed in detail below, the 

Commission is adopting, substantially 

as proposed, amendments to Rule 15c2– 

12. The amendments add the following 

events, as proposed, as paragraphs 

(b)(5)(i)(C)(15) and (16) of the Rule for 

which a Participating Underwriter in an 

Offering must reasonably determine that 

the issuer or obligated person has agreed 

to provide in its continuing disclosure 

agreement: (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 securities 

holders, if material; and (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. 

In addition, the Commission is 

adding, substantially as proposed, to 

paragraph (f) of the Rule, the following 

definition: The term financial obligation 

means a (i) debt obligation; (ii) 

derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation; or (iii) 

guarantee of (i) or (ii). 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. 

The Commission is also adopting, as 

proposed, a technical amendment to 

paragraph (b)(5)(i)(C)(14) of the Rule. 

In keeping with the objectives set 

forth in the Exchange Act, including 

Section 15(c)(2),36 and the antifraud 

provisions of the federal securities laws, 

the Commission believes the 

amendments to Rule 15c2–12, as 

adopted, are reasonably designed to 

prevent fraudulent, deceptive, or 

manipulative acts or practices in the 

municipal securities market. The 

Commission believes the amendments 

are consistent with the limitations set 

forth in Exchange Act Section 15B(d)(1) 

because the 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.37

III. Description of the Amendments to 

Rule 15c2–12 

A. Introduction 

Commenters were generally 

supportive of increased transparency in 

the municipal securities market.38

Nevertheless, some commenters 

suggested that the proposed 

amendments were unnecessary because 

information about issuer and obligated 

person financial obligations is already 

available in audited financial 

statements, other publicly available 

documents, and through voluntary 

disclosures to EMMA.39 One commenter 

suggested that the proposed 

amendments were not needed because 

the Tax Cuts and Jobs Act of 2017 40 has 

increased the cost of tax-exempt bank 

direct placements as compared to 

publicly offered debt, resulting in a 

likely reversal of the recent growth of 

direct placements.41

The Commission acknowledges the 

efforts of many issuers and obligated 

persons to be transparent. However, as 

stated in the Proposing Release, 

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 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.42 Further, 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 the 

provision of a final official statement to 

EMMA.43 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. 

Additionally, the Commission 

understands that to the extent 

information about financial obligations 

is disclosed and accessible to investors 

and other market participants, such 


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44 GASB Statement No. 88 has gone into effect for 

reporting periods beginning after June 15, 2018. See 

GASB Statement No. 88, supra note 39. GASB 

Statement No. 88 ‘‘requires that additional essential 

information related to debt be disclosed in notes to 

financial statements, including unused lines of 

credit, assets pledged as collateral for the debt, and 

terms specified in debt agreements related to 

significant events of default with finance-related 

consequences, significant termination events with 

finance-related consequences, and significant 

subjective accelerations clauses.’’ The Commission 

understands that those issuers and obligated 

persons who adhere to GASB standards when 

preparing their financial statements could provide 

information in their audited financial statements 

similar to that covered under new paragraph 

(b)(5)(i)(C)(15) of the Rule. However, while GASB 

establishes generally accepted accounting 

principles (GAAP) that are used by many states and 

local governments, there are no uniformly applied 

accounting standards in the municipal securities 

market. See 2012 Municipal Report, supra note 19. 

Further, there is no requirement in Rule 15c2–12 

that an issuer or obligated person undertake in its 

continuing disclosure agreement to provide audited 

financial statements to the MSRB. See 17 CFR 

240.15c2–12(b)(5)(i)(B) (limiting the requirement of 

audited financial statements to ‘‘when and if 

available’’). While the Commission supports efforts 

to improve the transparency and usefulness of 

financial statements, GASB Statement No. 88 is not 

a substitute for these amendments. Industry 

commentators have expressed a similar view. See 

generally, Standard and Poor’s Global Ratings, Bank 

Loan Structures Risk Remain, But GASB 88 Is A 

Positive Step Toward Transparency in Financial 

Reporting (May 2, 2018), available at https://

www.spratings.com/documents/20184/86957/ 

Bank+Loan+Structures+Risks+Remain+But+

GASB88+Is+A+Positive+Step+Toward+

Transparency+In+Financial+Reporting_May-02- 

2018.pdf/07d7140a-0019-4907-8ab9-35d7b463e77c 

(stating ‘‘[m]arkets function most efficiently when 

all stakeholders have symmetrical or equal access 

to material information. Although the [GASB 

Statement No. 88] release speaks to required 

disclosures, not all public finance issuers comply 

with GAAP standards or adopt all GASB 

statements. Consequently, we believe the municipal 

market is not functioning as effectively as it could 

around a bank loan structure. Nevertheless, the 

[GASB Statement No. 88] release is a significant 

positive development that signals even to those 

who have not adopted GASB statements that the 

marketplace is developing higher expectations 

about disclosures’’). 

45See 2012 Municipal Report, supra note 19. 

46Municipal Market Bank Loan Disclosure Task 

Force, Considerations Regarding Voluntary 

Secondary Market Disclosure About Bank Loans 

(May 1, 2013) (‘‘Considerations Regarding 

Voluntary Secondary Market Disclosure About 

Bank Loans’’), available at http://www.nfma.org/ 

assets/documents/position.stmt/wp.direct.bank.

loan.5.13.pdf, (stating ‘‘Bank loan covenants and 

events of default can be different from or set at 

higher levels than those applicable to outstanding 

bonds, thereby enabling the bank to assert remedies 

prior to other bondholders (which may effectively 

prioritize repayment of the bank loan)’’ and also 

stating ‘‘[c]ertain assets previously available to 

secure bonds may be pledged to the bank as 

security for the bank loan’’). The Task Force was 

composed of representatives from the American 

Bankers Association, Bond Dealers of America, 

Government Finance Officers Association, 

Investment Company Institute, National 

Association of Bond Lawyers (‘‘NABL’’), National 

Association of Health and Educational Facilities 

Finance Authorities, National Association of 

Independent Public Finance Advisors, National 

Federation of Municipal Analysts, and Securities 

Industry and Financial Markets Association. 

47See Arlington SD Letter. 

48See NABL Letter. 

49 Id. 

50For a discussion of the definition of the term 

‘‘financial obligation,’’ see infra Section III.A.2. 

51For example, Federal Deposit Insurance 

Corporation (‘‘FDIC’’) data show the amount of bank 

direct lending to state and local governments and 

their instrumentalities during the first quarter of 

2018 ($190,533,184,000) remains at a similar level 

to that of the fourth quarter of 2017 

($190,531,792,000). For a discussion of these data, 

see infra note 319 and related text. 

52For a discussion of market participant efforts to 

promote voluntary disclosure of certain financial 

obligations, see Proposing Release, supra note 3, 82 

FR at 13929–30. See also supra note 34. 

information currently may not include 

certain details about the financial 

obligations.44 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 of the 

financial obligation. 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.45 While it could be true in 

some cases that governing documents 

prohibit the granting of superior lien 

rights to other holders of the issuer’s or 

obligated person’s debt, there is no set 

standard of what provisions are set forth 

in the legal documents governing an 

issuance of municipal securities, and 

documents and the covenants they 

contain vary from issuer to issuer.46

Additionally, there are other terms of 

financial obligations that could affect 

the issuer’s or obligated person’s 

liquidity, overall creditworthiness, or an 

existing security holder’s rights. The 

amendments would cover any such 

terms if material and if they affect 

security holders. Further, the 

Commission recognizes that some states 

require that issuers and obligated 

persons submit their audited financial 

statements, which provide information 

about financial obligations, to a state 

repository within a certain number of 

days after the end of their fiscal year,47

and that information about financial 

obligations may be available under state 

sunshine laws and through improved 

technology.48 However, deadlines for 

such audited financial statements under 

state laws may extend far beyond the 

ten business days required by the 

Rule,49 and the procedures for 

requesting information under sunshine 

laws may not result in the timely and 

widespread delivery of such 

information to market participants. 

While technology has improved the 

ability to obtain and disseminate 

information, EMMA remains the single 

centralized repository for the electronic 

collection and availability of continuing 

disclosure information about municipal 

securities. Accordingly, the Commission 

believes these amendments will 

facilitate investor access to important 

information in a timely manner and 

help to enhance transparency. 

Additionally, the Commission 

recognizes that the Tax Cuts and Jobs 

Act of 2017 may impact the municipal 

debt market, including, but not limited 

to the use of direct placements. The 

amendments are intended to address the 

need for timely disclosure of important 

information related to an issuer’s or 

obligated person’s financial obligations 

and cover a variety of obligations 

incurred by issuers and obligated 

persons, including but not limited to 

direct placements.50 Moreover, the 

Commission believes that given the 

diverse reasons for which issuers and 

obligated persons engage in direct 

placements in lieu of a public offering 

of municipal securities, it is likely that 

direct placements will continue to be 

utilized in the municipal debt market.51

The Commission also recognizes the 

efforts of the MSRB, the Financial 

Industry Regulatory Authority 

(‘‘FINRA’’), academics, and industry 

groups to promote voluntary disclosure 

of financial obligations. However, as 

described in the Proposing Release, 

despite these ongoing efforts, few 

issuers or obligated persons have made 

voluntary disclosures of financial 

obligations, including direct 

placements, to the MSRB.52

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 is adopting as 

proposed new paragraph (b)(5)(i)(C)(15) 

to the Rule, which requires that a 

Participating Underwriter in an Offering 

must reasonably determine that the 

obligated person has undertaken, in a 

continuing disclosure agreement, to 

provide to the MSRB, within ten 

business days, notice 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 


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53See, e.g., NFMA Letter; Vanguard Letter; and 

ICI Letter. 

54Several commenters also stated their concern 

about the lack of guidance with respect to 

determining the materiality of 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. See, 

e.g., LPPC Letter; Kutak Rock Letter; Brown Letter; 

NABL Letter. The discussion in this section 

regarding materiality applies to these comments. 

55For further discussion of the term financial 

obligation, including comments received, see infra 

Section III.A.2. 

56See, e.g., SIFMA AMG Letter (asking for 

clarification that a series of related financial 

transactions must be aggregated for the purpose of 

assessing materiality); GFOA TX Letter (stating the 

difficulties in disclosing material derivative 

instruments as the amount of the financial 

obligation can fluctuate with the market). 

57See, e.g., DFW Letter; BDA Letter; Kutak Rock 

Letter; PFM Letter; Houston Letter; NABL Letter. 

58See NFMA Letter (recommending that the 

disclosure of debt obligations should not be subject 

to a materiality qualifier); Vanguard Letter 

(recommending disclosure of an issuer’s entire debt 

portfolio, including terms of direct placements and 

bank agreements); ICI Letter (recommending the 

removal of the second materiality qualifier and 

mandating disclosure for ‘‘any terms in connection 

with a financial obligation that affect security 

holders’’). 

59See BDA Letter (stating ‘‘some of those tests 

could include a percentage of the financial 

obligation as compared to total outstanding bonds, 

annual debt service as compared to annual revenues 

or expenditures, or some other comparable 

mechanical measurement’’). 

60See 1994 Amendments Adopting Release, 

supra note 8. 

61See Proposing Release, supra note 3, 82 FR at 

13935–36. 

62See THECB Letter (‘‘[w]hat constitutes 

materiality can vary by entity based on the size of 

the overall balance sheet, the size of existing 

obligations or the size of the overall bond 

portfolio’’). While the Commission agrees with that 

statement, these are not the only factors that are 

relevant in evaluating the particular facts and 

circumstances. 

63See, e.g., UHC Letter (requesting that the 

Commission ‘‘acknowledge that a financial 

obligation payable primarily or exclusively from 

one source of revenues would likely not be material 

to security holders of municipal securities payable 

primarily or exclusively from a separate or distinct 

source of revenues of the same issuer or obligated 

person’’). The Commission believes that an issuer 

or obligated person would have to assess a number 

of factors when assessing materiality, including the 

source of security pledged to the security holders. 

See also NABL Letter. 

64See Exchange Act Release No. 34–33742 (Mar. 

9, 1994), 59 FR 12759 (Mar. 17, 1994). The 

proposed term ‘‘significant obligor’’ was defined to 

mean any person who, directly or indirectly, is the 

source of 20 percent or more of the cash flow 

servicing obligations on the municipal securities. 

65See 1994 Amendments Adopting Release, 

supra note 8; see also 17 CFR 240.15c2– 

12(b)(5)(i)(A) and (f)(3). 

66See 1994 Amendments Adopting Release, 

supra note 8 at 59593. 

a financial obligation of the obligated 

person, any of which affect security 

holders, if material. 

i. Materiality 

Commenters raised a number of 

concerns related to the materiality 

qualifier contained in proposed new 

paragraph (b)(5)(i)(C)(15). Specifically, 

commenters (a) questioned the 

Commission’s approach to the 

materiality qualifier in the proposed 

amendments; 53 (b) asked the 

Commission to provide guidance on 

how to determine the materiality of a 

financial obligation; 54 (c) stated that the 

broad scope of the proposed definition 

of the term ‘‘financial obligation’’ would 

make materiality determinations 

challenging and burdensome; 55 and (d) 

requested guidance on how to make 

materiality determinations in 

connection with the incurrence of a 

series of related financial obligations.56

Each of these categories of comments is 

discussed below. 

a. Use of Materiality Standard 

Several commenters addressed the 

Commission’s use of a materiality 

standard in proposed paragraph 

(b)(5)(i)(C)(15).57 Some commenters, for 

example, suggested that the Commission 

eliminate the materiality qualifier to 

promote more robust disclosure of 

financial obligations,58 while other 

commenters recommended that the 

Commission provide mechanical tests 

for determining when a financial 

obligation needs to be disclosed.59

Materiality is a core principle that 

guides the Commission’s approach to 

securities regulation, and a materiality 

qualifier has appeared in Rule 15c2–12 

since the Rule was amended in 1994.60

The Commission continues to believe 

that including a materiality qualifier in 

the amendments is appropriate as it 

provides a framework for issuers and 

obligated persons to assess their 

disclosure obligations in the context of 

the specific facts and circumstances. As 

described in the Proposing Release, the 

Commission believes that not every 

incurrence of a financial obligation or 

agreement to terms is material.61 For 

example, an issuer or obligated person 

may incur a financial obligation for an 

amount that, absent material terms that 

affect security holders, would not raise 

the concerns the amendments are 

intended to address. Utilizing a 

materiality standard permits an issuer or 

obligated person to assess its disclosure 

obligation in the context of the specific 

facts and circumstances.62 For example, 

it may be appropriate for issuers and 

obligated persons to consider not only 

the source of security pledged for 

repayment of the financial obligation, 

but also the rights associated with such 

a pledge (e.g., senior versus 

subordinate), par amount or notional 

amount (in the case of a derivative 

instrument or guarantee of a derivative 

instrument), covenants, events of 

default, remedies, or other similar terms 

that affect security holders to which the 

issuer or obligated person agreed at the 

time of incurrence, when determining 

its materiality.63 Removing the 

materiality qualifier could result in the 

disclosure of financial obligations that, 

absent other facts or circumstances, 

would not raise the concerns the 

amendments are intended to address. 

Separately, some commenters 

suggested that the amendments include 

a mechanical test for materiality. In 

1994, the Commission proposed 

amendments to Rule 15c2–12 that 

would have used a mechanical test to 

identify any ‘‘significant obligor’’ with 

respect to an issue of municipal 

securities and require that both the final 

official statement and the annual 

financial information provided on an 

ongoing basis pursuant to the 

continuing disclosure agreement 

include disclosure with respect to any 

significant obligor.64 In response to a 

number of comments, the Commission 

adopted amendments to Rule 15c2–12 

that eliminated the requirement to 

provide information about specific 

‘‘significant obligors’’ in both the final 

official statement and on an ongoing 

basis. Instead, the Commission adopted 

an approach that leaves to the parties 

(including the issuer and the 

underwriter) the determination of 

whose financial information is material 

to the offering and required to be 

included in both the final official 

statement and provided on an ongoing 

basis as part of the annual financial 

information.65 The 1994 Adopting 

Release stated that the standard set forth 

in the defined term ‘‘final official 

statement’’ provided flexibility that 

many commenters asserted is necessary 

in determining the content and scope of 

the disclosed financial information and 

operating data, given the diversity 

among types of issuers, types of issues, 

and sources of repayment.’’ 66 The 

Commission believes this same need for 

flexibility applies to assessments of 

financial obligations and the materiality 

qualifier allows for consideration of 

diverse sets of factors. Therefore, the 

Commission does not believe that it 

would be appropriate to provide a 

mechanical test for determining the 

materiality of a financial obligation. 

Rather, the Commission continues to 

believe that materiality determinations 

should be based on whether the 

information would be important to the 


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67See Statement of the Commission Regarding 

Disclosure Obligations of Municipal Securities 

Issuers and Others, Exchange Act Release No. 34– 

33741 (Mar. 9, 1994), 59 FR 12748 (Mar. 17, 1994) 

(‘‘1994 Interpretive Release’’). 

68See, e.g., GFOA Letter; Denver Letter; THECB 

Letter (stating that ‘‘what constitutes an obligation 

and what is material, are vague in this amendment’’ 

and ‘‘what constitutes materiality can vary by entity 

based on the size of the overall balance sheet, the 

size of existing obligations or the size of the overall 

bond portfolio’’); see also Brown Letter (suggesting 

definitions of materiality the Commission could 

adopt); but see also ACI Letter (urging the 

Commission to reject a one-size-fits-all definition of 

materiality, since what is material to a small issuer 

may not be material to a larger issuer). 

69 In March 2014, the Division of Enforcement 

announced the 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) 

(‘‘SEC Charges 71 Municipal Issuers’’), available at 

https://www.sec.gov/news/pressrelease/2016- 

166.html. 

70See, e.g., DFW Letter. 

71See, e.g., NABL Letter (stating ‘‘particularly 

since the MCDC Initiative, Commission 

interpretations of ‘material’ are too vague, 

ambiguous, and unpredictable to enable issuers and 

underwriters to clearly determine when notice of an 

event must be filed or when a failure to file must 

be disclosed’’). 

72See, e.g., Granite SD Letter; Portland Letter; 

NABL Letter (stating that some compliance 

departments and investment banks now refuse to 

engage in materiality evaluations of prior events 

and continuing disclosure deficiencies). 

73See Proposing Release at supra note 3, 82 FR 

at 13930 and note 15. 

74The inquiry undertaken in connection with the 

MCDC Initiative required an assessment of whether 

the issuer or obligated person materially fulfilled its 

contractual obligations under its continuing 

disclosure agreement, which required a 

consideration of applicable state law and basic 

principles of contract law. 

75See 1994 Interpretive Release, supra note 67 

(quoting TSC Industries, Inc. v. Northway, Inc., 426 

U.S. 438, 440 (1976)). The principles behind this 

inquiry are consistent each time the question of 

whether a piece of information is material is 

presented, but the factors considered by issuers and 

obligated persons while undertaking such an 

inquiry are not uniform because it is a facts and 

circumstances driven analysis. This inquiry is 

distinct from the inquiry issuers, obligated persons, 

and underwriters conducted as part of the MCDC 

Initiative, which required an assessment of the 

issuer’s or obligated person’s performance of its 

contractual continuing disclosure obligations. 

76 Issuers and obligated persons have undertaken 

this type of analysis in the context of the Rule since 

1994 when the Rule was amended to prohibit 

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 continuing 

disclosure agreement to provide continuing 

disclosure information regarding the security and 

the issuer or obligated person for the life of the 

municipal security including notices of the 

occurrence of certain events, if material. See 1994 

Amendments Adopting Release, supra note 8. 

Since 2010, paragraphs (b)(5)(i)(C)(2), (7), (8), 

(10), (13), and (14) of the Rule have required a 

materiality analysis. See 2010 Amendments 

Adopting Release, supra note 8. See also supra note 

17. Four of those paragraphs, (b)(5)(i)(C)(2), (7), (8), 

and (10), have required a materiality analysis since 

1994. See 1994 Amendments Adopting Release, 

supra note 8. 

Furthermore, this type of analysis is frequently 

conducted under the securities laws, whereby 

materiality is determined by reference to whether 

there is a substantial likelihood that a reasonable 

security holder would consider the information 

important in deciding whether to buy or sell a 

security. See Basic, Inc. v. Levinson, 485 U.S. 224 

(1988). 

77See note 63 and accompanying text. 

total mix of information made available 

to the reasonable investor.67

b. Guidance 

Numerous commenters asked the 

Commission to provide guidance on 

how to determine the materiality of a 

financial obligation, stating that without 

such guidance, issuers, obligated 

persons, and dealers would not interpret 

materiality uniformly.68 Commenters 

pointed to the challenges faced by 

issuers and obligated persons when 

determining materiality in connection 

with their participation in the 

Municipalities Continuing Disclosure 

Cooperation Initiative (‘‘MCDC 

Initiative’’) 69 as indicative of the lack of 

clarity that exists with respect to 

evaluating materiality.70 In particular, 

commenters stated that the MCDC 

Initiative failed to produce clear 

guidance on materiality, resulting in 

additional market confusion about what 

constitutes materiality.71 They also 

stated that following the MCDC 

Initiative, and absent Commission 

guidance, Participating Underwriters 

have been conservatively applying 

materiality determinations to limit 

potential liability and requiring issuers 

and obligated persons to disclose 

potentially non-material information to 

EMMA.72

The Commission believes that the 

type of analysis undertaken in 

connection with the MCDC Initiative 73

is distinct from the analysis required to 

determine whether a piece of 

information is material and must be 

publicly disclosed to investors in 

offering materials.74 In the materiality 

inquiry that issuers, obligated persons, 

and dealers must regularly undertake 

when preparing disclosure documents 

in connection with an Offering, they 

must assess whether a piece of 

information at the time of issuance is of 

a character that there is a substantial 

likelihood that, under all the 

circumstances, ‘‘the omitted fact would 

have been viewed by the reasonable 

investor as having significantly altered 

the ‘total mix’ of information 

available.’’ 75 Compliance with these 

requirements will be evaluated using 

the same standard. 

The Commission believes that the 

determination by an issuer or obligated 

person of whether to submit an event 

notice under paragraph (b)(5)(i)(C)(15) 

requires the same analysis that is 

regularly made by such parties when 

preparing offering documents. 

Accordingly, under the Rule, as 

amended, an issuer or obligated person 

will need to consider whether a 

financial obligation or the terms of a 

financial obligation, if they affect 

security holders, would be important to 

a reasonable investor when making an 

investment decision.76 As noted 

above,77 an issuer or obligated person 

may consider a number of factors when 

assessing the materiality of a particular 

financial obligation. 

Due to the flexible facts-andcircumstances approach to assessing 

materiality, the Commission 

acknowledges, as raised by commenters, 

that in the course of providing 

disclosures to the market about their 

financial obligations, some issuers and 

obligated persons may have differing 

opinions with respect to whether a 

piece of information would be 

considered important to a reasonable 

investor when making an investment 

decision. Regardless of these potential 

differences of opinion, the Commission 

does not believe it is necessary to 

provide additional guidance at this 

time. Issuers and obligated persons have 

the benefit of experience with making 

materiality determinations under the 

federal securities laws generally and the 

Rule specifically. Furthermore, even 

absent uniformity, the amendments, as 

discussed throughout this Release, will 

result in increased timely disclosure in 

the municipal securities market of 

important information regarding the 

financial obligations of issuers and 

obligated persons. Additionally, the 

changes made to the proposed 

definition of financial obligation should 

also alleviate commenter concerns about 

assessing the materiality of each 

financial obligation incurred by issuers 

and obligated persons. Forms and 

guidance that the industry may develop 

in this area could also assist issuers and 

obligated persons in evaluating which 

financial obligations should be 

disclosed pursuant to their continuing 

disclosure agreements. 

c. Burden of Materiality Determinations 

Many commenters stated that 

materiality determinations would pose 


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78See, e.g., Portland Letter; Denver Letter; ACI 

Letter. 

79See, e.g., Portland Letter; ACI Letter; Kutak 

Rock Letter; San Jose Letter. 

80See, e.g., Denver Letter; San Jose Letter; White 

Plains Letter; see also TASBO Letter (stating that 

‘‘the analysis of agreements and instruments 

captured under the definition of ‘‘financial 

obligations’’ under the proposed regulations will 

require subject matter experts to review the 

financial obligations—which they otherwise would 

not be engaged to review—in detail and make 

nuanced determinations as to materiality’’). 

81See, e.g., ACI Letter; AAPA Letter; see also 

PFM Letter (stating that absent clarity from the 

Commission on materiality, ‘‘issuers and investors 

will likely be harmed by the potential of disclosing 

information that could prove to be irrelevant to the 

credit of a particular municipal securities 

transaction’’). 

82See ABA Letter; East Bay Letter. 

83See, e.g., SIFMA AMG Letter (asking for 

clarification that a series of related financial 

transactions must be aggregated for the purpose of 

assessing materiality); GFOA TX Letter (stating the 

difficulties in disclosing material derivative 

instruments as the amount of the financial 

obligation can fluctuate with the market). 

84For a discussion of the term ‘‘incurred,’’ see 

infra Section III.A.1.ii. 

85Relevant factors that could indicate that a series 

of financial obligations incurred close in time are 

related include the following: (i) Share an 

authorizing document, (ii) have the same purpose, 

or (iii) have the same source of security. 86See 26 CFR 1.150–1(c); see Internal Revenue 

Service, Lesson 2: Advanced Topics in Arbitrage, 

available at https://www.irs.gov/pub/irs-tege/ 

02%20Phase%20II%20Lesson%2002%20-%20%20

Advanced%20Topics%20in%20Arbitrage.pdf (IRS 

educational materials provided to the public 

containing the conditions under which separate 

bond series are considered to be a single issue for 

arbitrage purposes, stating: ‘‘[IRC] Regulations 

§ 1.150–1(c)(1) provides that the term issue means 

two or more bonds that meet all of the following 

requirements: (i) Sold at substantially the same time 

(less than 15 days apart), (ii) sold pursuant to the 

same plan of financing, and (iii) reasonably 

expected to be paid from the same source of funds. 

For example, bonds sold to finance a single facility 

or related facilities are considered part of the same 

financing plan, but short-term bonds to finance 

working capital and long-term bonds to finance 

capital projects would not be considered part of the 

same plan. Certificates of participation in a lease 

and general obligation bonds secured by tax 

revenues would not be considered part of the same 

plan’’). 

87U.S. Department of Treasury regulations 

similarly warn against entering ‘‘into a transaction 

or series of transactions with respect to one or more 

issues with a principal purpose of transferring to 

nongovernmental persons (other than as members 

of the general public) significant benefits of taxexempt financing in a manner that is inconsistent 

with the purposes of section 141 [of the Internal 

Revenue Code].’’ See 26 CFR 1.141–14. 

challenges given the broad scope of the 

proposed definition of ‘‘financial 

obligation.’’ 78 Commenters argued that 

ten business days was not enough time 

to disclose material financial 

obligations.79 Some commenters stated 

that without Commission guidance, 

issuers or obligated persons would 

likely utilize outside counsel in order to 

make materiality determinations.80

Commenters stated that to avoid the 

time and expense of reviewing all of 

their financial obligations for 

materiality, and to avoid being second 

guessed by dealers in the future, they 

might disclose all financial obligations, 

flooding EMMA with potentially 

immaterial information of limited value 

to investors.81 Commenters also stated 

that they might seek to avoid the cost, 

effort, and potential liability associated 

with summarizing key terms of a 

transaction by posting entire financing 

agreements to EMMA.82

The Commission acknowledges that 

there will be costs incurred by issuers, 

obligated persons, and dealers when 

evaluating whether a financial 

obligation is material. However, as 

discussed in Section III.A.2 herein, the 

Commission is adopting a narrower 

definition of ‘‘financial obligation’’ than 

proposed, which will reduce the burden 

on issuers, obligated persons, and 

dealers. The adopted definition of 

financial obligation significantly limits 

the types of transactions that issuers and 

obligated persons will need to identify 

and assess for materiality, and focuses 

the amendments on debt, debt-like, and 

debt-related obligations of issuers and 

obligated persons. The narrowed 

definition of financial obligation, which 

only covers those obligations that are 

debt, debt-like, or debt-related, will 

result in fewer financial obligations that 

issuers and obligated persons will need 

to review for materiality, and should 

help alleviate commenter concerns 

about disclosing a material financial 

obligation within ten business days. In 

addition, though the period for 

reporting the incurrence of a material 

financial obligation does not begin until 

the date on which the financial 

obligation is incurred, the Commission 

understands that most material terms of 

a financial obligation are typically 

known to the issuer or obligated person 

prior to the date of its incurrence. 

Accordingly, issuers and obligated 

persons could begin the process of 

assessing whether a particular 

obligation should be disclosed pursuant 

to paragraph (b)(5)(i)(C)(15) in advance 

of its incurrence. As a result, the 

Commission believes ten business days 

is a reasonable period of time for 

compliance. Moreover, the ten business 

day requirement is already in the Rule 

and introducing an alternate timeline 

for the amendments could cause 

confusion, add complexity to the Rule, 

and increase the compliance burden for 

issuers, obligated persons, and dealers. 

With respect to commenter concerns 

about the burdens of summarizing the 

terms of material financial obligations, 

issuers and obligated persons could 

consider amending existing disclosure 

policies and procedures to address the 

process for evaluating the disclosure of 

material financial obligations. Amended 

policies and procedures, in addition to 

industry practices that may develop, 

could help issuers and obligated 

persons streamline the process of 

disclosing material financial obligations 

to EMMA, and ease time and cost 

burdens associated with identifying, 

assessing, and disclosing material 

financial obligations. 

d. Materiality and a Series of Related 

Financial Obligations 

Commenters asked whether a series of 

related financial obligations could be 

considered material due to their 

aggregate par amount, though none of 

the constituent obligations would be 

material on its own.83 Materiality is 

determined upon the incurrence of each 

distinct financial obligation, taking into 

account all relevant facts and 

circumstances.84 For example, if the 

issuer or obligated person enters into a 

series of transactions that, though 

related,85 are incurred at different points 

in time for legitimate business 

purposes—e.g., to satisfy the necessary 

conditions for the debt to be considered 

tax-exempt under provisions of the 

Internal Revenue Code of 1986, as 

amended (‘‘IRC’’)—the issuer or 

obligated person would need to assess 

the materiality of each transaction at the 

time it was incurred. 

When an issuer or obligated person is 

considering whether a series of related 

transactions is a single incurrence or has 

been incurred at different points in time 

for legitimate business purposes for 

determining materiality under the 

amendments, such issuer or obligated 

person must consider all relevant facts 

and circumstances. An example of the 

type of facts and circumstances that 

could indicate that a series of related 

transactions were incurred separately 

for legitimate business purposes would 

be if the series of financial obligations 

satisfy the requirements set forth in the 

U.S. Department of Treasury regulations 

and guidance governing what 

constitutes a single issue of municipal 

securities under the IRC.86 The 

Commission cautions issuers and 

obligated persons against entering into a 

series of transactions with a purpose of 

evading potential disclosure obligations 

established by paragraphs 

(b)(5)(i)(C)(15) and (16) of the Rule in a 

manner that is inconsistent with the 

purposes of the Rule.87

ii. Incurrence of a Financial Obligation 

Some commenters recommended that 

the Commission provide guidance on 


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88See SIFMA AMG Letter; see also NABL Letter. 

89This is consistent with similar concepts in 

Exchange Act Form 8–K. Specifically, the 

instructions for Item 2.03 of Form 8–K provide that 

‘‘[a] registrant has no obligation to disclose 

information under this Item 2.03 until the registrant 

enters into an agreement enforceable against the 

registrant, whether or not subject to conditions, 

under which the direct financial obligation will 

arise or be created or issued.’’ See 17 CFR 249.308. 

90See NABL, Direct Purchases of State or Local 

Obligations by Commercial Banks and Other 

Financial Institutions (July 2017), available at 

https://www.nabl.org/DesktopModules/Bring2mind/ 

DMX/Download.aspx?portalid=0&EntryId=1118 

(‘‘Certain direct purchase financings are structured 

as ‘draw-down bonds.’ Under this structure, the 

purchaser from time to time makes advances [to the 

issuer or obligated person], up to a maximum 

aggregate principal amount of the bonds, over a 

limited period of time, rather than advancing all 

proceeds of the bonds at the initial closing, as in 

a typical publicly-offered borrowing’’). 

91The Commission likewise believes that a 

financial obligation is incurred with regard to a 

derivative instrument when the derivative 

instrument is enforceable against an issuer or 

obligated person. See infra note 155. 

92See Kutak Rock Letter (stating that unlike 

corporate issuers, there is no checklist or guidepost 

to assist issuers and obligated persons determine 

what must be included in disclosure); see also AZ 

Universities Letter (stating that there are no 

standard EMMA disclosure forms provided by the 

Commission or the MSRB and issuers will be left 

on their own to determine the proper format and 

scope of event notices posted on EMMA). 

93See Vanguard Letter (recommending that the 

Commission require the disclosure of financial 

covenant reports, similar to what is provided to 

banks under loan agreements); BDA Letter (stating 

that the amendments should require issuers and 

obligated persons to include in any filing a 

description to investors describing what is material 

about the event); NFMA Letter (encouraging the 

Commission to require in the rule text that either 

all relevant agreements or a detailed summary of 

terms of the financial transaction be posted along 

with the notice of incurrence to EMMA); and IAC 

Recommendation, supra note 6 (suggesting that the 

Commission clarify that disclosures made under the 

amendments should include information about the 

incurrence and amount of indebtedness as well as 

information about financial covenants). 

94See DAC Letter. 

95See ABA Letter (urging the Commission to 

provide a mechanism for redacting confidential and 

personally identifiable information and stating that 

disclosure of pricing terms may set unrealistic 

expectations for other issuers and may have an anticompetitive effect by setting a pricing benchmark 

for certain transactions); see also LPPC Letter 

(stating that the disclosure of covenants, events of 

default, remedies, priority rights, or other similar 

terms could adversely impact an issuer’s ability to 

effectively negotiate or enter into future agreements 

and could be used by the issuer’s counterparties to 

strengthen their negotiating positions). 

96 Industry organizations have developed 

recommendations for voluntary disclosure of direct 

placements. Such groups and others could, for 

example, develop a form submission document and 

guidance for market participants. See, e.g., 

Considerations Regarding Voluntary Secondary 

Market Disclosure About Bank Loans, supra note 

46. 

97See Proposing Release, supra note 3, 82 FR at 

13937. 

98 Id. 

99 Id. 

100The Commission further notes that 

information about financial obligations, including 

transaction documents, would likely be available 

under state sunshine laws. 

101See Proposing Release, supra note 3, 82 FR at 

13957. 

102See id. 

103See, e.g., AAPA Letter; ABA Letter, Form 

Letter. 

the meaning of ‘‘incurrence.’’ 88 The 

Commission believes that a financial 

obligation generally should be 

considered to be incurred when it is 

enforceable against an issuer or 

obligated person.89 Disclosure of a 

material financial obligation at such 

time would provide investors with 

important information about the current 

financial condition and potential 

liabilities of the issuer or obligated 

person, including potential impacts to 

the issuer’s or obligated person’s 

liquidity and overall creditworthiness. 

For example, if an issuer or obligated 

person enters into an agreement 

providing for a material drawdown 

bond,90 or such agreement contains 

material terms that affect security 

holders, the issuer or obligated person 

generally should provide notice at the 

time the terms of the obligation are 

legally enforceable against the issuer or 

obligated person, instead of each time a 

draw is made.91

iii. Form of Event Notice 

Commenters observed that the 

Commission did not prescribe the form 

of a notice made pursuant to new 

paragraph (b)(5)(i)(C)(15) 92 and some 

recommended that the Commission 

dictate the form and content of 

disclosures made under the new 

provision.93 One commenter, though, 

stated that the Commission should 

avoid being too prescriptive with 

respect to the form and content of a 

material event notice submitted under 

paragraph (b)(5)(i)(C)(15) of the Rule.94

Other commenters expressed concern 

about what they described as the 

potential negative impact of the public 

disclosure of financing documents on 

competition among lenders, as well as 

the possibility for the disclosure of 

confidential personally identifiable 

information.95

The Commission acknowledges 

commenter concerns regarding what 

form the notice should take. However, 

given the diversity of issuers and 

obligated persons, and in light of the 

structure of the Rule, the Commission 

believes at this time that market 

participants are best suited to consider 

developing best practices in this area to 

assist issuers and obligated persons and 

their advisors in carrying out the 

objective of the amendments, which is 

to facilitate the timely delivery of 

important information to investors and 

other market participants about issuers’ 

and obligated persons’ financial 

obligations.96 As described in the 

Proposing Release,97 a material event 

notice for the events described in 

paragraph (b)(5)(i)(C)(15) 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.98 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.99

The Commission believes that, 

depending on the facts and 

circumstances, it could be consistent 

with the requirements of the Rule for 

issuers and obligated persons to either 

submit a description of the material 

terms of the financial obligation, or 

alternatively, or in addition, submit 

related materials, such as transaction 

documents, term sheets prepared in 

connection with the financial 

obligation, or continuing covenant 

agreements or financial covenant reports 

to EMMA. Any such related materials, 

if submitted as an alternative to a 

description of the material terms of the 

financial obligation, should include the 

material terms of the financial 

obligation. The amendments do not 

require the provision of confidential 

information such as contact 

information, account numbers, or other 

personally identifiable information to 

EMMA. Provided the necessary 

disclosures are made, the formatting of 

such disclosures tailored to avoid 

disclosure of such confidential 

information would be consistent with 

Rule 15c2–12.100

2. ‘‘Financial Obligation’’ 

In the Proposing Release, the 

Commission defined the term ‘‘financial 

obligation’’ to mean a debt obligation, 

lease, guarantee, derivative instrument, 

or monetary obligation resulting from a 

judicial, administrative, or arbitration 

proceeding,101 but not including 

municipal securities as to which a final 

official statement has been provided to 

the MSRB consistent with Rule 15c2– 

12.102

Many commenters criticized the 

proposed definition of ‘‘financial 

obligation,’’ characterizing it as 

overbroad and vague.103 In particular, 

commenters argued that the proposed 

definition would elicit disclosures of 


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104See GFOA Letter; Brookfield Letter; GFOA TX 

Letter; Kissimmee Letter. 

105See BDA Letter; Portland Letter (pertaining to 

leases); GFOA Letter (pertaining to derivative 

instruments). See also IAC Recommendation, supra 

note 6 (stating, ‘‘One term that could be better 

defined is ‘financial obligation’, which should pick 

up indebtedness and similar obligations but should 

not be so broad as to pick up items such as ordinary 

course leases’’). 

106With respect to issuers and obligated persons, 

see generally GFOA Letter; NAHEFFA Letter; 

NCHSA Letter; and CA Finance Letter; and with 

respect to dealers, see also SIFMA Letter. 

107See AAPA Letter (stating that ‘‘many leases 

and legal or administrative proceedings are part of 

normal business operations’’); ACI Letter (‘‘the term 

‘financial obligation’ is very broad and would 

include many business and legal obligations that 

are not direct placements of municipal securities or 

bank loans and that are not generally considered to 

be indebtedness . . . US airports are party to well 

over 50,000 leases’’); DAC Letter (‘‘the scope of 

financial obligations [covers] obligations well 

beyond bank loans and direct sales . . . potentially 

requir[ing] issuers and obligated persons to identify, 

summarize, disclose, track and analyze, within tight 

timeframes, the incurrence and performance of a far 

broader range of activities’’); GFOA Letter 

(‘‘information suggested in the proposed 

requirements (e.g., leases, derivatives) includes 

transactions that may occur multiple times a year 

through the normal operating activities of state and 

local governments and are not on par with debt 

obligations’’); NAHEFFA Letter (‘‘the broad 

definition of financial obligation could pick up 

financial aid contracts, health insurance contracts, 

food service contracts, research agreements, 

management contracts, sports venue contracts, 

equipment and vehicle leases, among other 

contracts’’); NAMA Letter (‘‘the definition of 

‘financial obligations’ is too broad and will require 

the consideration of the materiality of many types 

of financings and financial obligations that do not 

affect a government or entity’s ability to pay debt 

. . . [many] are part of the day-to-day ‘operations’ 

of governments’’); Denver Letter (‘‘the City is 

currently a party to thousands of contracts . . . 

[and] is involved in hundreds of administrative and 

arbitration proceedings every year’’); Portland Letter 

(‘‘we agree that the incurrence of a bank loan or 

other debt obligation is something that should be 

disclosed to the market, [but] we are concerned that 

the definition . . . is easily interpreted to include 

varying types of leases, such as those for the 

copiers, lawn mowers, and other minor equipment 

acquisitions’’). 108See, e.g., THPRD Letter (‘‘the scope [of] 

‘financial obligations’ covered under the Proposed 

Amendment is overly broad and would be costly for 

our organization to monitor’’); Port Portland Letter 

(‘‘[t]o comply with the proposed amendments, 

issuers would have to create a centralized 

mechanism to monitor the creation and 

modification of a wide variety of financial 

instruments . . . [d]oing so would be unnecessarily 

burdensome and expensive’’). 

109See, e.g., AZ Universities Letter (stating that ‘‘a 

significant investment of time and money by the 

Universities will be necessary to monitor the need 

for filing an event notice under the Proposed 

Amendments . . . and the widely publicized lack 

of funding for public universities does not permit 

the necessary funding to restructure the 

Universities’ processes or hire additional staff and 

engage outside legal counsel at significant expense 

solely to comply with the Proposed Amendments’’); 

see also SIFMA Letter (arguing that it would be 

‘‘virtually impossible’’ for registered representatives 

to comply with their obligations under MSRB Rule 

G–47). 

110See BDA Letter (‘‘BDA believes that the 

primary investor desire for information giving rise 

to the Proposed Amendments is the way that bank 

debt competes with publicly traded bonds’’); see 

also NAMA Letter; Portland Letter; Form Letter. 111See, e.g., ICI Letter; BM Letter; NFMA Letter; 

SIFMA AMG Letter. For example, one commenter 

suggested that the Commission add ‘‘crowdfunding 

campaigns or public projects that pledge future 

revenues to backers of the projects’’ to the 

definition of ‘‘financial obligation.’’ See BM Letter. 

In the Commission’s view, the contractual 

arrangement between the issuer or obligated person 

and its backers memorializing the pledge of future 

revenues derived from the project could be a ‘‘debt 

obligation’’ for purposes of the Rule depending on 

the facts and circumstances. Accordingly, the 

Commission does not believe it is necessary to 

separately include crowdfunding-related 

obligations in the adopted definition of financial 

obligation. 

112See BM Letter; ICI Letter; Doty Letter. 113See ICI Letter. 

114Cf. BDA Letter (observing that the ‘‘primary 

investor desire for information giving rise to the 

Proposed Amendments is the way that bank debt 

competes with publicly traded bonds, and this 

competition is nothing new in the municipal 

securities market’’). 

For a description of commenter arguments that 

the term ‘‘financial obligation’’ should distinguish 

between debt and ordinary financial or operating 

matters, see supra notes 105 and 107. 

115Several commenters supported this type of 

approach to the disclosure of ‘‘financial 

obligations.’’ See, e.g., LPPC Letter (stating ‘‘LPPC 

believes that the Proposed Amendments should be 

narrowly tailored to require municipal issuers only 

to provide notice of the incurrence of bank loans, 

private placements or direct purchases of debt 

obligations, and derivative instruments that are 

entered into in connection with, and hedge, debt 

obligations of an issuer’’). See also IAC 

Recommendation, supra note 6. 

limited value to investors at a 

tremendous cost.104 With respect to the 

value of disclosure, commenters argued 

that the breadth of the proposed 

definition would produce disclosures of 

limited value because it did not 

distinguish between debt and ordinary 

financial and operating matters of an 

issuer or obligated person.105

Commenters also stated that the broad 

scope of the term ‘‘financial obligation,’’ 

as proposed, would impose substantial 

burdens on issuers, obligated persons, 

and other market participants.106 For 

example, commenters argued that the 

breadth of the proposed definition of the 

term ‘‘financial obligation’’ would 

require a significant amount of issuer or 

obligated person time and financial and 

personnel resources to monitor and 

assess materiality of its financial 

obligations, which for some issuers or 

obligated persons could cover 

thousands of obligations incurred in the 

normal course of business.107

Commenters argued that the proposed 

definition of the term ‘‘financial 

obligation,’’ if adopted, would make 

compliance with the Rule unreasonably 

costly for some,108 and virtually 

impossible for others.109 Ultimately, 

however, despite their objections to the 

proposed definition of ‘‘financial 

obligation,’’ many of these commenters 

suggested that the term should at least 

cover debt and debt-like obligations that 

could compete with the rights of 

existing security holders.110

Not all commenters, however, were 

critical of the proposed definition of the 

term ‘‘financial obligation.’’ 111 Several 

commenters stated that the proposed 

definition of the term would provide 

needed transparency to the municipal 

securities market.112 For example, one 

commenter stated that without timely 

disclosure of this information, investors 

and other market participants may not 

be aware that an issuer or obligated 

person has incurred a material financial 

obligation or agreed to certain terms that 

affect security holders.113

The purpose of the amendments is to 

facilitate investors’ and other market 

participants’ access to timely disclosure 

of important information related to an 

issuer’s or obligated person’s material 

financial obligations that could impact 

an issuer’s or obligated person’s 

liquidity, overall creditworthiness, or an 

existing security holder’s rights (e.g., a 

bank loan with a senior position in the 

debt payment priority structure). With 

these principles and commenter 

concerns in mind, the Commission is 

narrowing the definition of ‘‘financial 

obligation.’’ 

As adopted, ‘‘financial obligation’’ 

means a debt obligation; derivative 

instrument entered into in connection 

with, or pledged as security or a source 

of payment for, an existing or planned 

debt obligation; or a guarantee of either 

a debt obligation or a derivative 

instrument entered into in connection 

with, or pledged as security or a source 

of payment for, an existing or planned 

debt obligation. 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 below, the definition of 

the term ‘‘financial obligation’’ does not 

include ordinary financial and operating 

liabilities incurred in the normal course 

of an issuer’s or obligated person’s 

business, only an issuer’s or obligated 

person’s debt, debt-like, and debtrelated obligations.114 The Commission 

believes that a definition of the term 

‘‘financial obligation’’ that distinguishes 

debt, debt-like, and debt-related 

obligations from obligations incurred in 

an issuer’s or obligated person’s normal 

course of operations appropriately 

focuses the amendments on the types of 

obligations that could impact an issuer’s 

or obligated person’s liquidity, overall 

creditworthiness, or an existing security 

holder’s rights.115 Moreover, in the 

Commission’s view, the adopted 

definition of the term ‘‘financial 


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116See generally, Proposing Release, supra note 3, 

82 FR at 13936. For the Commission’s analysis of 

the costs and benefits of the amendments, see infra 

Section V.C. 117Compare ICI Letter (arguing that ‘‘timely 

disclosure’’ of financial obligations is necessary 

because ‘‘such information may significantly impact 

the fundamental value that investors place on a 

municipal bond and is therefore necessary to 

accurately assess, monitor, and compare credit 

quality of securities and issuers’’) with GFOA Letter 

(arguing that the ‘‘proposed additional ‘financial 

obligations’ covered by Rule 15c2–12 would be 

information that is both superfluous to investors 

and costly for issuers to present outside of financial 

statements’’). See generally, infra Section V for the 

Commission’s economic analysis of the 

amendments. 

118See Proposing Release, supra note 3, 82 FR at 

13937. 

119 Id. 

120See, e.g., Portland Letter (stating ‘‘we agree 

that the incurrence of a bank loan or other debt 

obligation is something that should be disclosed to 

the market’’); SIFMA Letter (stating ‘‘[w]e support 

event notice disclosure of incurrence of debt 

through a direct purchase, private placement, or 

bank loan[s]’’); NAST Letter (stating ‘‘we believe 

that enhanced and uniform disclosure related to 

bank loan debt would be beneficial for issuers and 

investors’’); NAMA Letter (stating ‘‘the definition of 

‘financial obligation’ should focus only o[n] specific 

behavior for which the SEC has expressed concern, 

namely, bank loans and private placements’’). See 

also SIFMA AMG Letter (recommending that debt 

obligation be replaced with the definition of ‘‘direct 

financial obligation’’ in Item 2.03(c) (‘‘Creation of a 

Direct Financial Obligation or an Obligation under 

an Off-Balance Sheet Arrangement of a Registrant’’) 

of Form 8–K). 

121See, e.g., NABL Letter; GFOA Letter. Despite 

the efforts of the MSRB and other market 

participants, voluntary disclosures remain 

relatively infrequent; moreover, under a voluntary 

disclosure regime, investors would not benefit from 

the uniform requirements of the Rule. Accordingly, 

and as discussed in Section III.A. and Section V.D. 

infra, and in the Proposing Release, the Commission 

does not believe that voluntary disclosure of debt 

obligations would fully achieve the Commission’s 

objectives. 

122See Proposing Release, supra note 3, 82 FR at 

13937–38. 

123See NABL Letter (arguing that the Commission 

has not provided adequate evidence of investor 

harm related to undisclosed debt obligations). 

124See Lynn Hume, Spike in Issuer Bank Loan 

Rates Feared as Drop in Corporate Tax Rate Looms, 

The Bond Buyer (Dec. 8, 2017), available at https:// 

www.bondbuyer.com/news/issuers-bank-loan-ratemay-spike-with-drop-in-corporate-tax-rate. 

125See Tax Cuts and Jobs Act of 2017, supra note 

40. 

126These terms operate such that a decline in the 

federal corporate income tax rate will increase the 

overall cost of the related direct placement to the 

issuer or obligated person, usually by either: (1) 

Increasing the interest rate paid by the issuer or 

obligated person to the lender, or (2) requiring the 

issuer or obligated person to make periodic cash 

payments to the lender in addition to any required 

interest payments. The purpose of these terms is to 

allow banks to maintain their after-tax yield 

regardless of the corporate income tax rate. The 

Commission understands that many of these 

provisions are automatically triggered upon a 

reduction of the federal corporate income tax rate. 

See Richard A. Newman et al., How to Calculate the 

Gross-Up, The Bond Buyer (Jan. 18, 2018), available 

at https://www.bondbuyer.com/opinion/how-banksmay-calculate-the-gross-up-on-direct-placementbonds (stating that interest rates paid by issuers and 

obligated persons could increase by as much as 102 

basis points as a result of such terms). 

127See supra Section III.A.1.iii (discussion of 

information that should be included in an event 

notice). 

128See Proposing Release, supra note 3, 82 FR at 

13937–38. 

129 Id. at 13937. 

130See Proposing Release, supra note 3, 82 FR at 

13937–38. 

131For a description of GASB’s decision to 

discontinue its use of the ‘‘capital lease’’ and 

‘‘operating lease’’ terminology, see Governmental 

Accounting Standards Board, Statement No. 87— 

Leases (June 2017), available at http://

www.gasb.org/jsp/GASB/Document_C/ 

DocumentPage?cid=1176169170145&accepted

Disclaimer=true. 

obligation’’ will greatly reduce the 

burden of complying with the 

amendments, while still capturing 

important information about the current 

financial condition of the issuer or 

obligated person.116 Accordingly, the 

Commission believes that this definition 

strikes the appropriate balance between 

benefits to investors and other market 

participants and costs of compliance 

with the Rule.117

i. Debt Obligation 

As proposed, the term ‘‘debt 

obligation’’ was intended to capture the 

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.118 As 

examples, the Commission stated that a 

direct purchase of municipal securities 

by an investor and a direct loan by a 

bank would be debt obligations of an 

issuer or obligated person.119

A number of commenters supported 

the Commission’s proposal to require 

disclosure of debt obligations.120 Even 

commenters that opposed the 

Commission’s proposed requirement to 

disclose debt obligations under the Rule 

advocated for the Commission to 

encourage voluntary disclosure of such 

obligations.121

The Commission continues to believe 

that the definition of ‘‘financial 

obligation’’ should include debt 

obligations because such obligations 

and their terms could adversely affect 

the rights of existing security holders, 

including the seniority status of such 

security holders, or impact the 

creditworthiness of an issuer or 

obligated person.122 Moreover, the 

Commission believes that undisclosed 

debt obligations and their terms could 

adversely affect security holders. 

Contrary to some commenter 

sentiment,123 recent events in the direct 

placement market support this belief.124

Specifically, recent changes to federal 

tax laws 125 have reportedly triggered 

provisions commonly found in direct 

placements relating to the rate at which 

a direct placement will bear interest.126

In the Commission’s view, these taxrelated provisions are illustrative of the 

types of terms to which issuers and 

obligated persons agree when incurring 

financial obligations that could impair 

an issuer’s or obligated person’s 

liquidity or creditworthiness and, thus, 

adversely affect the interests of existing 

security holders. Without paragraph 

(b)(5)(i)(C)(15), an issuer or obligated 

person would not, under the terms of a 

continuing disclosure agreement, be 

required to assess the materiality of and 

disclose, if material, either its agreement 

to such terms that affect security holders 

or the incurrence of the underlying debt 

obligation. For these reasons, the 

Commission believes that the timely 

disclosure of both the incurrence of a 

debt obligation, if material, and the 

obligation’s material terms that affect 

existing security holders, such as those 

related to the rate at which a debt 

obligation will bear interest,127 would 

provide important information about the 

issuer’s or obligated person’s current 

financial condition. 

In the Proposing Release, the 

Commission proposed ‘‘lease’’ as a 

separate element of the definition of 

‘‘financial obligation.’’ 128 Specifically, 

the Commission stated that the term 

‘‘lease’’ was intended to capture a lease 

that is entered into by an issuer or 

obligated person, including an operating 

or capital lease.129 The Commission 

stated, for example, that if an issuer or 

obligated person entered into a leasepurchase agreement to acquire an office 

building or an operating lease to lease 

an office building for a stated period of 

time, both would potentially be subject 

to disclosure under the Proposing 

Release.130 However, in light of the 

GASB decision to discontinue use of the 

‘‘capital lease’’ and ‘‘operating lease’’ 

labels in government accounting, the 

Commission believes it is appropriate to 

also discontinue its use of such labels in 

connection with the amendments.131

Thus, although the Commission used 

the ‘‘capital lease’’ and ‘‘operating 

lease’’ terminology in the Proposing 

Release, it is discontinuing the use of 

such terms in connection with the 

definition of the term ‘‘financial 

obligation.’’ Instead, as discussed below, 

the Commission is providing guidance 

that the term ‘‘debt obligation’’ generally 

should be considered to include lease 

arrangements entered into by issuers 

and obligated persons that operate as 

vehicles to borrow money. 

Commenters criticized the inclusion 

of leases, without limitation, in the 

definition of ‘‘financial obligation’’ as 


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132See, e.g., Portland Letter; San Jose Letter; BDA 

Letter; East Bay Letter. See also IAC 

Recommendation, supra note 6. 133See, e.g., GFOA Letter (suggesting that 

disclosure of operating leases would be 

‘‘superfluous to investors’’); East Bay Letter (stating 

that it ‘‘does not believe the minutiae of day to day 

operations would be helpful information for bond 

holders’’). See, e.g., Port Portland Letter (stating 

‘‘the sheer number of leases to which the Port is a 

party could create a volume of postings that would 

overwhelm participants in the municipal market’’); 

ACI Letter. 

134See, e.g., UHC Letter (‘‘The broad definition of 

leases implicates a variety of lease arrangements 

executed by UHC in the ordinary course of 

business, including office leases, copier leases, etc. 

. . . [i]dentifying and evaluating the materiality of 

every one of these arrangements . . . would be 

burdensome and costly’’). 

135See White Plains Letter; SIFMA AMG Letter. 

136See BDA Letter. 

137See id.; White Plains Letter. 

138See BDA Letter. 

139See Proposing Release, supra note 3, 82 FR at 

13937. 

140See generally Association for Governmental 

Lease and Finance, An Introduction to Municipal 

Lease Financing: Answers to Frequently Asked 

Questions (July 1, 2000) (‘‘Municipal Lease 

Financing’’), available at https://

aglf.memberclicks.net/assets/docs/municipal_

lease_financing.pdf; see also BDA Letter (arguing 

that ‘‘the definition of financial obligation should 

be narrowed to include only obligations for 

borrowed money, leases that operate as vehicles to 

borrow money, and derivatives that are executed for 

the purpose of hedging these types of 

transactions’’). 

141For example, the types of leases that could be 

debt obligations include, but are not limited to, 

lease-revenue transactions and certificates of 

participation transactions. Typically, in a leaserevenue transaction, an issuer or obligated person 

borrows money to finance an equipment or real 

property acquisition or improvement and a lease 

secures the issuer’s or obligated person’s obligation 

to make principal and interest payments to the 

lender. See Municipal Lease Financing, supra note 

140; see also CA Finance Letter (stating that the 

majority of its municipal securities transactions are 

structured as lease-revenue transactions). In a 

certificates of participation transaction, the issuer or 

obligated person sells certificates of participation 

and the proceeds of the certificates are used, 

typically, to finance an equipment or real property 

acquisition or improvement by the issuer or 

obligated person. The issuer or obligated person, 

typically, will, as part of the transaction, execute a 

lease with a trustee, which serves as the mechanism 

through which the trustee receives payments from 

the issuer or obligated person. The trustee then 

proportionately distributes the lease payments it 

receives from the issuer or obligated person to 

certificate holders to pay principal and interest 

when and as due. See Municipal Lease Financing, 

supra note 140. 

Moreover, in the context of Rule 15c2–12, the 

Commission is not limiting the term ‘‘debt 

obligation’’ to debt as it may be defined for state law 

purposes, but instead is applying it more broadly 

to circumstances under which an issuer or obligated 

person has borrowed money. Debt, as defined for 

state law purposes, ‘‘ordinarily means general 

obligation debt. Typically, the limitation is 

interpreted to exclude revenue bonds, special fund 

obligations, and other debt which is not backed by 

the full faith and credit of the [issuer] coupled by 

the unlimited power to levy an ad valorem tax to 

pay such debt.’’ See Nat’l Ass’n of Bond Lawyers, 

Fundamentals of Municipal Bond Law 25 (2018). 

The Commission believes that, for the purposes of 

Rule 15c2–12, a narrow interpretation of ‘‘debt’’ 

would be under-inclusive because issuers and 

obligated persons can, and often do, borrow money 

through a variety of transactions, many of which 

would not qualify as ‘‘debt’’ under relevant state 

laws. See id. (describing forms of debt that would 

not be ‘‘debt’’ as ordinarily defined by state law). 

See also Steven Maguire and Jeffrey M. Stupak, 

Cong. Research Serv., RL30638, Tax-Exempt Bonds: 

A Description of State and Local Government Debt 

(2015), available at https://www.hsdl.org/ 

?view&did=761823 (stating that ‘‘an advantage of 

[lease rental revenue bonds and certificates] is that 

many states’ constitutional and statutory definitions 

do not consider this type of financing to be 

debt[.]’’). 

For a discussion of when a debt obligation is 

incurred for purposes of the Rule, see supra Section 

III.A.1.ii. 

overbroad and argued that the 

Commission should exclude ‘‘operating 

leases’’ from the definition of ‘‘financial 

obligation.’’ 132 For example, 

commenters argued that information 

about an issuer’s or obligated person’s 

non-debt-related leases would not 

provide useful information to 

bondholders, while others stated that 

the inclusion of leases in the proposed 

definition of ‘‘financial obligation’’ 

would result in a ‘‘deluge of filings’’ 

without adding any significant value to 

the municipal securities market.133

Commenters also argued that requiring 

disclosure of all material leases would 

impose significant burdens on issuers 

and obligated persons.134 As an 

alternative to the Commission’s 

proposed treatment of leases, some 

commenters suggested that the 

disclosure of ‘‘capital leases’’ under the 

Rule would be appropriate because such 

obligations could compete with existing 

security holders.135 Specifically, one 

commenter recommended that, subject 

to the materiality qualifier, the 

Commission should only require 

disclosure of leases that operate as a 

vehicle to borrow money.136

The Commission agrees with 

commenters that, as proposed, the term 

‘‘lease’’ was too broad. Accordingly, the 

Commission believes that it is 

appropriate to limit the Rule’s coverage 

of leases to those that operate as 

vehicles to borrow money.137 The 

Commission believes that this is 

appropriate because a lease entered into 

as a vehicle to borrow money could 

represent competing debt of the issuer 

or obligated person. Such leases 

implicate the Commission’s concerns 

regarding access to timely disclosure 

regarding their incurrence or terms 

because they could, for example, 

contain acceleration provisions or more 

restrictive debt service covenants and, 

as a result, could affect existing security 

holder’s rights.138 Due to the 

Commission’s decision to narrow the 

scope of leases covered by the 

amendments to only include those 

entered into as a vehicle to borrow 

money, the Commission believes it is 

appropriate to remove the term ‘‘lease’’ 

from the definition of ‘‘financial 

obligation.’’ As discussed below, 

however, leases that operate as vehicles 

to borrow money generally would be 

debt obligations and thus would be 

defined as financial obligations under 

the Rule. Accordingly, the Commission 

believes that it is appropriate to (i) 

remove the term ‘‘lease’’ from the 

definition of the term ‘‘financial 

obligation;’’ and (ii) provide guidance 

that the term ‘‘debt obligation’’ generally 

should be considered to include lease 

arrangements entered into by issuers 

and obligated persons that operate as 

vehicles to borrow money. 

As discussed above, the proposed 

term ‘‘debt obligation’’ did not include 

leases because the Commission 

included the term ‘‘lease’’ as a separate 

item in the definition of ‘‘financial 

obligation.’’ 139 The Commission stated 

in the Proposing Release that the term 

‘‘debt obligation’’ is intended to capture 

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. The 

Commission believes that an obligation 

to repay borrowed money over time 

under the terms of a lease is 

functionally equivalent to a similar 

obligation that is incurred under the 

terms of an indenture, loan agreement, 

or similar contract.140 Accordingly, the 

Commission believes that a lease 

entered into as a vehicle to borrow 

money is more appropriately defined as 

a variety of ‘‘debt obligation’’ rather 

than a separate type of ‘‘financial 

obligation’’ as was proposed. The 

Commission believes that leases entered 

into as a vehicle to borrow money are 

commonly used by municipal securities 

issuers and obligated persons and, when 

used, commonly understood to be a tool 

for facilitating an issuer’s or obligated 

person’s ability to borrow money.141

Therefore, under the Rule, a lease that 

operates as a vehicle to borrow money 

generally should be treated like an 

obligation incurred under the terms of 

an indenture, loan agreement, or similar 

contract. 

In the Proposing Release, the 

Commission included the phrase ‘‘that 

will be repaid over time’’ when 

discussing the term ‘‘debt obligation.’’ 

As adopted, the Rule does not include 

the phrase ‘‘that will be repaid over 

time’’ to avoid any suggestion that there 

is a temporal consideration regarding 

the repayment period of a short-term or 

long-term debt obligation that could be 

used to distinguish an obligation that is 


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142A ‘‘similar contract’’ could, for example, 

include a line of credit obtained from a bank or 

other lender. 

143See BDA Letter (stating that leases entered into 

in the ordinary course of an issuer’s operations do 

not represent competing debt and should be 

excluded from the definition of financial 

obligation); see also TASBO Letter (stating that 

operating transactions ‘‘have little or no impact on 

a school district’s ability to pay debt service on 

public securities secured by a separate unlimited ad 

valorem debt service tax’’). 

A determination of whether a lease is a ‘‘debt 

obligation’’ should be based on the substance of the 

arrangement, not its label. Accordingly, any type of 

lease arrangement could, under the appropriate 

facts and circumstances, be a ‘‘debt obligation’’ and 

be subject to disclosure under the Rule, if it is 

entered into as a vehicle to borrow money and is 

material. 

144Several commenters stated that such 

disclosures would likely be available in an issuer’s 

or obligated person’s audited financial statements. 

See, e.g., Arlington SD Letter; Lebanon Letter. 

Examples of such leases that are typically not 

vehicles to borrow money that are common among 

issuers and obligated persons include, but are not 

limited to: Commercial office building leases (see 

San Jose Letter), airline and concessionaire leases 

at airport facilities (see ACI Letter and DFW Letter), 

and copy machine leases (see PFM Letter). Unless 

they are a debt obligation under the Rule, disclosure 

of these types of lease arrangements pursuant to the 

Rule will not be required. However, issuers and 

obligated persons may choose to voluntarily 

disclose such leases to EMMA. 

145See Proposing Release, supra note 3, 82 FR at 

13938. 

146 Id. 

147See, e.g., LPPC Letter. 

148See id., Kissimmee Letter; BDA Letter; and 

WPPI Letter (stating ‘‘in the normal course of 

operations, power utilities enter physical 

commodities derivatives and we would strongly 

oppose the inclusion of these lengthy contracts as 

a material event’’). 

149See LPPC Letter. 

150 In its comment letter, NABL argued that the 

Commission offered little evidence of the need for 

disclosure of derivative instruments. See NABL 

Letter. But see NFMA, Recommended Best Practices 

in Disclosure for Direct Purchase Bonds, Bank 

Loans, and Other Bank-Borrower Agreements (June 

2015), available at http://www.nfma.org/assets/ 

documents/RBP/rbp_bankloans_615.pdf (stating, 

‘‘In any credit analysis, liquidity is a key 

component. Bank loans—like a host of other 

financial products, including LOCs, liquidity 

facilities, and swaps—often include obligor 

payment provisions that change upon the 

occurrence of certain events. These ‘triggers’ can 

result in the acceleration of debt payments or in the 

requirement for the payment or posting of collateral 

for termination payments, either of which can 

potentially impair obligor liquidity’’). 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). See also 

Government Finance Officers Association, Potential 

Impacts of Tax Reform on Outstanding and Future 

Municipal Debt Issuance (Feb. 2018), available at 

http://www.gfoa.org/potential-impacts-tax-reformoutstanding-and-future-municipal-debt-issuance 

(highlighting derivatives as a tool to simulate taxexempt advance refundings, which were abolished 

under recent changes to the federal tax laws, and 

reminding issuers to ‘‘fully understand’’ the 

‘‘specific benefits, risks, and costs’’ of such a 

financial tool), and Brian Tumulty, What GFOA is 

Warning on Alternatives to Advance Refundings, 

The Bond Buyer (Feb. 15, 2018), available at 

https://www.bondbuyer.com/news/what-gfoa-iswarning-on-alternatives-to-advance-refundings?

brief=00000159-f607-d46a-ab79-fe27f2be0000. 151See e.g., Ianthe Jeanne Dugan, School District, 

Bank in Swap Clash, Wall St. J. (May 24, 2011), 

available at https://www.wsj.com/articles/SB1000

1424052702303654804576341772921133838 

(discussing potential swap termination fee liability 

of a school district to its swap counterparty); see 

also Statement of State College Area School District 

Board of School Directors (Jan. 14, 2013) (‘‘State 

College Area Swap Statement’’), available at http:// 

www.statecollege.com/news/local-news/statecollege-area-school-district-agrees-to-9-millionpayment-in-interest-rate-swap-agreement-withroyal-bank-of-canada,1222044/. 

a ‘‘debt obligation’’ from one that is not. 

In the Commission’s view, any shortterm or long-term debt obligation of an 

issuer or obligated person under the 

terms of an indenture, loan agreement, 

lease, or similar contract 142 is covered 

by the term ‘‘debt obligation’’ regardless 

of the length of the debt obligation’s 

repayment period. 

As adopted, the term ‘‘debt 

obligation’’ includes short-term and 

long-term debt obligations of an issuer 

or obligated person under the terms of 

an indenture, loan agreement, lease, or 

similar contract. 

With respect to leases that do not 

operate as vehicles to borrow money, 

the Commission agrees with 

commenters that the burden of assessing 

their materiality and disclosing such 

leases within ten business days would 

not justify the benefit of such 

disclosures. While the Commission 

continues to believe that lease 

arrangements that are not vehicles to 

borrow money might be relevant to the 

general financial condition of an issuer 

or obligated person, the Commission 

also believes that such lease 

arrangements do not warrant inclusion 

in the Commission’s definition of 

‘‘financial obligation’’ because they 

generally do not represent competing 

debt of the issuer or obligated person.143

Accordingly, at this time, the 

Commission does not believe that such 

leases raise the same concerns regarding 

timely disclosure of their incurrence as 

leases entered into as a vehicle to 

borrow money.144

ii. Derivative Instrument Entered Into in 

Connection With, or Pledged as Security 

or a Source of Payment for, an Existing 

or Planned Debt Obligation 

As proposed, the term ‘‘derivative 

instrument’’ was 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.145

The Commission stated that though 

issuers and obligated persons may not 

use each type of derivative instrument 

listed, the proposed list was sufficiently 

broad to cover the use of derivative 

instruments that may develop in the 

future.146 As discussed below, many 

commenters raised questions about the 

proposed scope of the term ‘‘derivative 

instrument.’’ A common theme was that 

the Commission should limit the scope 

of derivative instruments covered by the 

Rule to those instruments related to 

debt, such as interest-rate swaps, 

because only such instruments could 

compete with the rights of existing 

securities holders.147 Commenters also 

stated that an overly broad 

interpretation of the term would elicit 

disclosures that would be of minimal 

value to investors because such 

instruments would not represent 

competing debt of an issuer or obligated 

person.148 Commenters cited 

instruments entered into to manage fuel 

prices or power price volatility or to 

reduce other similar risks related to 

commodity or future inventory 

purchases by issuers and obligated 

persons as the types of instruments that 

should not be covered by the Rule.149

The Commission continues to believe 

derivative instruments should be 

included in the adopted definition of 

the term ‘‘financial obligation’’ because 

such instruments could adversely 

impact an issuer’s or obligated person’s 

liquidity and overall creditworthiness, 

or adversely affect security holders.150

However, the Commission agrees with 

commenters that the term, as proposed, 

was too broad, and is adopting a more 

tailored approach to derivative 

instruments by limiting the definition to 

those that are ‘‘entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation.’’ In the 

Commission’s view, derivative 

instruments entered into in connection 

with an existing or planned debt 

obligation such as an interest rate swap 

could, for example, expose an issuer or 

obligated person to contingent liquidity 

risk, such as a requirement to post 

collateral or pay a termination fee upon 

the occurrence of certain events,151 any 

of which could adversely impact the 

issuer’s or obligated person’s liquidity 

and overall creditworthiness, and affect 

the interests of security holders. 

Therefore, such instruments raise the 

Commission’s fundamental concern that 

security holders lack access or lack 

timely access to information about an 

issuer’s or obligated person’s material 

financial obligations. Accordingly, as 

adopted, the definition of ‘‘financial 

obligation’’ includes a ‘‘derivative 


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152For a discussion of when an issuer or 

obligated person should assess the materiality of a 

derivative instrument entered into in connection 

with, or pledged as security or a source of payment 

for, an existing or planned debt obligation, see 

supra Section III.A.1.ii. 

153See Proposing Release, supra note 3, 82 FR at 

13938. 

154See State College Area Swap Statement, supra 

note 151. 

155For purposes of paragraph (b)(5)(i)(C)(15), a 

forward starting interest rate swap generally would 

mean any swap used in the municipal debt market 

that is anticipated to be cash settled at the time of 

incurrence of a debt obligation, swap anticipated to 

be part of a synthetic fixed rate debt obligation, or 

similar product. 

For a discussion of when a forward starting 

interest rate swap is ‘‘incurred,’’ see supra Section 

III.A.1.ii. If the incurrence of such a swap is 

material, a forward starting interest rate swap 

would be disclosed within ten business days of its 

incurrence because, in the Commission’s view, the 

issuer’s or obligated person’s contingent obligation 

to make payments, post collateral, etc. would begin 

at the point of incurrence of the swap, not if or 

when the planned debt obligation is incurred 

because the terms of the swap will be set at the time 

that the swap is incurred. As a result, the issuer or 

obligated person would, at that time, assume market 

risk (e.g., interest rate fluctuations) and 

counterparty risk (e.g., counterparty liquidity). 

156See Proposing Release, supra note 3, 82 FR at 

13938. 

157See, e.g., OMPA Letter; Oregon Treasurer 

Letter; WPPI Letter. 

instrument entered into in connection 

with, or pledged as security or a source 

of payment for, an existing or planned 

debt obligation.’’ 

The term ‘‘derivative instrument 

entered into in connection with, or 

pledged as security or a source of 

payment for, an existing or planned debt 

obligation’’ is not limited to derivative 

instruments incurred by issuers or 

obligated persons solely to hedge the 

interest rate of a debt obligation or to 

hedge the value of a debt obligation to 

be incurred in the future.152 Instead, the 

term covers any type of derivative 

instrument that could be entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation. Accordingly, 

the Commission reiterates that the 

definition captures any swap, securitybased 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 in the adopted definition 

of ‘‘financial obligation’’ provided that 

such instruments are related to an 

existing or planned debt obligation.153

This includes, under certain 

circumstances, instruments that are 

related to an existing or planned debt 

obligation of a third party. To determine 

whether a derivative instrument that 

relates to an existing or planned debt 

obligation of a third party is covered by 

paragraph (b)(5)(i)(C)(15), the 

Commission believes that it would be 

reasonable to distinguish derivative 

instruments designed to hedge against 

the risks of a related debt obligation (i.e., 

debt-related derivatives) from derivative 

instruments designed to mitigate 

investment risk. In the Commission’s 

view, the former generally would be 

covered by paragraph (b)(5)(i)(C)(15), 

while the latter would not. This 

definition is sufficiently comprehensive 

to cover the use of derivative 

instruments that may develop in the 

future, while, at the same time, limiting 

the scope of its current and future 

application to the types of instruments 

that are related to an existing or planned 

debt obligation. 

The Commission believes that a debt 

obligation is ‘‘planned’’ at the time the 

issuer or obligated person incurs the 

related derivative instrument if, based 

on the facts and circumstances, a 

reasonable person would view it likely 

or probable that the issuer or obligated 

person will incur the related yet-to-beincurred debt obligation at a future date. 

In the Commission’s view, it would be 

likely or probable that an issuer or 

obligated person will incur a future debt 

obligation if, for example, the relevant 

derivative instrument would serve no 

economic purpose without the future 

debt obligation (regardless of whether 

the future debt obligation is ultimately 

incurred).154 For example, in a forward 

starting interest rate swap transaction, 

an issuer or obligated person typically 

incurs the forward starting interest rate 

swap in advance of the incurrence of a 

debt obligation. As part of such 

agreement, the issuer or obligated 

person agrees to pay its counterparty 

interest at a fixed rate, and, in exchange, 

the counterparty agrees to provide 

payments to the issuer or obligated 

person at a variable rate.155 These 

payment obligations will commence and 

the initial rate for the counterparty’s 

variable rate payments will be set only 

once the related debt obligation is 

incurred. In addition, upon incurrence 

of the forward starting interest rate 

swap, the issuer or obligated person 

would typically pay a premium to its 

swap counterparty to establish the fixed 

rate payment based on the then 

prevailing interest rates. Accordingly, 

without the future incurrence of a debt 

obligation, the forward starting interest 

rate swap would have no economic 

value (for the issuer or obligated 

person). Therefore, the Commission 

believes that such an instrument would 

generally serve no economic purpose 

(for the issuer or obligated person) 

except if and when it is paired with a 

planned incurrence of a debt obligation. 

Factors relevant to whether an issuer’s 

or obligated person’s debt obligation is 

‘‘planned’’ might include, but are not be 

limited to, whether: (1) The documents 

evidencing the relevant derivative 

instrument explicitly or implicitly 

assume a future debt obligation; (2) the 

legislative body of the issuer or 

obligated person has taken any 

preliminary (e.g., preliminary 

resolution) or final (e.g., authorizing 

resolution) action to authorize the 

related future debt obligation; or (3) the 

issuer or obligated person has hired any 

professionals (e.g., municipal advisor, 

bond counsel, rate consultant) to assist 

or advise the issuer or obligated person 

on matters related to the future debt 

obligation. Determinations by issuers 

and obligated persons of whether a 

derivative instrument contemplates a 

future debt obligation should prioritize 

substance over form. In addition, 

whether a debt obligation is ‘‘planned’’ 

is based on an objective assessment of 

the facts and circumstances prevailing 

at the time of incurrence of the 

derivative instrument, and is not a 

bright-line test. 

iii. Guarantee of a Debt Obligation or a 

Derivative Entered Into in Connection 

With, or Pledged as Security or a Source 

of Payment for, an Existing or Planned 

Debt Obligation 

As proposed, the term ‘‘guarantee’’ 

was 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.156 Several 

commenters requested further 

clarification or asked that the 

Commission better define the scope of 

the term ‘‘guarantee.’’ 157 In response, 

the Commission is revising the 

definition of ‘‘financial obligation’’ with 

respect to guarantees and clarifying the 

scope of guarantees that, if material, 

would be subject to disclosure under the 

Rule. 

As adopted, the term ‘‘financial 

obligation’’ is defined to include a 

guarantee of a debt obligation or a 

derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation. The 

Commission’s refinement of this aspect 

of the definition of ‘‘financial 

obligation’’ is generally responsive to 

commenter requests for greater clarity as 

to the scope of guarantees covered by 

the term ‘‘financial obligation’’ and 

consistent with commenter sentiment 

that the Rule only cover guarantees that 

relate to debt, debt-like, or debt-related 


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158See BDA Letter; ICI Letter; SIFMA AMG 

Letter. 159See Proposing Release, supra note 3, 82 FR at 

13938. As stated in the Proposing Release, 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 

amendments. 

160For a discussion of materiality considerations 

in connection with the Rule, see supra Section 

III.A.1.i, and for a discussion of the form of event 

notices provided under paragraph (b)(5)(i)(C)(15) of 

the Rule, see supra Section III.A.1.iii. 

161See Proposing Release, supra note 3, 82 FR at 

13938. 162See, e.g., GA Finance Letter (‘‘The SEC should 

exclude monetary obligations resulting from 

judicial, administrative, or arbitration proceedings 

from the definition of financial obligation.’’); DAC 

Letter (same); see also Denver Letter; Houston 

Letter; San Jose Letter. 163See DAC Letter. 164See, e.g., San Jose Letter (‘‘[T]he City is 

involved in a variety of administrative, judicial and 

arbitration proceedings at any given time.’’); Denver 

Letter (‘‘[T]he City is involved in hundreds of 

judicial, administrative and arbitration proceedings 

every year . . . [i]n the vast majority of cases, staff 

involved in these contracts, regulatory, judicial and 

administrative proceedings are not aware of the 

Rule, making the likelihood of an inadvertent noncompliance much greater . . . [t]he City anticipates 

a significant amount of time, expense and resources 

would be required to actively monitor its financial 

obligations, if the term remains so broadly 

defined’’). 

165See LPPC Letter. 

166See NABL Letter. 

167See LPPC Letter (arguing that issuers and 

obligated persons typically have funding reserves 

and insurance to cover costs related to judicial, 

administrative, or arbitration hearings). 

obligations.158 In the Commission’s 

view, the adopted rule text eliminates 

any ambiguity between the proposed 

rule text and the Commission’s intended 

scope of the term ‘‘guarantee.’’ 

The Commission continues to believe 

that the guidance provided in the 

Proposing Release regarding the term 

‘‘guarantee’’ accurately sets forth the 

coverage of guarantee of a debt 

obligation or derivative instrument 

entered into in connection with, 

pledged as security or a source of 

payment for, an existing or planned debt 

obligation by the Rule.159 Moreover, the 

Commission continues to believe that 

guarantees should be included in the 

adopted definition of the term 

‘‘financial obligation’’ because such 

arrangements could impact an issuer’s 

or obligated person’s liquidity, overall 

creditworthiness, or existing security 

holder’s rights. However, to provide 

additional clarity, the term ‘‘guarantee’’ 

is intended to capture any guarantee 

provided by an issuer or obligated 

person (as a guarantor)‘‘ 160 for the 

benefit of itself or a third party, which 

guarantees payment of a financial 

obligation. 

A guarantee of a debt obligation or a 

derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation could raise 

two disclosures under the Rule—one for 

the guarantor and one for the 

beneficiary of the guarantee. 

Specifically, if an issuer or obligated 

person incurs a material guarantee, such 

guarantee would be subject to disclosure 

under the Rule, as amended. For an 

issuer or obligated person that is the 

beneficiary of a guarantee provided in 

connection with a debt obligation or a 

derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation, the 

Commission believes that, generally, 

such beneficiary issuer or obligated 

person should assess whether such 

guarantee is a material term of the 

underlying debt obligation or derivative 

instrument and, if so (and if the 

underlying debt obligation or derivative 

instrument is material), disclose the 

existence of such guarantee under the 

Rule. 

iv. Monetary Obligation Resulting From 

a Judicial, Administrative, or 

Arbitration Proceeding 

As proposed, the term ‘‘monetary 

obligation resulting from a judicial, 

administrative, or arbitration 

proceeding’’ was included in the 

definition of ‘‘financial obligation’’ 

because the Commission believed that 

the requirement to pay such an 

obligation could adversely impact an 

issuer’s or obligated person’s overall 

creditworthiness and liquidity, and 

adversely affect security holders.161

Commenters who addressed this issue 

were almost uniformly opposed to the 

inclusion of this term in the definition 

of ‘‘financial obligation.’’ 162 A common 

sentiment among commenters was that 

monetary obligations resulting from a 

judicial, administrative, or arbitration 

proceeding are of a fundamentally 

different character than the other 

categories included within the 

definition of financial obligation, and 

therefore are ill-suited to being subject 

to the same set of regulatory language 

and materiality and financial difficulties 

determinations.163

Moreover, commenters argued that 

monitoring the numerous judicial, 

administrative, and arbitration 

proceedings to which they are party 

would be overly burdensome and would 

require the expenditure of a significant 

amount of issuer and obligated person 

time and financial and personnel 

resources.164 One commenter 

questioned whether disclosure of these 

obligations was necessary, suggesting 

that many issuers and obligated persons 

have insurance or funding reserves to 

cover potential fines or penalties 

incurred through judicial, 

administrative or arbitration 

proceedings.165 Another commenter 

stated that in one of the examples cited 

by the Commission in the Proposing 

Release as an instance in which a 

monetary obligation resulting from a 

judicial proceeding impaired the 

liquidity and creditworthiness of an 

issuer, the obligation had been disclosed 

in the issuer’s publicly available audited 

financial statements, reviewed by rating 

agencies, and had been widely covered 

by media prior to the bankruptcy 

date.166

The Commission is revising the 

definition of the term ‘‘financial 

obligation’’ to exclude the term 

‘‘monetary obligation resulting from a 

judicial, administrative, or arbitration 

proceeding.’’ The Commission believes 

that, though a monetary obligation 

resulting from a judicial, administrative, 

or arbitration proceeding might be 

relevant to the general financial 

condition of an issuer or obligated 

person, such obligations do not 

typically impact the rights or interests of 

security holders as issuers and obligated 

persons generally have reserve funding 

or insurance to cover such costs, with 

such funding and insurance typically 

being reflected in their financial 

statements.167 In addition, an initial 

judgment in a judicial, administrative, 

or arbitration proceeding may not reflect 

the ultimate disposition of the 

proceeding, and years could pass 

between entry of the initial judgment 

and the payment of any resulting 

monetary obligation. Given this delay, 

the Commission believes that it is 

unlikely that a monetary obligation 

resulting from a judicial, administrative, 

or arbitration proceeding would have an 

immediate impact on an issuer’s or 

obligated person’s liquidity or 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44715 

168See Proposing Release, supra note 3, 82 FR at 

13957. 169See, e.g., DAC Letter; see also GA Finance 

Letter. 170See, e.g., DAC Letter. 171See id. 

172The Commission understands that issuers and 

obligated persons have since 1995 followed a 

similar approach with respect to voluntarily 

submitted final official statements when choosing 

to opt out of the small issuer exception of Rule 

15c2–12(d)(2)(ii)(A). Cf. Division of Market 

Regulation, U.S. Securities and Exchange 

Commission, Staff Opinion Letter on Rule 15c2–12 

(June 23, 1995), at Question 17, available at https:// 

www.sec.gov/info/municipal/nabl-1-interpretiveletter-1995-06-23.pdf (staff guidance regarding an 

issuer’s or obligated person’s obligations under the 

Rule if such issuer or obligated person chooses to 

opt out of the small issuer exception of Rule 15c2– 

12(d)(2)(ii)(A)). 

173See 17 CFR 240.15c2–12(f) (emphasis added). 

174See Proposing Release, supra note 3, 82 FR at 

13941. 

175See Kutak Rock Letter; DAC Letter. 

176See Proposing Release, supra note 3, 82 FR at 

13940. 

creditworthiness or would adversely 

affect security holders. 

Accordingly, at this time, the 

Commission does not believe that 

monetary obligations resulting from 

judicial, administrative, or arbitration 

proceedings raise the same concerns 

regarding ready and prompt access to 

information about their existence as the 

other types of obligations included in 

the adopted definition of financial 

obligation. Therefore, the Commission is 

removing the term ‘‘monetary obligation 

resulting from a judicial, administrative, 

or arbitration proceeding’’ from the term 

‘‘financial obligation.’’ 

v. Exclusion of Municipal Securities as 

to Which a Final Official Statement Has 

Been Provided to the MSRB Consistent 

With Rule 15c2–12 From Definition of 

‘‘Financial Obligation’’ 

As proposed and adopted, 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– 

12.168 In response to the proposed 

exclusion, some commenters suggested 

that the Commission should revise the 

language so the exclusion would apply 

when the Rule requires a final official 

statement to be provided to the MSRB 

rather than when the final official 

statement has actually been provided to 

the MSRB by an underwriter.169

According to commenters, such a 

revision would allow an issuer or 

obligated person to utilize the exclusion 

even when an underwriter fails to 

submit the final official statement to the 

MSRB.170 The Commission declines to 

adopt the recommended revision. The 

Commission continues to believe that 

the exclusion as proposed is consistent 

with the current regulatory framework 

in which an underwriter is responsible 

for delivering the final official statement 

to the MSRB. Moreover, this framework 

establishes appropriate incentives for all 

involved parties to ensure that the final 

official statement is, in fact, provided to 

the MSRB, and helps ensure the 

relevant information is made available 

to investors. 

Commenters also requested that the 

Commission revise the proposed 

language to include an exclusion from 

disclosure under paragraph 

(b)(5)(i)(C)(15) for any financial 

obligation for which a final official 

statement is provided to the MSRB 

voluntarily.171 The Commission 

declines to adopt the recommended 

revision. The Commission continues to 

believe that the exclusion should apply 

only to municipal securities as to which 

a final official statement is provided to 

the MSRB consistent with the Rule, and 

that such final official statement could 

be provided to the MSRB voluntarily. If 

such final official statement is provided 

to the MSRB voluntarily, the 

Commission believes that such 

voluntary submission would be made 

consistent with the Rule if it is provided 

to the MSRB consistent with the 

requirements set forth in Rule 15c2– 

12(b).172 Therefore, for this exclusion to 

apply, whether the final official 

statement is submitted voluntarily or 

not, the issuer or obligated person must 

submit the final official statement to the 

MSRB subject to the requirements of 

Rule 15c2–12(b). This exclusion from 

the definition of ‘‘financial obligation’’ 

covers only ‘‘municipal securities as to 

which a final official statement has been 

provided to the [MSRB] consistent with 

this rule’’ 173 and does not extend to 

instruments or obligations (contingent 

or otherwise) related to such municipal 

securities. Under a continuing 

disclosure agreement, an issuer or 

obligated person will need to disclose 

any such derivative instrument or 

guarantee if it is material and affects 

security holders for purposes of new 

paragraph (b)(5)(i)(C)(15) of the Rule 

and make any related disclosures 

required under new paragraph 

(b)(5)(i)(C)(16) of the Rule. 

3. 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 is adopting as 

proposed the amendment to add new 

paragraph (b)(5)(i)(C)(16) to the Rule, 

which requires that a Participating 

Underwriter in an Offering must 

reasonably determine that the 

continuing disclosure agreement 

provides for the submission of notice of 

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, 

provided the occurrence reflects 

financial difficulties. 

As the Commission stated in the 

Proposing Release, although the 

occurrence of the events listed in 

paragraph (b)(5)(i)(C)(16) may not be 

common in the municipal market, they 

can significantly and adversely impact 

the value of an issuer’s or obligated 

person’s outstanding municipal 

securities.174 The Commission also 

believes the 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. 

i. Default 

Two commenters recommended that 

‘‘default’’ be revised to ‘‘event of 

default,’’ arguing that ‘‘default’’ was 

vague while ‘‘event of default’’ is 

usually defined in transaction 

documents.175 Because an ‘‘event of 

default’’ is often specifically defined in 

transaction documents, it would be 

more narrowly applied than ‘‘default.’’ 

As described in the Proposing Release, 

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, 

where an issuer or obligated person fails 

to comply with specified covenants.176

Typically, 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. The Commission believes 

that there are defaults that may reflect 

financial difficulties even if they do not 

qualify as ‘‘events of defaults’’ under 

transaction documents. This may 

constitute important information related 

to an issuer’s or obligated person’s 

material financial obligations that could 

impact an issuer’s or obligated person’s 

liquidity, overall creditworthiness, or an 

existing security holder’s rights. 

Accordingly, the Commission believes 

the concept of ‘‘default’’ should be 

retained as proposed. 


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177See DAC Letter. 

178See SIFMA Letter. 

179The Commission believes that a ‘‘modification 

of terms’’ occurs when such modified terms become 

enforceable against the issuer or obligated person 

which is consistent with the Commission’s view of 

when a financial obligation is incurred. See supra 

Section III.A.1.ii. 

180See San Jose Letter. 

181See DAC Letter. 

182See Proposing Release, supra note 3, 82 FR at 

13939–40. 

183See, e.g., ABA Letter; Brookfield Letter; Bishop 

Letter; Kutak Rock Letter. 

184See SIFMA Letter (recommending the 

Commission consider replacing ‘‘reflecting financial 

difficulties’’ with ‘‘materially impairs the ability of 

an issuer/obligated person to pay debt service as 

scheduled on outstanding obligations,’’ or 

‘‘materially impairs the creditworthiness of the 

issuer/obligated person’’). 

185See ICI Letter; Vanguard Letter; SIFMA AMG 

Letter; see also NFMA Letter (arguing that ‘‘the 

triggering of an event related to financial difficulties 

should always be publicly disclosed on EMMA, 

without regard to the materiality of the obligation 

itself’’). 

186See Proposing Release, supra note 3, 82 FR at 

13939. 

187For example, as described in the Proposing 

Release, 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 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. See Proposing Release, supra note 3, 

82 FR at 13939. 

Issuers and obligated persons may consider 

disclosing the occurrence of events that do not 

reflect financial difficulties as a matter of best 

practice if they believe investors would find those 

occurrences important. 

188See Kutak Rock Letter; NAMA Letter. 

189See SIFMA Letter. 

ii. Modification of Terms 

One commenter proposed revising 

‘‘modification of terms’’ to 

‘‘modification of material terms’’ 177 and 

another commenter recommended 

adding ‘‘including written or verbal 

waivers’’ after ‘‘modification of 

terms.’’ 178 The Commission believes 

both revisions are unnecessary. A 

modification of terms would be reported 

under a continuing disclosure 

agreement only if the modification 

‘‘reflect[s] financial difficulties of the 

issuer or obligated person.’’ This 

qualifier is included to help target the 

disclosure of information relevant to 

investors in making an assessment of 

the current financial condition of the 

issuer or obligated person. Accordingly, 

because the modification of terms 

already is subject to a qualifier, the 

Commission believes there is no need to 

also include a materiality qualifier. 

Additionally, ‘‘modification of terms’’ is 

broad, and as such, a written or verbal 

waiver of a deal provision would be a 

modification of the terms of an 

agreement because such waivers are a 

departure from what was agreed to 

under the terms of the agreement. 

Consequently, the Commission is 

adopting the concept of ‘‘modification 

of terms’’ without any changes.179

iii. Other Similar Events 

One commenter stated that the ‘‘other 

similar events’’ language was too 

vague 180 and another recommended 

that the Commission remove it from the 

rule text.181 The Commission continues 

to believe that the term should be 

retained in the rule text to ensure that 

paragraph (b)(5)(i)(C)(16) covers not 

only defaults, events of acceleration, 

termination events, or modifications of 

terms that reflect financial difficulties of 

the issuer or obligated person, but also 

events arising under the terms of a 

financial obligation that similarly reflect 

financial difficulties of the issuer or 

obligated person. As stated in the 

Proposing Release, in order to be subject 

to disclosure under the Rule, the term 

‘‘other similar events under the terms of 

a financial obligation of the obligated 

person reflecting financial difficulties’’ 

must necessarily share similar 

characteristics with one of the preceding 

listed events (a default, event of 

acceleration, termination event, or 

modification of terms).182 The 

Commission is adopting ‘‘other similar 

event’’ as proposed to address the 

disclosure of the occurrence of events 

that, although not specifically set forth 

in the rule text, are still relevant to 

investors and other market participants 

in making an assessment of the current 

financial condition of the issuer or 

obligated person. Such events may have 

potential adverse impacts on the issuer’s 

or obligated person’s liquidity and 

overall creditworthiness, or affect 

security holders. 

iv. Reflect Financial Difficulties 

Some commenters argued that ‘‘reflect 

financial difficulties’’ was vague and 

encouraged the Commission to provide 

additional guidance to prevent a flood 

of event notices to EMMA.183 One 

commenter suggested alternative 

language that would narrow the events 

reported under paragraph 

(b)(5)(i)(C)(16).184 Some commenters, 

with the goal of prompting more 

disclosure to the market, encouraged the 

Commission to remove the reflects 

financial difficulties qualifier, stating 

that it would limit the disclosure of the 

occurrence of events unrelated to 

financial difficulties, such as legislative 

dysfunction, but were nonetheless 

important to investors.185

The Commission continues to believe 

that the ‘‘reflect financial difficulties’’ 

qualifier is appropriate. The 

Commission believes that the term is 

not vague, as the concept of ‘‘reflecting 

financial difficulties’’ has been used in 

paragraphs (b)(5)(i)(C)(3) and (4) since 

the 1994 amendments to Rule 15c2–12, 

and, as such, market participants should 

be familiar with the concept as it relates 

to the operation of Rule 15c2–12.186

Furthermore, the Commission also 

believes that additional guidance on the 

term would be difficult to provide, due 

to the diversity of issuers and obligated 

persons as well as the financial 

conditions affecting them. Accordingly, 

the Commission believes that ‘‘reflect 

financial difficulties’’ is an appropriate 

qualifier to help target the disclosures to 

result in information relevant to 

investors in making an assessment of 

the current financial condition of the 

issuer or obligated person. Removing 

‘‘reflect financial difficulties’’ could 

result in overly broad disclosures of 

event occurrences that would not 

necessarily be relevant or important to 

investors’ decisions, for instance, by not 

reflecting on the creditworthiness of an 

issuer or obligated person.187 Moreover, 

the narrowed definition of ‘‘financial 

obligation,’’ as adopted, will limit the 

number of financial obligations that 

issuers and obligated persons will need 

to evaluate when considering whether a 

disclosure is required under paragraph 

(b)(5)(i)(C)(16) and thereby reduce the 

burden on issuers, obligated persons, 

and dealers. 

v. Scope of Financial Obligations 

Subject to Paragraph (b)(5)(i)(C)(16) 

Some commenters stated their belief 

that paragraph (b)(5)(i)(C)(16) applies to 

all of an issuer’s or obligated person’s 

currently outstanding financial 

obligations as opposed to just those 

incurred after the effective date of the 

amendments.188 Another commenter 

recommended limiting this event to 

only those financial obligations that had 

been previously disclosed under 

paragraph (b)(5)(i)(C)(15).189

As discussed below, the amendments 

will only affect those continuing 

disclosure agreements entered into on or 

after the compliance date for these 

amendments. Issuers and obligated 

persons with a continuing disclosure 

agreement entered into on or after the 

compliance date must disclose, 

pursuant to paragraph (b)(5)(i)(C)(15), 

material financial obligations incurred 

on or after the date on which such a 


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190For a discussion of how issuers and obligated 

persons should proceed when a preliminary official 

statement is distributed prior to the compliance 

date, but the Offering is settled and the continuing 

disclosure agreement is executed after the 

compliance date, see below in this Section III.C. 

191 In the Proposing Release, the Commission 

stated that 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. The Commission recognized 

that for continuing disclosure agreements entered 

into prior to the compliance date, the 

recommending dealer would receive notice solely 

of those events covered by that continuing 

disclosure agreement, which would likely not 

include any of the items added by the amendments. 

See Proposing Release, supra note 3, 82 FR at 

13941. The Commission solicited comments on the 

impact of the proposed amendments with respect 

to recommending dealers. With the exception of 

one related comment that is discussed in Section 

IV.D.4., the Commission received no comments on 

this subject. 

192See id. 

193See Hawkins Letter. 

194See GFOA Letter; ABA Letter; BDA Letter; 

NABL Letter. 

195See GFOA Letter; NABL Letter; NAMA Letter. 

196See ABA Letter. 

197See ICI Letter. 

198 If any of the provisions of these amendments, 

or the application thereof to any person or 

circumstance, is held to be invalid, such invalidity 

shall not affect other provisions or application of 

such provisions to other persons or circumstances 

that can be given effect without the invalid 

provision or application. 

199 44 U.S.C. 3501 et seq. 

continuing disclosure agreement was 

entered into. However, an event under 

the terms of a financial obligation 

pursuant to paragraph (b)(5)(i)(C)(16) 

that occurs on or after the compliance 

date must be disclosed regardless of 

whether such obligation was incurred 

before or after the compliance date. The 

Commission believes narrowing 

paragraph (b)(5)(i)(C)(16) to only 

financial obligations incurred after the 

compliance date or disclosed under 

paragraph (b)(5)(i)(C)(15) would exclude 

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. Financial 

obligations incurred prior to the 

compliance date for these amendments 

may have long maturity dates and the 

occurrence of the events set forth in 

paragraph (b)(5)(i)(C)(16) can 

significantly and adversely impact the 

value of an issuer’s or obligated person’s 

outstanding municipal securities. 

Additionally, the Commission believes 

that the burden on issuers and obligated 

persons to monitor for these events will 

be limited because the occurrence of a 

default, event of acceleration, 

termination event, modification of 

terms, or other similar events, are 

significant in nature, and therefore 

issuers and obligated persons should 

typically be aware that they have 

occurred. 

B. Technical Amendment 

The Commission did not receive any 

comments on its proposed technical 

amendment to paragraph (b)(5)(i)(C)(14) 

of the Rule to remove the term ‘‘and’’ 

because new events are proposed to be 

added to paragraph (b)(5)(i)(C) of the 

Rule. The Commission is adopting this 

amendment as proposed. 

C. Compliance Date and Transition 

The amendments to Rule 15c2–12 

will impact only those continuing 

disclosure agreements entered into in 

connection with Offerings that occur on 

or after the compliance date of these 

amendments.190 Accordingly, 

continuing disclosure agreements 

entered into prior to the compliance 

date would not be required to reflect 

changes made to the Rule by such 

amendments. As a result, for municipal 

securities issued prior to the compliance 

date, a recommending dealer would not 

be required to have procedures in place 

that provide reasonable assurance that it 

will receive prompt notice of the events 

added to the Rule by the 

amendments.191

Additionally, in the Proposing 

Release, the Commission stated that the 

amendments would apply to continuing 

disclosure agreements that are entered 

into in connection with Offerings 

occurring on or after the compliance 

date of the amendments.192 One 

commenter inquired whether, under 

that formulation, a primary offering 

‘‘occurs’’ on the date of the distribution 

of the preliminary official statement or 

on the date the corresponding issuance 

of municipal securities is settled and the 

continuing disclosure agreement is 

executed.193 For the purposes of these 

amendments, the Commission believes 

that an Offering generally should be 

considered to occur on the date the 

continuing disclosure agreement is 

executed. However, if a preliminary 

official statement is distributed before 

the compliance date, with an 

expectation that the Offering will occur 

on or after the compliance date, the 

preliminary official statement should 

generally attach a form of continuing 

disclosure agreement that reflects the 

adopted amendments. 

In the Proposing Release, the 

Commission proposed a compliance 

date three months after the final 

adoption of the amendments. Several 

commenters argued that the proposed 

compliance period of three months after 

adoption was insufficient.194

Commenters stated that issuers and 

obligated persons would need to 

establish and implement procedures to 

centralize information, which would 

both be costly and time-consuming.195

Another commenter questioned whether 

the MSRB would be able to implement 

the necessary adjustments to EMMA by 

the compliance date.196 However, 

another commenter argued that the 

three-month period was suitable and 

urged the Commission to make the 

amendments effective as soon as 

practicable.197 The Commission has 

considered these comments and is 

extending the compliance date to 180 

days after publication of the 

amendments in the Federal Register. 

The Commission believes that a date of 

180 days after publication of the 

amendments in the Federal Register 

should be sufficient time for 

Participating Underwriters to revise 

their procedures to comply with the 

Rule, and for issuers and obligated 

persons to become aware of the 

amendments and plan for their 

implementation. Moreover, after 

consultation by Commission staff with 

MSRB staff, the Commission believes 

180 days after publication of the 

amendments in the Federal Register 

will be adequate for the MSRB to make 

the necessary modifications to the 

EMMA system. The Commission is 

establishing February 27, 2019 as the 

compliance date for these 

amendments.198

IV. Paperwork Reduction Act 

The Rule, as amended, contains 

‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).199 In accordance with 44 

U.S.C. 3507 and 5 CFR 1320.11, the 

Commission 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. 

In the Proposing Release, the 

Commission provided estimates of the 

burden of complying with the proposed 

amendments to the Rule and solicited 

comments on those estimates and the 

collection of information requirements. 

On April 26, 2018, the Commission 

published a notice soliciting comment 


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200Proposed Collection; Comment Request 

(Extension: Rule 15c2–12, SEC File No. 270.330, 

OMB Control No. 3235–0372), 83 FR 18358 (Apr. 

26, 2018). 

201See SIP Letter; NABL III Letter. 

202See 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) (‘‘2015 PRA Notice’’). 

203See, e.g., NABL OMB Letter; GFOA Letter; 

Kutak Rock Letter; ABA Letter; AZ Universities 

Letter; Arlington SD Letter; Denver Letter; 

NAHEFFA Letter; NCSHA Letter; SIFMA Letter; SIP 

Letter; and TASBO Letter. 204See 17 CFR 240.15c2–12(b). 

205See 17 CFR 240.15c2–12(c). 

206See 17 CFR 240.15c2–12(b)(5)(i)(C). 

on the currently approved collection of 

information; 200 the Commission hereby 

withdraws this notice from the Federal 

Register, but addresses the comments 

received 201 in response to it below in 

this Section IV. In the Proposing 

Release, the Commission stated that the 

estimates of the effect that the 

amendments will have on the collection 

of information were based on data from 

various sources, including the most 

recent PRA submission for Rule 15c2– 

12.202 As discussed above, the 

Commission received numerous 

comment letters on the proposed 

rulemaking. Of the comment letters the 

Commission received, some 

commenters addressed the collection of 

information aspects of the proposal.203

Certain commenters addressed the 

accuracy of the Commission’s burden 

estimates for the proposed collection of 

information, stating that the estimates 

were too low. The Rule as amended 

includes several modifications or 

clarifications from the proposed rule 

amendments that address concerns 

raised by commenters and that are 

intended, in part, to decrease 

implementation burdens relative to the 

proposal. As discussed in Section 

III.A.2., the Commission is narrowing 

the scope of the amendments to Rule 

15c2–12 and expects that the total 

burden of complying with the adopted 

amendments to Rule 15c2–12 will be 

significantly lower than the burden of 

complying with the amendments as 

originally proposed. Nevertheless, in 

response to comments received on the 

burden estimates in the Proposing 

Release, the Commission is revising its 

approach to estimating the PRA burden 

related to the Rule and is increasing its 

PRA burden estimates related to the 

amendments and Rule 15c2–12. 

Discussed below is the revised 

Paperwork Reduction Act analysis for 

Rule 15c2–12. First, the Commission 

provides a summary of the collection of 

information required under Rule 15c2– 

12 prior to these amendments, the 

amendments to Rule 15c2–12 as 

proposed, and the amendments to Rule 

15c2–12 as adopted. Second, the 

Commission summarizes the use of the 

information collected under the Rule. 

Third, the Commission discusses the 

respondents subject to a collection of 

information requirement under the 

Rule. Fourth, the Commission discusses 

the burdens under the Rule prior to 

these amendments, estimated burdens 

in the Proposing Release, and the 

revised burdens under Rule 15c2–12 as 

it applies to broker-dealers, issuers of 

municipal securities, and the MSRB. 

Finally, the Commission discusses the 

costs under the Rule prior to these 

amendments, estimated costs in the 

Proposing Release, and the revised costs 

under Rule 15c2–12 to broker-dealers, 

issuers of municipal securities, and the 

MSRB. 

A. Summary of Collection of 

Information 

1. Collection of Information Prior to 

Amendments 

Paragraph (b) of Rule 15c2–12 

requires a dealer acting as a 

Participating Underwriter in an 

Offering: (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 noncompetitively 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.204 In addition, under paragraph 

(c) of the Rule, a dealer that 

recommends 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 any event specified in 

paragraph (b)(5)(i)(C) of the Rule and 

any failure to file annual financial 

information regarding the security.205

Under paragraph (b)(5)(i)(C) of Rule 

15c2–12, dealers acting as Participating 

Underwriters in Offerings 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 with respect to 

the securities being offered; (2) nonpayment 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 the securities, if material; 

(11) rating changes; (12) bankruptcy, 

insolvency, receivership or similar 

event of the obligated person; (13) 

consummation of a merger, 

consolidation, or acquisition, 

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 is terms, if 

material; and (14) appointment of a 

successor or additional trustee or the 

change of name of a trustee, if 

material.206

2. Proposed Amendments to 

Rule 15c2–12 

Under the proposed amendments, the 

Commission proposed to add two 

additional event notices that a dealer 

acting as 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 


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207See supra Section I. 208See 2015 PRA Notice, supra note 202. The 

number of issuers in the estimate reflects those 

issuers that are affected by the continuing 

disclosure requirements of Rule 15c2–12. 

209See NABL OMB Letter. 

210See Proposing Release, supra note 3, 82 FR at 

13943; 2015 PRA Notice, supra note 202. 

municipal securities, to provide to the 

MSRB. Specifically, the proposed 

amendments would have amended the 

list of events for which notice is to be 

provided to include the following added 

two additional events as paragraphs 

(b)(5)(i)(C)(15) and (16) of Rule 15c2–12: 

(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; and (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. 

For purposes of the proposed 

amendments, the Commission proposed 

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 did not include municipal 

securities as to which a final official 

statement has been provided to the 

Municipal Securities Rulemaking Board 

consistent with Rule 15c2–12. 

3. Adopted Amendments to 

Rule 15c2–12 

In response to comments received and 

as discussed in Section III.A., the 

Commission has revised its proposed 

amendments to Rule 15c2–12. The two 

additional events as paragraphs 

(b)(5)(i)(C)(15) and (16) of Rule 15c2–12 

are unchanged from the Proposing 

Release: (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; and (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. 

However, the definition of the term 

‘‘financial obligation’’ has been 

narrowed and is now defined as a (i) 

debt obligation; (ii) derivative 

instrument entered into in connection 

with, or pledged as security or a source 

of payment for, an existing or planned 

debt obligation; or (iii) guarantee of (i) 

or (ii). The terms ‘‘lease’’ and ‘‘monetary 

obligation resulting from a judicial, 

administrative, or arbitration 

proceeding’’ have been removed; the 

term ‘‘derivative instrument’’ has been 

limited to those ‘‘entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation’’; and the 

term ‘‘guarantee’’ has been limited to 

guarantees of a ‘‘debt obligation’’ or 

‘‘derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation.’’ As 

discussed above in Section III.A.2., 

these terms were removed or narrowed 

in response to comments and in order 

to reduce the burden of complying with 

the amendments. 

B. Use of Information 

The adopted amendments would 

provide dealers with timely access to 

important information about municipal 

securities that they can use to carry out 

their obligations under securities laws, 

thereby reducing the likelihood of 

antifraud violations. This information 

could be used by individual and 

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.207

The adopted amendments will enable 

market participants 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. 

C. Respondents 

In November 2015, OMB approved an 

extension without change of the 

approved collection of information 

associated with the Rule. The approved 

paperwork collection associated with 

Rule 15c2–12 applies to dealers, issuers 

of municipal securities, and the MSRB. 

The paperwork collection associated 

with these adopted amendments would 

apply to the same respondents. Under 

the Rule prior to these amendments, 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.208 In the 

Proposing Release, the Commission 

estimated that the number of 

respondents would not change because 

the proposed amendments would not 

expand the types of securities covered 

under paragraphs (b)(5) and (c) of the 

Rule, and thus would not increase the 

number of dealers or issuers having a 

paperwork burden. The Commission 

received one comment that contended 

that the Commission’s estimate of the 

number of issuers affected was too 

low.209 As discussed in greater detail 

below, the Commission continues to 

believe that its estimate of the number 

of dealers made in the Proposing 

Release is appropriate, but is revising its 

estimate of the number of issuers. 

D. Total Annual Reporting and 

Recordkeeping Burden 

The Commission estimates the 

aggregate information collection burden 

for the amended Rule to consist of the 

following: 

1. Dealers 

In the Proposing Release, consistent 

with prior estimates, the Commission 

estimated that approximately 250 

dealers potentially could serve as 

Participating Underwriters in an 

offering of municipal securities.210 The 

Commission received no comments on 

this estimate. The Commission has 

reviewed this estimate and continues to 

estimate that, under the amendments, 

the number of dealers subject to a 

paperwork burden as Participating 

Underwriters will be 250. 

Under the Rule prior to these 

amendments, the Commission has 

estimated that the total annual burden 

on all 250 dealers is 22,500 hours (90 

hours per dealer per year). This estimate 

is the sum of two separate burdens: (1) 

2,500 hours per year for 250 dealers (10 

hours per dealer per year) 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 dealer per year) 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. 

i. Amendments to Events To Be 

Disclosed Under a Continuing 

Disclosure Agreement 

a. Estimates in Proposing Release 

In the Proposing Release, the 

Commission stated it did not expect the 


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211As discussed above, under the Rule prior to 

these amendments, the Commission estimated that 

dealers would incur a burden of 20,000 hours (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. 

212This estimate reflected the following: 2,500 

hours (estimate 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 municipal securities, to provide 

continuing disclosure documents to the MSRB) + 

[20,000 hours (estimate under the Rule prior to 

these amendments for dealers 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) + 2,500 

hours (estimate of the increased burden due to the 

amendments on dealers to determine whether 

issues 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)] = 

25,000 hours. 

213See ABA Letter. 

214See NABL OMB Letter. 

215See id. 

216See id. 

217As discussed above, under the Rule prior to 

these amendments, the Commission estimated that 

the total annual burden for dealers 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 was 

20,000 hours, or 80 hours per year per dealer. The 

Commission used this estimate as a baseline for its 

estimate in the Proposing Release, concluding that 

the proposed amendments would add 2,500 hours 

of additional burden on dealers to perform this task, 

for a total of 22,500 hours. 

218See, e.g., NABL OMB Letter; SIFMA Letter. 

219See NABL OMB Letter. 

220See id. 

221See id. (highlighting the ‘‘substantial ‘due 

diligence’ time’’ spent by 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). 

proposed amendments to 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. 

Thus, the Commission estimated that 

pursuant to the Rule as proposed to be 

amended, 250 dealers would continue 

to incur 2,500 hours per year (10 hours 

per year per dealer) to make this 

determination. 

However, because the proposed 

amendments would add two events 

notices to paragraph (b)(5)(i)(C) of the 

Rule, the Commission estimated that the 

amendments to the Rule would result in 

an increase of 2,500 hours per year (10 

hours per dealer per year) for dealers 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. Using the 

Commission’s prior estimate of 20,000 

hours per year (80 hours per dealer per 

year) as a baseline for this burden,211

the Commission estimated that dealers 

would incur an additional 2,500 hours 

per year, for a total estimated burden of 

22,500 hours per year (90 hours per 

dealer per year) to make this 

determination. 

Therefore, in the Proposing Release, 

the Commission estimated that the total 

annual burden of dealers acting as a 

Participating Underwriter in an Offering 

would increase by 2,500 hours to 25,000 

hours annually (100 hours per dealer 

per year).212

b. Comments Received 

The Commission received no 

comments on its estimate that dealers 

would continue to incur a burden of 

2,500 hours per year (10 hours per 

dealer per year) to reasonably determine 

that the issuer or obligated person has 

undertaken, in a written agreement or 

contract, for the benefit of holders of 

municipal securities, to provide 

continuing disclosure documents to the 

MSRB. However, as discussed in further 

detail below, the Commission is revising 

its method for calculating the PRA 

burden on dealers. Accordingly, this 

estimate is being changed to reflect the 

new calculation method. 

The Commission received several 

comments on its estimate that the 

amendments, by adding two event 

notices to paragraph (b)(5)(i)(C) of the 

Rule, would increase the burden on 

dealers by 2,500 hours (10 hours per 

dealer per year) 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. One 

commenter stated that because the 

amendments were ‘‘substantially 

overbroad in scope,’’ they would subject 

dealers acting as Participating 

Underwriters in Offerings to ‘‘enormous 

burdens’’ beyond what had been 

estimated.213 Another commenter 

criticized the Commission’s estimate as 

failing to account for the time needed to 

interpret the ‘‘broad’’ definition of 

‘‘financial obligation’’ contained in the 

proposed amendments, assess the 

materiality of events, and complete 

review procedures.214 That commenter 

stated that the Commission’s estimates 

of an increase in burden of ten hours per 

dealer per year, when calculated on a 

per issuance basis, resulted ‘‘in an 

average additional underwriter burden 

of approximately 12 minutes’’ per 

issuance of municipal securities.215

That commenter further stated that this 

estimate was unrealistic because each 

dealer, to comply with the proposed 

amendments, would have to ‘‘obtain a 

list of all financial obligations (bonds, 

notes, leases, guarantees, derivatives, 

and monetary obligations from judicial, 

administrative, or arbitration 

proceedings), obtain a copy of the 

financial obligation,’’ and then perform 

a series of reviews, including whether 

the financial obligation is ‘‘material,’’ to 

determine whether the issuer had failed 

to comply with any previous 

undertakings in a written contract or 

agreement specified in paragraph 

(b)(5)(i) of the Rule.216

Commenters also criticized the 

Commission’s prior estimate, predating 

the proposed amendments, that dealers 

would incur a burden of 20,000 hours 

per year (80 hours per dealer per year) 

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.217 These 

commenters contended that, 

irrespective of the increased burden 

from the proposed amendments, the 

Commission’s prior estimates of this 

burden on dealers were also far too 

low.218 One commenter argued that the 

Commission’s prior PRA estimates 

‘‘greatly underestimated the compliance 

burdens of the existing Rule,’’ and, 

noting that the Commission used its 

prior PRA estimates as the starting point 

for its new burden estimates, criticized 

the Commission for its ‘‘reliance on 

inapposite, faulty prior estimates.’’ 219

That commenter also argued that ‘‘as a 

result of subsequent Commission 

actions, its prior estimates are no longer 

indicative.’’ 220 That commenter further 

discussed prior Commission estimates 

of PRA burdens attributable to Rule 

15c2–12, arguing that the prior 

estimates had contained ‘‘gross 

inaccuracies’’ that had not been 

sufficiently addressed.221

c. Revised Estimates of Burden 

The Commission has considered the 

comments received and in response is 

revising its method to calculate the PRA 

burden for dealers under Rule 15c2–12. 

In doing so, the Commission is also 

revising (1) its estimate that dealers 

would continue to incur a burden of 

2,500 hours per year (10 hours per 

dealer per year), to reasonably 


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222See id. 

223See infra Section IV.D.2. 

224According to the MSRB Fact Book for each 

respective year, in 2017 there were 12,709 primary 

market submissions to the MSRB, in 2016 there 

were 14,314 primary market submissions to the 

MSRB, and in 2015 there were 13,952 primary 

market submissions to the MSRB. 12,709 + 14,314 

+ 13,952 = 40,975. 40,975/3 = 13,658. See MSRB 

2017 Fact Book, supra note 24. 

225As discussed above, this estimate received no 

comments from commenters and the Commission 

continues to believe that this burden is unaffected 

by the amendments. This estimate is being revised 

solely to correspond with the Commission’s new 

method of calculation. 

226 13,658 (estimated annual issuances) × .25 

(hourly burden 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) = 

3,414.5 hours. 3,414.5 hours/250 (estimated number 

of dealers) = 13.65 hours. 

227 In the Proposing Release, the Commission 

estimated dealers would continue to incur a burden 

of 2,500 hours per year, or ten 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 

municipal securities, to provide continuing 

disclosure documents to the MSRB. 3,415 hours 

¥ 2,500 hours = 915 hours. 

228Although not required by the Commission, a 

staff letter suggested that a standard form should be 

used. See Letter from Catherine McGuire, Chief 

Counsel, Division of Market Regulation, U.S. 

Securities and Exchange Commission, to John S. 

Overdorff, Chair, Securities Law and Disclosure 

Committee, Nat’ Ass’n of Bond Lawyers (Sept. 19, 

1995) (‘‘NABL 2’’), available at https://

www.sec.gov/info/municipal/nabl-2-interpretiveletter-1995-09-19.pdf (stating that such documents 

‘‘should list all events in the same language as is 

contained in the rule, without any qualifying words 

or phrases’’). 

229 13,658 (estimated annual issuances) × 1 

(average additional hourly burden per issuance as 

a result of the amendments) = 13,658 hours. 13,658 

hours/250 (estimated number of dealers) = 54.63 

hours. 

230 In the Proposing Release, the Commission 

estimated that the amendments to the Rule would 

result in an additional 2,500 hours annually (an 

additional 10 hours per year per dealer) for dealers 

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. 13,658 hours (new estimate of annual 

increased burden on dealers) ¥ 2,500 hours 

(previous estimate) = 11,158 hours. 11,158/250 

(estimated number of dealers) = 44.63 hours. 

231See supra Section III.A.2.i. 

232See supra Section III.A.2.iv. 

determine that the issuer or obligated 

person has undertaken, in a written 

agreement or contract, for the benefit of 

holders of municipal securities, to 

provide continuing disclosure 

documents to the MSRB; (2) its estimate 

that the amendments would increase the 

burden on dealers by 2,500 hours (10 

hours per dealer per year), 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; and (3) its prior 

estimates under the Rule, predating the 

proposed amendments, that the total 

annual burden for dealers 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 was 20,000 hours 

(80 hours per dealer per year). 

In prior PRA submissions, the 

Commission calculated the PRA burden 

on dealers on a collective, rather than 

per issuance, basis, primarily focusing 

on the number of dealers acting as 

Participating Underwriters in Offerings. 

However, in response to comments,222

the Commission is now calculating the 

PRA burdens on dealers under Rule 

15c2–12 on a per issuance of municipal 

securities basis. The Commission 

believes this is appropriate because a 

dealer’s obligations under Rule 15c2–12 

are triggered by acting as a Participating 

Underwriter in an Offering. This 

method is consistent with the 

Commission’s estimates of the PRA 

burden on issuers for the Rule, which 

are also calculated on a per event 

basis.223 The Commission is basing its 

estimate on the average number of 

primary market submissions to the 

MSRB over the past three years— 

13,658.224

Using this new method of calculation, 

the Commission is revising its estimate 

that dealers would continue to incur a 

burden of 2,500 hours per year (10 

hours per dealer per year), to reasonably 

determine that the issuer or obligated 

person has undertaken, in a written 

agreement or contract, for the benefit of 

holders of municipal securities, to 

provide continuing disclosure 

documents to the MSRB.225 The 

Commission estimates that dealers will 

incur a 15 minute burden per issuance 

of municipal securities to make this 

determination, resulting in an annual 

burden on all dealers of approximately 

3,415 hours (approximately 13.7 hours 

per dealer per year).226 This revised 

estimate constitutes an increase of 

approximately 915 hours 

(approximately 3.7 hours per dealer) 

over the estimates provided in the 

Proposing Release.227 No commenter 

provided an estimate for this burden. 

However, the Commission understands 

that most continuing disclosure 

agreements are provided to the dealer by 

the issuer or obligated person and that 

most of these agreements are standard 

form agreements 228 of limited length. 

Further, the Commission believes that 

the determination required to be made— 

that the issuer or obligated person has 

undertaken to provide continuing 

disclosure documents to the MSRB—is 

a narrow one that does not require a 

substantial time commitment from the 

dealer. For these reasons, the 

Commission believes the estimate of a 

15 minute burden per issuance is 

appropriate. 

The Commission is also revising its 

estimate that the amendments, by 

adding two event notices to paragraph 

(b)(5)(i)(C) of the Rule, would increase 

the burden on dealers by 2,500 hours 

per year (10 hours per dealer per year) 

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. Under 

the new method of calculation, the 

Commission believes that the 

amendments will, on average, amount to 

an additional one hour burden per 

issuance of municipal securities, 

resulting in an annual increased burden 

on all dealers of 13,658 hours 

(approximately 55 hours per year per 

dealer).229 This revised estimate 

constitutes an increase of 11,158 hours 

(approximately 45 hours per dealer), 

over the estimates provided in the 

Proposing Release.230 The Commission 

believes this revised estimate 

appropriately reflects the concerns 

raised by commenters while also 

recognizing that the amendments have 

been substantially narrowed from the 

amendments as proposed. The adopted 

definition of ‘‘financial obligation’’ in 

the Rule has significantly limited the 

scope of leases covered 231 and no 

longer covers monetary obligations 

resulting from a judicial, administrative, 

or arbitration proceeding.232

Accordingly, dealers, when determining 

whether issuers or obligated persons 

have failed to comply with the events 

added by the amendments, will have a 

substantially smaller set of ‘‘financial 

obligations’’ to review. 

Finally, the Commission is revising its 

prior estimates, predating the proposed 

amendments, that the total annual 

burden for dealers 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 is 20,000 

hours (80 hours per dealer per year). No 

commenter provided an estimate for this 

burden. Under the new method of 

calculation, the Commission believes 

that dealers will incur 8 hours of burden 

per issuance of municipal securities to 

make this determination, resulting in an 


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233 13,658 (estimated annual issuances) × 8 

(average burden estimate per issuance for dealers 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) = 109,264 hours. 109,264 hours/250 

(estimated number of dealers) = 437.05 hours. 

234 In the Proposing Release, the Commission 

estimated that the dealer burden, not including the 

proposed amendments, for determining 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, was 

20,000 hours (80 hours per year per dealer). See 

Proposing Release, supra note 3, 82 FR at 13943– 

44 and note 131. 109,264 hours (revised estimate of 

this dealer burden) ¥ 20,000 hours (estimate in the 

Proposing Release) = 89,264 hours. 89,264/250 

(estimated number of dealers) = 357.05 hours. 

235See MSRB 2017 Fact Book, supra note 24. 

236 109,264 hours (revised estimate of dealer 

burden, prior to these amendments, 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) + 13,658 

hours (revised estimate of additional dealer burden, 

due to the amendments, 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) + 3,415 

hours (revised annual estimate 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) = 126,336.5 

hours. 126,337 hours/250 (estimated number of 

dealers) = 505.35 hours. 

237 0.25 hours (revised estimate of burden per 

issuance for dealer to reasonably determine that the 

issuer or obligated person has undertaken, in a 

written agreement or contract, for the benefit of 

holders of municipal securities, to provide 

continuing disclosure documents to the MSRB) + 1 

hour (revised estimate of additional burden per 

issuance, due to the amendments, for dealers 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) + 8 hours (revised estimate of burden per 

issuance, prior to these amendments, for dealers 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) = 9.25 hours per issuance. 

238 126,337 hours (revised estimate of total dealer 

burden) ¥ 25,000 hours (estimate of total dealer 

burden in Proposing Release) = 101,337 hours. 

101,337 hours/250 (estimated number of dealers) = 

405.35 hours. 

239See Proposing Release, supra note 3, 82 FR at 

13944. 

240See id. 

241See NABL OMB Letter. 

242See id. 

243See supra Sections III.A.1 and III.A.2. 

244 126,337 hours (revised estimate of total annual 

burden for dealers acting as a Participating 

Underwriter) + 1,250 hours (estimated one-time 

burden for dealers acting as a Participating 

Underwriter) = 127,587 hours. 

245See supra note 236. 

annual burden on dealers of 109,264 

hours (approximately 437 hours per 

dealer per year).233 This revised 

estimate constitutes an increase of 

89,264 hours (an increase of 

approximately 357 hours per dealer), 

over the estimate provided in the 

Proposing Release.234 The Commission 

arrived at the 8-hour per issuance 

burden estimate after considering (1) the 

comments addressing the prior burden 

estimates for dealers under Rule 15c2– 

12, particularly the comments related to 

the Commission’s prior PRA 

submissions; (2) comments addressing 

the potential that dealer burdens may 

have shifted as a result of subsequent 

Commission action; (3) the MSRB’s 

statistics concerning the number of 

event notices filed on an annual basis; 

and (4) the potential volume of 

documentation to be reviewed under 

this obligation.235 Based on the 

Commission’s experience, the 

Commission believes that the estimate 

of an average burden of 8 hours per 

issuance is appropriate. 

Accordingly, under the Commission’s 

revised estimates, the total annual 

burden for all dealers acting as 

Participating Underwriters in Offerings 

will be 126,337 hours (approximately 

505 hours per dealer per year),236 or an 

average of 9.25 hours per issuance of 

municipal securities.237 This revised 

estimate constitutes an increase of 

101,337 hours (approximately 405 hours 

per dealer) over the estimates in the 

Proposing Release for the entire dealer 

community.238 The Commission 

understands that burdens will vary 

across dealers and across specific 

issuances depending on numerous 

factors, such as the frequency of 

issuances by the issuer, size and 

complexity of the issuer, and the 

familiarity of the dealer with the issuer. 

The burden for some dealers will exceed 

our estimate, and the burden for others 

will be less. However, the Commission 

believes, on balance, that 126,337 hours 

(on average approximately 505 hours 

per dealer per year), is a reasonable 

estimate for the time needed for dealers 

acting as Participating Underwriters in 

Offerings to comply with their 

obligations under Rule 15c2–12. 

ii. One-Time Paperwork Burden 

In the Proposing Release, the 

Commission estimated that each dealer 

acting as a Participating Underwriter in 

an Offering 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.239 Based on prior 

estimates for similar amendments, the 

Commission estimated that it would 

take each dealer’s internal compliance 

attorney approximately 30 minutes to 

prepare and issue a notice describing 

the dealer’s obligations in light of the 

Proposed Amendments, for a total onetime, first-year burden of 125 hours for 

the entire dealer community.240 The 

Commission also stated that it believed 

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. 

One commenter expressed concern 

that the Commission’s estimate of the 

one-time burden on dealers acting as 

Participating Underwriters in Offerings 

was too low.241 The commenter stated 

that dealers would have to ‘‘identify 

their resulting duties, develop 

procedures for complying with them 

(including means for determining 

appropriate review levels and 

materiality judgments in commonly 

recurring circumstances), communicate 

the procedures to applicable personnel, 

and include the procedures in periodic 

training.’’ 242 The commenter did not 

provide its own estimate for the onetime burden on dealers. In response to 

this comment, the Commission is 

revising its estimate of the time it will 

take each dealer to prepare and issue a 

notice advising its employees about the 

amendments to Rule 15c2–12 from 30 

minutes per dealer to five hours per 

dealer. The Commission believes this 

revised estimate more accurately 

captures the time needed to complete 

the tasks identified by the commenter 

while also recognizing that the 

Commission has narrowed the scope of 

the amendments and removed several 

terms that commenters had 

characterized as burdensome and timeconsuming to interpret and 

implement.243

Accordingly, the Commission 

estimates that the 250 dealers acting as 

a Participating Underwriter in Offerings 

would incur a one-time burden of five 

hours each, for a total one-time, first 

year burden of 1,250 hours for all 

dealers. 

iii. Total Burden for Dealers 

Under the amendments to Rule 15c2– 

12 as adopted, the total burden on all 

dealers would be 127,587 hours for the 

first year 244 and 126,337 hours for each 

subsequent year.245 Table 1 below 

briefly summarizes the Commission’s 

PRA burden estimates for dealers in the 

2015 PRA Notice (the Commission’s 

most recent estimates prior to these 


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246The 2015 PRA Notice contained no estimates 

of one-time burdens and costs because the approved 

collection of information associated with the Rule 

had not changed. 247See Proposing Release, supra note 3, 82 FR at 

13944; 2015 PRA Notice, supra note 202. 248See NABL OMB Letter. 249 28,000 is the current approximate number of 

issuers identified in MSRB Form G–32 filings as 

agreeing to provide continuing disclosure 

information under Rule 15c2–12 dating from June 

2018 back to February 2011, when the MSRB first 

began collecting such information. 

250See 2015 PRA Notice, supra note 202. 

251 73,480 (annual number of event notices) × 2 

(estimate of average hours needed to prepare and 

submit each) + 62,596 (annual number of annual 

filings) × 7 (estimate of average hours needed to 

prepare and submit each) + 7,063 (annual number 

of failure to file notices) × 2 (estimate of average 

hours needed to prepare and submit each) = 

599,258 hours. 

amendments), the Proposing Release, 

and the Adopting Release. 

TABLE 1—SUMMARY OF PRA BURDEN ESTIMATES FOR DEALERS

Annual 

burden 

(hours) 

One-time 

burden 

(hours) 

Dealers (2015 PRA Notice) ..................................................................................................................................... 22,500 246 n/a 

Dealers (Proposing Release) .................................................................................................................................. 25,000 125 

Dealers (Adopting Release) .................................................................................................................................... 126,337 1,250 

2. Issuers 

The amendments, as adopted, 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. 

Under the Rule prior to these 

amendments and in the Proposing 

Release, the Commission estimated that 

20,000 issuers of municipal securities 

annually submit to the MSRB 

approximately 62,596 annual filings, 

73,480 event notices, and 7,063 failure 

to file notices.247 The number of issuers 

was based on information received from 

the MSRB in 2015 regarding the number 

of issuers affected by continuing 

disclosure agreements. In response to 

the Proposing Release, the Commission 

received a comment stating that the true 

number of issuers affected by Rule 

15c2–12 was 34,696, or the number of 

filings on EMMA in 2016 listed under 

the category of ‘‘audited financial 

statements or CAFRs.’’ 248 However, the 

Commission believes that category 

likely overstates the number of issuers 

affected by continuing disclosure 

agreements because a large number of 

those filings may not reflect distinct 

issuers filing separate audited financial 

statements. Many of the documents filed 

under that category are supplemental 

documents, or multiple years of audited 

financial statements filed by a single 

issuer all in one year. Instead, based on 

recent data provided by the MSRB staff 

to the Commission staff in conjunction 

with this rulemaking, the Commission 

believes that an appropriate revised 

estimate is that 28,000 issuers are 

affected by continuing disclosure 

requirements under Rule 15c2–12.249

i. Amendments to Event Notice 

Provisions of the Rule 

The Commission proposes to modify 

paragraph (b)(5)(i)(C) of the Rule, which 

presently requires a dealer acting as a 

Participating Underwriter 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 Rule prior to these 

amendments contained fourteen such 

events. The adopted amendments to this 

paragraph of the Rule add two new 

event disclosure items: New paragraph 

(b)(5)(i)(C)(15) contains 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; and new paragraph 

(b)(5)(i)(C)(16) requires the disclosure 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, any of which reflect 

financial difficulties. The Commission 

believes that the adopted amendments 

to paragraph (b)(5)(i)(C) of the Rule will 

increase the current annual paperwork 

burden for issuers because they will 

result in an increase in the number of 

event notices to be prepared and 

submitted. 

ii. Total Burden on Issuers for 

Amendments to Event Notices 

Under the Rule prior to these 

amendments, the Commission estimates 

that issuers prepare and submit 

annually: (1) 73,480 event notices, with 

each notice taking approximately two 

hours to prepare and submit; (2) 62,596 

annual filings, with each filing taking 

approximately seven hours to prepare 

and submit; and (3) 7,063 failure to file 

notices, with each notice taking 

approximately two hours to prepare and 

submit.250 Accordingly, under the 

estimate prior to these amendments, 

issuers would incur a total annual 

burden of 599,258 hours.251

In the Proposing Release, the 

Commission estimated that the 

amendments to the Rule would result in 

an increase to the annual total burden 

of issuers. Specifically, the Commission 

estimated that the proposed amendment 

in paragraph (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, and that the proposed 

amendment in paragraph (b)(5)(i)(C)(16) 

would increase the total number of 

event notices submitted by issuers 

annually by approximately 100 notices. 

The Commission also estimated that the 

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 continue to be 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. Accordingly, the 

Commission estimated that the increase 

in number of event notices would result 

in an increase of 4,400 hours in the 

annual paperwork burden for issuers to 

submit event notices, with a total 

annual paperwork burden for issuers to 

submit event notices of approximately 

151,360 hours (146,960 hours + 4,400 


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252 75,680 (annual number of event notices 

including additional 2,200 event notice burden 

created by amendments) × 2 (average estimate of 

hours needed to prepare and submit each) + 62,596 

(average number of annual filings) × 7 (average 

estimate of hours needed to prepare and submit 

each) + 7,063 (average number of failure to file 

notices) × 2 (average estimate of hours needed to 

prepare and submit each) = 603,658 hours. The 

Commission believed that the proposed 

amendments would not affect the number of annual 

filings or failure to file notices required to be filed 

by issuers, so those estimates were unchanged from 

the estimates under the Rule prior to these 

amendments. See 2015 PRA Notice, supra note 202. 

253See GFOA Letter; NABL OMB Letter; Kutak 

Rock Letter; ABA Letter; SIP Letter. 

254See GFOA Letter. 

255See NABL OMB Letter. 

256See Kutak Rock Letter. 

257See, e.g. Houston Letter; Denver Letter. 

258See Denver Letter. See also, e.g. AZ 

Universities Letter; Kutak Rock Letter; NABL OMB 

Letter; NAHEFFA Letter. 

259See NABL OMB Letter. 

260See id. 

261See GFOA Letter (‘‘Respondents estimated that 

the average amount of internal staff time committed 

to ensuring compliance to the proposed 

amendments would be 7.3 hours per material event 

and 7.8 per occurrence, modification of terms or 

other similar event’’). 

262See Kutak Rock Letter. 

263See NABL OMB Letter. The commenter 

estimated that one-quarter of 34,696 issuers (as 

discussed above, the Commission believes this 

likely overstates the number of issuers) would each 

file three material event notices annually under the 

proposed amendment (15), and each notice would 

take 4.2 hours to prepare and file. Using these 

estimates, issuers would file an additional 26,022 

event notices to comply with proposed amendment 

(15) based off the following: 34,696 (estimated 

number of issuers) × .25 (estimated percentage of 

such issuers filing event notices under proposed 

amendment (15)) × 3 (number of event notices 

needed to be filed be each such issuer) = 26,022 

filings. The commenter did not provide any basis 

for its estimate that one-quarter of issuers would 

need to file event notices, or any basis for its 

estimate that each such issuer would file three 

event notices, which would result in an additional 

26,022 filings. Moreover, the commenter was basing 

its estimates on the proposed amendments, not the 

narrowed, adopted definition of ‘‘financial 

obligation.’’ 

264See id. The commenter estimated that 100 

notices would need to be filed under proposed 

amendment (16), and that each would take 5.3 

hours to prepare and file. The commenter’s estimate 

that each such notice would take 5.3 hours to 

prepare and file is based on a survey response. 

265See id. The commenter estimated that 34,696 

issuers would each need 25 hours a year to monitor 

and elevate possibly reportable events under the 

proposed amendments. The commenter did not 

provide a basis for its estimate that every issuer 

would need 25 hours a year to monitor for such 

events. 

266See id. The commenter estimated that one-half 

of 34,696 issuers would need ten hours a year to 

evaluate possibly reportable events. The commenter 

did not provide a basis for its estimate that one-half 

of issuers would need to evaluate possibly 

reportable events, and its estimate that such an 

evaluation would take ten hours a year. 

267See id. 

268 75,680 (annual number of event notices) × 4 

(revised estimate of hours needed to prepare and 

submit each) = 302,720 hours. This number 

includes and incorporates its estimate that the 

amendments, as adopted, add an additional 2,200 

event notices to the burden estimates. The burden 

estimate in the Proposing Release was 75,680 event 

notices at 2 hours each, equaling 151,360 hours. 

302,720 hours ¥ 151,360 hours = 151,360 hours of 

increased burden over the estimate in the Proposing 

Release. 

269The Commission is not adopting the estimates 

of total burden provided by the commenters 

because those estimates were in response to 

amendments that have since been substantially 

narrowed. See supra Section III.A.2. 

hours), and a total annual burden on 

issuers of 603,658 hours.252

iii. Comments Related to Estimated 

Paperwork Burden on Issuers 

The Commission received several 

comments relating to the estimates of 

the Paperwork Reduction Act burden on 

issuers.253 Commenters expressed 

concern that the Commission’s 

estimates understated the burden of the 

proposed amendments on issuers 

because, in large part, the Commission 

failed to account for the overly broad 

definition of ‘‘financial obligation.’’ One 

commenter criticized the term financial 

obligation for requiring ‘‘information 

that is both superfluous to investors and 

costly for issuers to present,’’ further 

stating that ‘‘leases, for example, are 

transactions that take place many times 

per year in many jurisdictions and are 

commonly related to the ongoing 

operations of a government.’’ 254

Another commenter stated that issuers 

‘‘enter into a staggering number of leases 

and other financial obligations, as 

defined in the Proposed Amendments, 

in the ordinary course of providing 

important services to the public.’’ 255

And another commenter stated that the 

definition of financial obligation could 

capture routine items such as 

equipment lease programs and shortterm maintenance contracts.256

Commenters also criticized the 

inclusion of ‘‘monetary obligation 

resulting from a judicial, administrative, 

or arbitration proceeding,’’ stating that 

issuers could be subject to potentially 

hundreds of such obligations annually 

and that monitoring for such obligations 

would be expensive and timeconsuming.257 Many commenters stated 

that, as defined, ‘‘financial obligations’’ 

incurred by the issuer would be 

managed across dozens of departments 

and that ‘‘significant expense and 

effort’’ would be required to train 

employees across these departments and 

create ‘‘a system of coordination and 

review that would enable the [issuer] to 

comply’’ with the proposed 

amendments.258

Commenters also criticized the 

Commission for failing to account for 

the burden created by what they termed 

the ambiguity of the term ‘‘material.’’ 

One commenter argued that the 

Commission, by refusing to give explicit 

guidance as to materiality, will force 

issuers to ‘‘review voluminous, often 

inconsistent court decisions and 

administrative orders in an attempt to 

give clarity to the term.’’ 259 The net 

result, the commenter argued, is that 

issuers will expend far more hours than 

estimated by the Commission to review 

‘‘even routine financial obligations’’ for 

materiality.260

These commenters generally 

contended that the burden of complying 

with the proposed amendments was far 

greater than the Commission’s 

estimates. One commenter, after 

surveying its members, estimated that 

the time needed to ensure compliance 

with the proposed amendments would 

be approximately seven hours per event 

notice required to be filed with the 

MSRB under the proposed rule.261

Another commenter suggested that the 

time needed for an issuer to prepare and 

submit an event notice for the proposed 

amendments could be up to 100 times 

greater than the Commission’s original 

estimate of two hours per notice.262 And 

another commenter estimated that the 

total annual burden on issuers for 

preparing and submitting event notices 

would be 109,292 hours 263 for proposed 

amendment (15) and 530 hours 264 for 

proposed amendment (16). That 

commenter further estimated that 

issuers would spend 867,400 hours 265 a 

year monitoring for possibly reportable 

events and 173,480 hours 266 evaluating 

possibly reportable events. Commenters 

also criticized past Commission 

estimates of issuer burden for filing 

event notices for being ‘‘substantially 

understated.’’ 267

In response to comments, the 

Commission is revising, from two hours 

to four hours, its estimate of the average 

time needed for an issuer to prepare and 

submit an event notice to the MSRB in 

an electronic format, including time to 

actively monitor the need for filing. The 

Commission believes this change, which 

recognizes an increased annual burden 

estimate on issuers of 151,360 hours 268

from the estimates in the Proposing 

Release, appropriately reflects the 

concerns raised by the commenters that 

the original estimates were too low.269

This four-hour estimate applies to the 

average time needed to monitor, 

prepare, and file all sixteen types of 

event notices, not just the two new 

event notices required by the 

amendments to the Rule. The 

Commission recognizes that the event 

notices required by the amendments 

may on average be more complex and 

require more than an average of four 


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270See Kutak Rock Letter. 

271According to the 2017 MSRB Fact Book, bond 

call notices in 2017 were 63% of total event notices 

(38,198 of 60,883 total event notices). In 2016, bond 

call notices were 66% (41,862 of 63,586 event 

notices) of total event notices. See MSRB 2017 Fact 

Book, supra note 24. 

272Other than comments in the NABL OMB 

Letter discussed above in note 263, the Commission 

did not receive comments quantifying the increase 

in the total number of event notices that issuers 

would file because of the proposed amendments. As 

previously stated, the narrowing of the definition of 

‘‘financial obligation’’ from the definition proposed 

in the Proposing Release should reduce the number 

of required filings. Nonetheless, in light of the 

comments in the NABL OMB Letter suggesting that 

filings resulting from the proposed amendments 

might be higher than the Commission originally 

estimated, in light of a lack of data to quantify a 

reduction in filings resulting from the narrowed 

scope of the amendments, and to provide an 

estimate for the paperwork burden that would not 

be under-inclusive, the Commission has elected to 

retain the proposed estimate at this time. 

273See supra Section III.A.2.i. 

274Compare, e.g., Denver Letter (the broad scope 

of financial obligation will require ‘‘significant 

expense and effort . . . [to] train relevant City 

employees across dozens of departments and 

agencies and to create a system of coordination and 

review’’) and TASBO Letter (‘‘school districts will 

be required to restructure their organizations and 

establish review processes in order to vet the types 

of ’financial obligations’ captured under the broad 

definition included in the proposed regulations.’’) 

with BDA Letter (if the definition of financial 

obligation were ‘‘properly crafted around competing 

debt, all of the material ’financial obligations’ 

would ordinarily fall within the responsibility of 

that one department because it tends to be 

responsible for all debt of the issuer’’). 

275 438,172 hours (estimated burden for issuers to 

submit annual filings) + 302,720 hours (estimated 

annual burden for issuers to submit event notices 

under the amendments) + 14,126 hours (estimated 

annual burden for issuers to submit failure to file 

notices) = 755,018 hours. 

hours to monitor, evaluate, prepare, and 

file. But, as discussed below, the 

Commission believes that the adopted 

amendments will generate relatively few 

event notices and that the majority of 

the event notices required to be filed 

under the Rule are not as timeconsuming for an issuer to monitor, 

evaluate, prepare, and file. As even 

commenters critical of the 

Commission’s estimates stated, ‘‘the 

existing events under Rule 15c2–12 are 

generally objectively ascertainable by 

most laymen and rarely occur, making 

them easily identifiable by issuers and 

relatively inexpensive to handle.’’ 270

Furthermore, the majority of event 

notices filed on EMMA in recent years 

have been for bond calls, which is an 

action typically instituted by the issuer 

itself and therefore one the issuer would 

require very little effort to monitor.271

Accordingly, the Commission believes 

that increasing the estimate of average 

time needed to monitor, evaluate, 

prepare, and file an event notice in 

electronic format to the MSRB to four 

hours per event notice addresses the 

comments raised and forms an 

appropriate average estimate of the 

burden on issuers to comply with this 

collection of information requirement 

under the Rule. 

However, the Commission is not 

changing its estimate that the 

amendments to the Rule will result in 

2,200 additional event notices filed 

annually, raising the total number of 

event notices prepared by issuers 

annually to approximately 75,680. The 

Commission believes this estimate 

remains appropriate because of the 

substantial narrowing of the definition 

of financial obligation from the 

definition proposed in Proposing 

Release.272 The adopted definition of 

financial obligation removes or 

extensively limits the definitions, such 

as the modifications regarding leases, 

derivatives, and judicial obligations that 

commenters cited as the most 

burdensome. The adopted definition of 

financial obligation is tailored to apply 

only to debt, debt-like, and debt-related 

obligations. The adopted definition 

narrows the number of transactions for 

which issuers and obligated persons 

will need to monitor, evaluate, review, 

or file notices. The Commission believes 

this change will reduce the burdens of 

the adopted amendments as compared 

to the proposed amendments. In 

particular, the narrowing of ‘‘financial 

obligation’’ to focus on instruments that 

compete with a security holder’s 

interests, as a security holder 273 will 

dramatically limit the need for issuers to 

centralize reporting and analysis for 

staff across multiple departments.274

Moreover, as discussed in Section 

III.A.1.i, the Commission has provided 

examples intended to assist issuers in 

determining materiality under the Rule, 

addressing another issue commenters 

believed added to the burden of 

compliance with the Rule. 

iv. Total Burden for Issuers 

Under the amendments to Rule 15c2– 

12 as adopted, the total burden on 

issuers to submit continuing disclosure 

documents would be 755,018 hours.275

Table 2 below briefly summarizes the 

Commission’s PRA burden estimates for 

issuers in the 2015 PRA Notice (the 

Commission’s most recent estimates 

prior to these amendments), the 

Proposing Release, and the Adopting 

Release. 

TABLE 2—SUMMARY OF PRA BURDEN ESTIMATES FOR ISSUERS

Estimated 

filings 

(submissions) 

Annual 

burden 

(hours) 

One-time 

burden 

(hours) 

Estimates in 2015 PRA Notice 

Issuers (annual filings) ................................................................................................................. 62,596 438,172 n/a 

Issuers (event notices) ................................................................................................................ 73,480 146,960 n/a 

Issuers (failure to file notices) ..................................................................................................... 7,063 14,126 n/a 

Estimates in Proposing Release 

Issuers (annual filings) ................................................................................................................. 62,596 438,172 0 

Issuers (event notices) ................................................................................................................ 75,680 151,360 0 

Issuers (failure to file notices) ..................................................................................................... 7,063 14,126 0 

Estimates in Adopting Release 

Issuers (annual filings) ................................................................................................................. 62,596 438,172 0 

Issuers (event notices) ................................................................................................................ 75,680 302,720 0 

Issuers (failure to file notices) ..................................................................................................... 7,063 14,126 0 


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276See 2015 PRA Notice, supra note 202. 277First-year burden for the MSRB: 12,699 hours 

(estimate of annual burden in the Proposing 

Release) + 1,162 hours (estimate for one-time 

burden to implement the proposed amendments) = 

13,861 hours. 278According to the MSRB, its estimated annual 

burden has changed from 12,699 hours to 19,500 

hours due to a change in the method of calculation 

used by the MSRB to estimate annual burden. 279According to the MSRB, its estimated one-time 

burden has changed from 1,162 hours to 1,700 

hours after further assessment of the work needed 

to prepare EMMA for two new event notices. 

280First-year burden for the MSRB: 19,500 hours 

(estimated annual burden) + 1,700 hours (estimate 

for one-time burden to implement the amendments) 

= 21,200 hours. 

281See NABL OMB Letter and SIFMA Letter. 

282See id. 

283See NABL OMB Letter. The commenter 

derived this estimate by multiplying 9,358,046 (the 

number of municipal securities trades reported by 

the MSRB in 2016) by 76% (the purported 

percentage of such transactions that would require 

review) and then by 2 (how many hours such a 

review would take). The 76% figure was the mean 

response in the commenter’s survey to the question 

‘‘what percentage [of issuers] have outstanding 

‘financial obligations’ that you believe the SEC 

might determine to be material . . . ?’’ The 

estimate that it would take two hours for a dealer 

to complete its due diligence was apparently 

derived from a survey response indicating that an 

issuer’s redacted financial obligations to be 

reviewed would average 39 pages in length. 

284 126,337 hours (total estimated annual burden 

for dealers) + 755,018 hours (total estimated annual 

burden for issuers) + 19,500 hours (total estimated 

annual burden for MSRB) = 900,855 hours. The 

initial first-year burden would be 903,805 hours: 

127,587 hours (total estimated burden for dealers in 

first year) + 755,018 hours (total estimated burden 

for issuers in first year) + 21,200 hours (total 

estimated burden for MSRB in the first year) = 

903,805 hours. 

3. MSRB 

Under the Rule prior to these 

amendments, 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.276 In the Proposing 

Release, the Commission estimated, 

based on preliminary consultations 

between Commission staff and MSRB 

staff, that 12,699 hours was still a 

reasonable estimate for this annual 

burden. The Commission also 

estimated, based on consultations with 

the MSRB staff, that the MSRB would 

require a one-time burden of 1,162 

hours to implement the necessary 

modifications to EMMA to reflect the 

additional mandatory disclosures under 

Rule 15c2–12. Accordingly, the 

Commission estimated that the total 

burden on the MSRB to collect, store, 

retrieve, and make available the 

disclosure documents covered by the 

Rule would be 13,861 hours 277 for the 

first year and 12,699 hours for each 

subsequent year. 

The Commission received no 

comments on these estimates. However, 

the Commission is revising these 

estimates to correspond with updated 

estimates provided by the MSRB. The 

Commission now estimates that the 

MSRB incurs an annual burden of 

approximately 19,500 hours to collect, 

index, store, retrieve, and make 

available the pertinent continuing 

disclosure documents under the 

Rule.278 The Commission also now 

estimates that the MSRB would require 

a one-time burden of 1,700 hours to 

implement the necessary modifications 

to EMMA to reflect the additional 

mandatory disclosures under Rule 

15c2–12.279 Accordingly, the 

Commission estimates that the total 

burden on the MSRB to collect, store, 

retrieve, and make available the 

disclosure documents covered by the 

Rule would be 21,200 hours 280 for the 

first year and 19,500 hours for each 

subsequent year. Table 3 below 

summarizes the Commission’s PRA 

burden estimates for the MSRB in the 

2015 PRA Notice (the Commission’s 

most recent estimates prior to these 

amendments), the Proposing Release, 

and the Adopting Release. 

TABLE 3—SUMMARY OF PRA BURDEN ESTIMATES FOR THE MSRB 

Annual 

burden 

(hours) 

One-time 

burden 

(hours) 

MSRB (2015 PRA Notice) ....................................................................................................................................... 12,699 n/a 

MSRB (Proposing Release) .................................................................................................................................... 12,699 1,162 

MSRB (Adopting Release) ...................................................................................................................................... 19,500 1,700 

4. Total Burden for Dealers Effecting 

Transactions in the Secondary Market 

Under the Rule prior to these 

amendments and in the Proposing 

Release, the Commission made no 

estimate of the burden on dealers 

effecting transactions in the secondary 

market to comply with Rule 15c2–12. 

Two commenters characterized this as 

an omission.281 Those commenters cited 

to obligations, under Rule 15c2–12(c) 

and MSRB Rule G–47, which those 

commenters stated required dealers in 

the secondary market to disclose 

material information to investors, 

expressing concern that the proposed 

amendments would greatly increase the 

burden on such dealers.282 One 

commenter estimated that the total 

annual burden on dealers effecting 

transactions in the secondary market 

would be 14,224,229 hours.283

The Commission continues to believe 

that neither the adopted amendments 

nor Rule 15c2–12 prior to amendment 

contains ‘‘collection of information 

requirements’’ within the meaning of 

the PRA on dealers effecting 

transactions in the secondary market. 

Rule 15c2–12(c) requires only that a 

dealer acting in the secondary market 

have ‘‘procedures in place that provide 

reasonable assurance that it will receive 

prompt notice of any event disclosed 

pursuant to paragraph (b)(5)(i)(C), 

paragraph (b)(5)(i)(D), and paragraph 

(d)(2)(ii)(B)’’ of the Rule. To the extent 

that dealers effecting transactions in the 

secondary market review and disclose 

material to customers, those associated 

burdens stem from antifraud provisions 

and MSRB rules that are not subject to 

this PRA analysis. 

5. Annual Aggregate Burden for 

Amendments to Rule 15c2–12 

The Commission estimates that the 

ongoing annual aggregate information 

collection burden for the Rule after 

giving effect to the amendments would 

be 900,855 hours.284

E. Total Annual Cost 

1. Dealers and the MSRB 

In the Proposing Release, the 

Commission stated that it did 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 


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285See Proposing Release, supra note 3, 82 FR at 

13946. 

286 Id. 

287 Id. 

288According to the MSRB, its estimated annual 

cost has changed to $520,000 after a change in the 

method of calculation used by the MSRB to 

estimate annual cost. This estimate corresponds to 

the estimated annual cost in hardware and software 

costs to operate the continuing disclosure service 

for the MSRB’s EMMA system. 

289See Proposing Release, supra note 3, 82 FR at 

13946. The Commission estimated the following: 

20,000 (number of issuers) × .65 (percentage of 

issuers that may use designated agents) × $750 

(estimated average annual cost for issuer’s use of 

designated agent) = $9,750,000. See also 2015 PRA 

Notice, supra note 202. 

290 Id. 

291See supra Section IV.D.2.iii. 

292See supra Section IV.D.2 (revising the 

estimated number of issuers affected by continuing 

disclosure agreements consistent with the Rule 

from 20,000 to 28,000). This revision is necessary 

because the Commission’s prior calculations in the 

Proposing Release relied on an estimate of 65% of 

20,000 issuers. 

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.285 To the extent that dealers 

would incur a one-time burden of 

preparing and issuing a notice advising 

the dealer’s employees about the 

amendments, the Commission believed 

that the work would be consistent with 

the type of compliance work that a 

dealer typically handles internally, and 

that the dealer would not incur any 

additional external costs.286 The 

Commission received no comments on 

this estimate and continues to believe 

that this estimate is appropriate. 

Also in the Proposing Release, the 

Commission stated that it did not expect 

the MSRB to incur any additional 

external costs associated with the 

proposed amendments to the Rule. The 

Commission believed that the MSRB 

would not incur additional external 

costs specifically associated with 

modifying the indexing system to 

accommodate the amendments to the 

Rule because the MSRB would 

implement those changes internally. 

The Commission received no comments 

on this estimate. After consultation of 

the Commission staff with MSRB staff, 

the Commission continues to believe 

that this estimate is appropriate. 

Additionally, in the Proposing Release, 

the Commission estimated that the 

MSRB expends $10,000 annually in 

hardware and software costs for the 

MSRB’s EMMA system.287 After 

consultation of the Commission staff 

with MSRB staff, the Commission now 

estimates that the MSRB expends 

$520,000 annually in hardware and 

software costs for the MSRB’s EMMA 

system.288

Under the amendments to Rule 15c2– 

12 as adopted, the total external costs to 

dealers would be zero and the total 

external costs to the MSRB would be 

$520,000 annually. Table 4 below 

summarizes the Commission’s PRA 

external cost estimates for dealers and 

the MSRB in the 2015 PRA Notice (the 

Commission’s most recent estimates 

prior to these amendments), the 

Proposing Release, and the Adopting 

Release. 

TABLE 4—SUMMARY OF PRA COST ESTIMATES FOR DEALERS AND THE MSRB 

Annual 

external 

cost 

One-time 

external 

cost 

Estimates in 2015 PRA Notice 

Dealers ..................................................................................................................................................................... $0 n/a 

MSRB ....................................................................................................................................................................... 10,000 n/a 

Estimates in Proposing Release 

Dealers ..................................................................................................................................................................... 0 $0 

MSRB ....................................................................................................................................................................... 10,000 0 

Estimates in Adopting Release 

Dealers ..................................................................................................................................................................... 0 0 

MSRB ....................................................................................................................................................................... 520,000 0 

2. Issuers 

In the Proposing Release, the 

Commission stated that it believes 

issuers generally would not incur 

external costs associated with the 

preparation of event notices filed under 

the amendments, because issuers would 

generally prepare the information 

contained in the continuing disclosures 

internally. 

However, the Commission recognized 

that issuers would be subject to some 

costs associated with the amendments 

to the Rule if they paid third parties to 

assist them with their continuing 

disclosure responsibilities. Under the 

Rule prior to these amendments, 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, with an average total 

annual cost incurred by issuers using 

the services of a designated agent of 

$9,750,000.289 In the Proposing Release, 

the Commission modified this estimate 

to account for the estimated increase in 

filings as a result of the proposed 

amendments. The Commission 

estimated that the proposed 

amendments would result in 2,200 more 

event notices filed annually, increasing 

costs for issuers using a designated 

agent for submission of event notices to 

the MSRB of approximately six percent, 

to $10,335,000.290

The Commission received no 

comments on this estimate. The 

Commission continues to believe that 

the amendments will result in an 

increase of 2,200 event notices filed 291

and that the amendments will increase 

costs for the issuers using a designated 

agent by approximately six percent. The 

Commission also continues to believe 

that up to 65% of issuers may use 

designated agents; however, the 

Commission is revising its calculations 

to correspond with its revised estimate 

of the number of issuers affected by 

continuing disclosure agreements 

consistent with the Rule, which has 

changed from 20,000 in the Proposing 

Release to 28,000.292 As a result, the 

Commission is making two adjustments. 

First, the Commission is revising its 

estimate of the cost to issuers who may 


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293Previously, the Commission estimated that 

65% of 20,000 issuers would use designated agents 

for the submission of event notices to the MSRB. 

See 2015 PRA Notice, supra note 202. The 

Commission now estimates that 65% of 28,000 

issuers may use designated agents. 

294 28,000 issuers (revised estimate of issuers 

affected by continuing disclosure agreements 

consistent with the Rule) × .65 (percentage of 

issuers that may use designated agents) × $750 

(estimated average annual cost for issuer’s use of 

designated agent for the Rule prior to these 

amendments) = $13,650,000. 

295 28,000 (number of issuers) × .65 (percentage of 

issuers that may use designated agents) × $795 

($750 × 1.06) (estimated average annual cost for 

issuer’s use of designated agent under the 

amendments to the Rule) = $14,469,000. The 

increase in annual cost as a result of the 

amendments is $819,000 ($14,469,000 ¥ 

$13,650,000 = $819,000). 

296See 2010 Amendments Adopting Release, 

supra note 8. 

297See Proposing Release, supra note 3, 82 FR at 

13946. 

298 Id. 20,000 issuers × $100 = $2,000,000. 

299See Kutak Rock Letter. 

300See NABL 2, supra note 228. 

301See supra Section IV.D.2. 

302 28,000 issuers (revised estimate of issuers 

affected by continuing disclosure requirements 

under the Rule) × $400 (hourly wage for an outside 

attorney) × .25 hours (estimated time for outside 

attorney to revise a continuing disclosure document 

in accordance with the amendments to the Rule) = 

$2,800,000 (total one-time cost for all issuers). See 

also Proposing Release, supra note 3, 82 FR at 

13946 and note 153. 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 of outside counsel would be an 

average of $400 per hour. 

303See NAMA Letter; ABA Letter; Arlington SD 

Letter; GFOA Letter. 

304See GFOA Letter. According to the 

commenter, it surveyed 174 GFOA members 

primarily responsible for debt disclosure in their 

respective jurisdictions. 

305See Arlington SD Letter. 

306See, e.g., NAMA Letter (stating the ‘‘too 

broad’’ definition of financial obligation would 

force issuers to consult counsel for ‘‘many types of 

financings and financial obligations that do not 

affect a government[’s] . . . ability to pay debt); see 

also BDA Letter (stating if the definition of financial 

obligation were focused on competing debt, the 

responsibility to assess whether an event notice was 

needed would be handled by an issuer’s debt 

finance department). 

307See supra Section IV.D.2.iii. 308While some commenters stated that the 

assistance of outside counsel would be required on 

nearly all event notices under the proposed 

amendments, the Commission believes that the 

narrowed scope of the adopted amendments, as 

well as the examples provided in Section III.A.1. 

intended to assist issuers in determining materiality 

under the Rule, will substantially reduce the need 

for issuers to consult with outside counsel. 

309See NABL OMB Letter (survey of outside bond 

counsel: ‘‘If asked to prepare a summary of a 

financial obligation, on average how many hours 

would be required to comply?’’ Median answer—4 

hours). 

310 1,100 (number of event notices requiring 

outside counsel) × 4 (estimated time for outside 

use designated agents under the Rule 

prior to these amendments to reflect the 

increase in the number of issuers who 

may use designated agents.293 Second, 

the Commission is increasing the 

estimated cost to issuers who may use 

designated agents under the Rule by six 

percent, to account for the estimated 

increased costs as a result of the 

amendments to issuers who use 

designated agents. Accordingly, the 

Commission now estimates an average 

total annual cost incurred by issuers 

using the services of a designated agent 

for the Rule prior to these amendments 

of $13,650,000 294 and further estimates 

that those costs would be increased by 

approximately six percent as a result of 

the amendments, to $14,469,000.295

In the Proposing Release, the 

Commission also estimated that issuers 

would incur some cost to revise their 

current template for continuing 

disclosure agreements to reflect the 

proposed amendments to the Rule. The 

Commission stated its belief that 

continuing disclosure agreements tend 

to be standard form agreements. As it 

did in response to prior amendments to 

the Rule in 2010,296 the Commission 

estimated that it would take an outside 

attorney approximately 15 minutes to 

revise the template for continuing 

disclosure agreements for the proposed 

amendments to the Rule.297 The 

Commission estimated that each issuer, 

if it employed an outside attorney to 

update its template for continuing 

disclosure agreements, would incur a 

cost of approximately $100, for a onetime total cost of $2,000,000 for all 

issuers.298 The Commission received 

one comment on this estimate. The 

commenter agreed that updating the 

template was ‘‘a relatively simple 

process,’’ but stated that the 

Commission failed to account for the 

time spent reviewing the revised 

continuing disclosure agreement.299

Because continuing disclosure 

agreements tend to be standard form 

agreements and because the updates 

required to continuing disclosure 

agreements by these amendments 

amount to simply adding the text of two 

additional events,300 the Commission 

continues to believe that the estimate of 

15 minutes per issuer is appropriate and 

accounts for the average total cost 

incurred by each issuer to update and 

review its template for continuing 

disclosure agreements. However, as a 

result of the Commission’s revised 

estimate of issuers affected by 

continuing disclosure requirements 

under Rule 15c2–12,301 the Commission 

now estimates a one-time total cost of 

$2,800,000 for all issuers.302

The Commission did not estimate any 

other external costs incurred by issuers 

as a result of the proposed amendments. 

Several commenters disagreed, stating 

that due to the proposed broad 

definition of financial obligation and 

commenters’ view that there was lack of 

clarity around materiality, issuers 

would rely, in some part, on outside 

counsel to assist in the monitoring, 

evaluating, preparing, and filing of the 

event notices required by the proposed 

amendments.303 One commenter, citing 

those same reasons, reported that 97% 

of survey respondents indicated that 

outside counsel would be required 

when preparing an event notice under 

the proposed amendments.304 Another 

commenter reported that it would need 

to ‘‘enter into new engagements with 

subject matter experts’’ to determine 

whether certain financial obligations 

needed to be disclosed under the 

proposed amendments.305

The Commission has considered these 

comments and is revising its cost 

estimates for issuers. As discussed in 

Section III.A.2., the Commission has 

clarified and narrowed the scope of the 

amendments which will substantially 

lessen the burden on issuers of 

monitoring, evaluating, preparing, and 

filing event notices required by the 

amendments to the Rule. The 

Commission expects that any external 

costs that would have been incurred by 

issuers under the proposed amendments 

would be similarly reduced by those 

changes. The Commission also believes 

that the adopted amendments, by 

focusing on debt, debt-like, and debtrelated obligations, will reduce the need 

for issuers to obtain outside counsel to 

assist with an event notice.306

However, the Commission 

acknowledges that some issuers may 

retain outside counsel to assist in the 

evaluation and preparation of some of 

the more complex event notices as a 

result of the amendments to the Rule. 

As discussed above, the Commission 

estimates that the amendments will 

generate 2,200 additional event notices 

a year.307 The Commission believes a 

reasonable estimate is that issuers may 

retain outside counsel on half of those 

event notices, 1,100, while preparing 

the other half solely internally.308 The 

Commission further believes that, for 

those 1,100 complex event notices in 

which issuers and obligated persons 

seek assistance from outside counsel, 

one-half of the burden of preparation of 

the event notices (including time for 

monitoring and evaluation) will be 

carried by issuers internally (four 

hours), and the other-half of the burden 

will be carried by outside professionals 

retained by the issuer (four hours).309

Thus, the Commission now estimates 

that issuers will incur an approximate 

annual total cost of $1,760,000 310 to 


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attorney to assist in the preparation of such event 

notice) × $400 (hourly wage for an outside attorney) 

= $1,760,000. 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 of outside counsel would be an 

average of $400 per hour. 

311 $1,760,000 (annual cost to employ outside 

counsel to assist in preparation of certain event 

notices) + $14,469,000 (annual cost to employ 

designated agents to submit event notices) = 

$16,229,000. 

312See supra note 302. 

313See 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. 

314Continuing 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. 

315See Proposing Release, supra note 3, 82 FR at 

13937. In the Proposing Release, the Commission 

defined the term ‘‘financial obligation’’ to mean a 

debt obligation, lease, guarantee, derivative 

instrument, or monetary obligation resulting from a 

judicial, administrative, or arbitration proceeding, 

but not including municipal securities as to which 

a final official statement has been provided to the 

MSRB consistent with Rule 15c2–12. 

316See supra Section III.A.2. The adopted 

definition of financial obligation removes the term 

‘‘lease’’ and ‘‘monetary obligation resulting from a 

judicial, administrative, or arbitration proceeding’’ 

from the proposed definition of financial obligation, 

and limits the coverage of derivative or guarantee 

to those related to a debt obligation. The 

Commission believes the revised definition helps 

distinguish debt and debt-like obligations from 

obligations incurred in an issuer’s or obligated 

person’s normal course of operations, and focuses 

the amendments on the types of obligations that 

could compete with a security holder’s interests. 

employ outside counsel to assist in the 

examination, preparation, and filing of 

certain event notices. 

Under the amendments to Rule 15c2– 

12 as adopted, the total cost to issuers 

would be $16,229,000 annually,311 with 

a one-time cost of $2,800,000.312 Table 

5 below summarizes the Commission’s 

PRA external cost estimates for issuers 

in the 2015 PRA Notice (the 

Commission’s most recent estimates 

prior to these amendments), the 

Proposing Release, and the Adopting 

Release. 

TABLE 5—SUMMARY OF PRA COST ESTIMATES FOR ISSUERS

Annual 

external 

cost 

One-time 

external 

cost 

Estimates in 2015 PRA Notice 

Issuers (that use the services of a designated agent to submit continuing disclosure documents) ...................... $9,750,000 n/a 

Estimates in Proposing Release 

Issuers (that use the services of a designated agent to submit continuing disclosure documents) ...................... 10,335,000 $0 

Issuers (to update template for continuing disclosure agreements to reflect the proposed amendments) ........... 0 2,000,000 

Estimates in Adopting Release 

Issuers (that use the services of a designated agent to submit continuing disclosure documents) ...................... 14,469,000 0 

Issuers (to update template for continuing disclosure agreements to reflect the amendments) ............................ 0 2,800,000 

Issuers (to hire outside counsel to assist in preparing event notices) .................................................................... 1,760,000 0 

F. Retention Period of Recordkeeping 

Requirements 

As an SRO subject to 17 CFR 240.17a–1 

(Rule 17a–1 under the Exchange Act), 

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 17 CFR 

240.17a–3 and 240.17a–4 (Exchange Act 

Rules 17a–3 and 17a–4). Participating 

Underwriters and dealers transacting 

business in municipal securities are 

subject to existing recordkeeping 

requirements of the MSRB.313 The 

amendments to the Rule would contain 

no recordkeeping requirements for any 

other persons. 

G. Collection of Information Is 

Mandatory 

Any collection of information 

pursuant to the 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 amendments to the Rule 

would not be kept confidential and 

would be publicly available.314

Specifically, the collection of 

information that would be provided 

pursuant to the continuing disclosure 

documents under the amendments 

would be accessible through the MSRB’s 

EMMA system and would be publicly 

available via the internet. 

V. Economic Analysis 

A. Introduction 

The Commission is adopting, 

substantially as proposed, amendments 

to Rule 15c2–12 under the Exchange Act 

to revise the list of event notices that a 

Participating Underwriter in an Offering 

must reasonably determine an issuer or 

obligated person has agreed to provide 

to the MSRB in its continuing disclosure 

agreement. 

As discussed above, the main 

difference between the Rule as 

proposed 315 and the Rule as adopted 316

is that the definition of financial 

obligation is narrower in the adopted 

amendments. The Commission believes 

that the revisions being made to the 

proposed definition do not qualitatively 

change the overall assessment of the 

economic impacts from the Proposing 

Release. While the amendments being 

adopted may result in a smaller increase 

in disclosure than the proposed 

amendments because of the narrower 

scope of the definition of financial 

obligation, they will still lead to an 

increase in disclosure compared to a 

baseline that consists of the existing 

regulatory framework for municipal 

securities disclosure, including Rule 

15c2–12 prior to these amendments, and 

current relevant MSRB rules. Therefore, 

the economic effects of the amendments 

being adopted remain qualitatively 

consistent with those under the 


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44730 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

317See infra Section V.C.2.i and Section V.D.1. 

318See Proposing Release, supra note 3, 82 FR at 

13929. 

319Federal Deposit Insurance Corporation, 

Consolidated Reports of Condition and Income, 

available at https://www.fdic.gov/regulations/ 

resources/call/index.html. According to the FDIC, 

every national bank, state member bank, insured 

state nonmember bank, and savings association is 

required to file a call report as of the close of 

business on the last day of each calendar quarter. 

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. Item RCON2107 is defined as follows: 

‘‘Includes all obligations of states and political 

subdivisions in the United States (including those 

secured by real estate), other than leases and other 

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).’ 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 Board of Governors of the 

Federal Reserve System, Micro Data Reference 

Manual, available at http://www.federalreserve.gov/ 

apps/mdrm/data-dictionary (includes detailed 

variable definition). 

320As of the end of 2010, the dollar amount of 

municipal securities outstanding was $3.94 trillion. 

See SIFMA, US Bond Market Issuance and 

Outstanding, available at https://www.sifma.org/ 

wp-content/uploads/2017/06/cm-us-bond-marketsifma.xls (‘‘SIFMA Bond Data’’). See also Board of 

Governors of the Federal Reserve System, Federal 

Reserve Board Historical Flow of Funds, available 

at https://www.federalreserve.gov/datadownload/ 

Choose.aspx?rel=z1 (‘‘Historical Flow of Funds’’). 

As of the end of the first quarter of 2018, the dollar 

amount of municipal securities outstanding was 

$3.84 trillion. See Flow of Funds, supra note 22 at 

121 Table L. 212. 

321See Daniel Bergstresser and Peter Orr, Direct 

Bank Investment in Municipal Debt, 35 Mun. Fin. 

J. 1, 3 (2014) (‘‘Bergstresser and Orr’’); California 

Debt and Investment Advisory Commission, New 

Frontiers in Public Finance: A Return to Direct 

Lending (Oct. 3, 2012), available at http://

www.treasurer.ca.gov/cdiac/webinars/2012/ 

20121003/presentation.pdf. 

322Although historically municipal securities 

have had significantly lower rates of default than 

corporate and foreign government bonds, as 

mentioned in Section II, defaults by issuers and 

obligated persons have occurred. Since 2011, the 

municipal securities market has experienced six of 

the seven largest municipal bankruptcy filings in 

U.S. history. See supra note 28. 

323See supra Section III.A. See also Proposing 

Release, supra note 3, 82 FR at 13929–30. 

324 Id. 

325See supra note 52. See also Bergstresser and 

Orr, supra note 321. 

proposed amendments. More discussion 

on the relative costs and benefits of the 

two approaches and why some of the 

economic effects cannot be quantified 

follow in later sections.317

As discussed in the Proposing 

Release, 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.318 According to 

the Consolidated Reports of Condition 

and Income (‘‘Call Report’’) filed by 

financial institutions,319 the dollar 

amount of commercial bank loans to 

state and local governments has nearly 

tripled since the financial crisis, 

increasing from $66.5 billion as of the 

end of 2010 to $190.5 billion by the end 

of first quarter 2018. In comparison, the 

dollar amount of municipal securities 

outstanding remained relatively flat 

over the same time period.320

The use of direct placements or other 

debt obligations may benefit issuers and 

obligated persons in the form of 

convenience or lower borrowing costs 

relative to a public offering of municipal 

securities—there is typically no 

requirement to prepare an offering 

document or obtain a credit rating, 

liquidity facility, or bond insurance.321

On the other hand, the use of these 

financial obligations may negatively 

affect existing investors for several 

reasons. First, the incurred financial 

obligations, if material, could 

substantially increase or change an 

issuer’s or obligated person’s overall 

indebtedness and impact its liquidity 

and overall creditworthiness, and 

thereby affect the value of the municipal 

securities held by investors. Second, an 

issuer or obligated person may agree to 

covenants of a financial obligation that 

may negatively affect security holders’ 

contractual rights. For example, the 

covenants could alter the debt payment 

priority structure of the issuer’s or 

obligated person’s outstanding 

securities, or pledge the assets 

previously available to secure the bonds 

to the lender, both of which could dilute 

existing security holders’ claims or 

create contingent liquidity risk, credit 

risk, or refinancing risk. Similarly, 

‘‘default, event of acceleration, 

termination event, modification of 

terms, or other similar events under the 

terms of a financial obligation’’ as 

included in the rule text in paragraph 

(b)(5)(i)(C)(16), could also impact the 

value of municipal securities held by 

investors.322

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 included in the 

amendments, despite their potential 

impact on the risks of, and returns to, 

municipal securities.323 Moreover, to 

the extent information about a financial 

obligation is disclosed and accessible to 

investors and other market participants, 

such information currently may not 

include certain details about a financial 

obligation.324 As a result, investors 

could be making investment decisions 

on whether to buy, sell or hold 

municipal securities without 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. 

As described in Section III.A and the 

Proposing Release, 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.325 However, despite these 

ongoing efforts, few issuers or obligated 

persons have made voluntary 

disclosures of financial obligations, 

including direct placements, to the 

MSRB. 

The Commission is mindful of the 

costs imposed by and benefits obtained 

from its rules. In the Proposing Release, 

the Commission solicited comments on 

all aspects of the costs and benefits 

associated with the amendments, 

including any effect the Rule may have 

on efficiency, competition, and capital 

formation. The Commission has 

considered these comments, which are 

discussed in more detail in the sections 

below, and continues to believe that the 

amendments to Rule 15c2–12 will 

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. The 

Commission believes that more timely 

and informative disclosure allows 

investors to make more informed 

investment decisions and analysts to 

produce more informed analyses, and 

such disclosure can therefore enhance 

transparency in the municipal securities 

market and investor protection. The 

discussion below elaborates on the 

likely costs and benefits of the 

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 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44731 

326See supra notes 124, 125, and 126. 

327Municipal 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 31–32 

(Mar. 8, 2018) available at http://

www.federalreserve.gov/apps/fof/Guide/z1_tables_

description.pdf. 

328See Call Report, supra note 319. 

329Flow of Funds, supra note 22, at 121 Table L. 

212. 

330See SIFMA Bond Data, supra note 320. 

331See id. 

332See Bergstresser and Orr, supra note 321. 

333See SIFMA Bond Data and Historical Flow of 

Funds, supra note 320. 

334See Call Report, supra note 319. See also 

SIFMA Bond Data, supra note 320. 

335See supra note 52. See also Bergstresser and 

Orr, supra note 321. 

from the Rule amendments. However, 

the Commission is unable to quantify 

some of the economic effects of the 

amendments because many of the key 

variables or inputs for calculating such 

effects are not available. For example, 

the Commission is unable to reasonably 

estimate the scope of the improvement 

in pricing of municipal securities under 

the amendments. In order to estimate 

the improvement in pricing, one needs 

to first estimate the level of the 

mispricing under both the Rule prior to 

these amendments and the amended 

Rule, and to do that requires 

information about the true value, or 

fundamental value, of securities. That 

fundamental value, in turn, depends on 

a number of factors, many of which are 

not observable. As one example, credit 

risk of the issuer or obligated person is 

a crucial factor in determining the value 

of its securities. But as already 

discussed, issuers and obligated persons 

may incur material financial obligations 

without disclosing them for an extended 

period of time under current rules. 

Since it is not known whether issuers 

and obligated persons have incurred 

material financial obligations and the 

resulting amount of debt they have 

outstanding, and since the terms of such 

financial obligations, including interest 

rate, maturity, and priority structure are 

also unknown, the Commission cannot 

measure the change in estimates of 

issuers’ and obligated persons’ credit 

risks that the Commission anticipates 

would result from this new information. 

Without robust estimates of credit risk, 

among other necessary inputs, it is not 

possible to quantify the improvement in 

pricing, even if it is assumed the 

amendments would completely 

eliminate mispricing. 

Similarly, due to an absence of data, 

the Commission is unable to provide a 

reasonable estimate of the potential 

change in borrowing costs issuers or 

obligated persons may experience as a 

result of the amendments. For example, 

loan rate determinants include the 

characteristics of the issuer or obligated 

person (e.g., size, credit risk, etc.), loan 

characteristics (e.g., size of the loan, 

maturity, priority structure and 

covenants, etc.), and the issuer’s or 

obligated person’s relationship with the 

lenders (e.g., the length of the 

relationship and the number of lenders). 

Because of the unavailability of this 

information, the Commission is not able 

to quantify the amendments’ impact on 

borrowing costs. 

There are other factors that also limit 

the Commission’s ability to quantify the 

future economic impact of the 

amendments. For example, recent 

federal tax law changes may also affect 

borrowing costs of issuers and obligated 

persons as well as investor demand for 

municipal debt, among other things.326

Because the impacts from the changes in 

the federal tax laws and the 

amendments are likely to overlap, it 

may not be possible to disentangle the 

two. In addition, the amendments’ 

impact may vary significantly across 

different issuers and obligated persons, 

which poses additional challenges to 

quantifying the amendments’ effects. 

Additional discussion of these factors 

and issues on quantification follows in 

later sections. 

B. Economic Baseline 

To assess the economic impact of the 

amendments to Rule 15c2–12, the 

Commission is using as its baseline the 

existing regulatory framework for 

municipal securities disclosure, 

including Rule 15c2–12 prior to these 

amendments, and current relevant 

MSRB rules. 

1. The Current Municipal Securities 

Market 

As discussed above and in the 

Proposing Release, the need for more 

timely and informative disclosure of 

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. Below is 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,327 and Call Report data from the 

FDIC.328

According to Flow of Funds data, the 

notional amount of the total municipal 

securities outstanding in the U.S. was 

$3.84 trillion as of the end of the first 

quarter of 2018.329 Prior to (and during) 

the 2008 financial crisis, the amount of 

municipal securities outstanding was 

increasing steadily, growing from $2.87 

trillion in 2004 to a post-crisis peak of 

$3.94 trillion in 2010.330 Since 2010, the 

overall size of the municipal securities 

market has remained flat.331

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.332 U.S. chartered 

depository institutions’ holdings of 

outstanding municipal securities have 

grown rapidly, from 6.46% of the total 

outstanding (or $254.6 billion) in 2010 

to 14.4% of the total outstanding (or 

$554.4 billion) in the first quarter of 

2018, an over two-fold increase.333 The 

fastest growth has been in direct lending 

to state and local governments and their 

instrumentalities. The dollar amount of 

bank loans to state and local 

governments has nearly tripled since the 

2008 financial crisis, increasing from 

$66.5 billion at the end of 2010 to 

$190.5 billion by the end of the first 

quarter of 2018, or equivalently, an 

increase from 1.69% of total municipal 

securities outstanding to 4.95%.334

The incurrence of financial 

obligations can result in an increase in 

the issuer’s or obligated person’s 

outstanding debt, negatively affecting 

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, a topic 

that has been discussed by the MSRB, 

certain market participants, and 

academics.335 As a result, investors and 

other market participants may not have 

access or 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. As discussed in 

the Proposing Release, recognizing the 


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44732 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

336See Proposing Release supra note 3, 82 FR at 

13934. 

337See id. 

338See supra Section II. 

339See supra notes 16, 17, and 18. 

340See Proposing Release, supra note 3, 82 FR at 

13929. 

341See supra note 97. 

342See Proposing Release, supra note 3, 82 FR at 

13933 and note 76. 

343See supra note 52. 

344See supra note 34. 

345See id. 

346See Proposing Release, supra note 3, 82 FR at 

13933 and note 76. 

347See GASB Statement No. 88—Certain 

Disclosures Related to Debt, including Direct 

Borrowings and Direct Placements, supra note 44. 

348See GASB, GASB Establishes New Guidance 

on Debt Disclosures, Addresses Direct Borrowings 

and Direct Placements (Apr. 2, 2018), available at 

http://www.gasb.org/cs/Satellite?c=GASBContent_

C&cid=1176170309590&d=Touch&pagename=

GASB%2FGASBContent_C%2FGASBNewsPage. 

349See GASB Statement No. 88—Certain 

Disclosures Related to Debt, including Direct 

Borrowings and Direct Placements, supra note 44. 

350 Id. 

credit implications of direct placements, 

at least one rating agency now requires, 

and other rating agencies strongly 

encourage, issuers and obligated 

persons to notify them of the incurrence 

of direct placements, and to provide all 

relevant documentation related to such 

indebtedness.336 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.337 While such 

efforts can induce more disclosure and 

help mitigate mispricing, each rating 

agency would have to implement a 

similar process to collect the same 

information, and issuers and obligated 

persons would have to provide identical 

responses multiple times, which might 

not be an efficient way to increase 

disclosure in the municipal securities 

market. 

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 disclosures in the 

municipal securities primary market.338

Currently, Rule 15c2–12, most recently 

amended in 2010, prohibits a 

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) Annual filings; (2) event notices; and 

(3) failure to file notices.339 The Rule 

prior to these amendments 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 events 

covered in these amendments. As 

discussed in Section III.A, 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 

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 

financial obligations, 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, as discussed above and in the 

Proposing Release, 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– 

12.340

Furthermore, to the extent the 

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. 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.341

3. MSRB Rules 

MSRB rules do not address the 

disclosure of the events covered in the 

amendments. However, as described 

above and in the Proposing Release, the 

MSRB has highlighted the increased use 

of direct placements as a financing 

alternative.342 The MSRB has 

encouraged issuers to voluntarily 

disclose direct placements on 

EMMA,343 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.344

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.345 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 stated that the 

best way to ensure disclosure of direct 

placements is to amend Rule 15c2– 

12.346

4. GASB Statement No. 88 

GASB released in April 2018 

Statement No. 88, Certain Disclosures 

Related to Debt, including Direct 

Borrowings and Direct Placements.347 In 

issuing the guidance, GASB stated the 

‘‘guidance [is] designed to enhance 

debt-related disclosures in notes to 

financial statements, including those 

addressing direct borrowings and direct 

placements.’’ 348 GASB Statement No. 

88 states ‘‘[t]he primary objective of this 

Statement is to improve the information 

that is disclosed in notes to government 

financial statements related to debt, 

including direct borrowings and direct 

placements. It also clarifies which 

liabilities governments should include 

when disclosing information related to 

debt. This Statement defines debt for 

purposes of disclosure in notes to 

financial statements. . . .’’ 349

GASB Statement No. 88 also ‘‘requires 

that additional essential information 

related to debt be disclosed in notes to 

financial statements, including unused 

lines of credit, assets pledged as 

collateral for the debt, and terms 

specified in debt agreements related to 

significant events of default with 

finance-related consequences, 

significant termination events with 

finance-related consequences, and 

significant subjective accelerations 

clauses.’’ 350

As discussed more fully above, 

although GASB Statement No. 88 could 

result in the disclosure of more 

information related to debt disclosed in 

issuers’ or obligated persons’ audited 

financial statements consistent with that 


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351See supra note 44. 

352See, e.g., Emilia Istrate, Cecilia Mills and 

Daniel Brookmyer, National Association of 

Counties, Counting Money: State and GASB 

Standards for County Financial Reporting (Feb. 

2016), available at http://www.naco.org/sites/ 

default/files/documents/Counting%20Money_

Full%20Report.pdf. 

353See supra note 125. 

354See, e.g., Carla Fried, The Tax Law Gives 

Municipal Bonds a New Allure, N.Y. Times, (Feb. 

23, 2018), available at https://www.nytimes.com/ 

2018/02/23/business/the-tax-law-gives-municipalbonds-a-new-allure.html. 

355See, e.g., Kyle Glazier, Why Muni Issuers Are 

Eschewing Bank Loans, The Bond Buyer, (May 21, 

2018), available at https://www.bondbuyer.com/ 

news/why-muni-issuers-are-eschewing-bank-loans 

(noting that ‘‘issuers are already removing direct 

bank loans from their portfolios in favor of other 

types of more traditional debt thanks to the new tax 

law as well as rising interest rate’’). 

356See supra notes 124 and 126. 

357See, e.g., Lynn Hume, Alternatives to Taxexempt Advance Refundings Would Cost Issuers, 

The Bond Buyer (Nov. 22, 2017), available at 

https://www.bondbuyer.com/news/issuers-havecostlier-alternatives-to-advance-refundings; GFOA, 

Potential Impacts of Tax Reform on Outstanding 

and Future Municipal Debt Issuance, available at 

http://www.gfoa.org/potential-impacts-tax-reformoutstanding-and-future-municipal-debt-issuance; 

see also supra note 139. See also supra note 150. 

358The 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 events pursuant to Rule 15c2–12 

amendments, in which case, the actual costs and 

benefits of the amendments would depend on the 

issuer’s or obligated person’s commitment to 

disclosure. 

under new paragraph (b)(5)(i)(C)(15) of 

the Rule, the new guidance does not 

improve the timeliness of the disclosure 

investors and market participants will 

receive, nor does it cover the events 

under paragraph (b)(5)(i)(C)(16) of the 

Rule.351 Additionally, currently, not all 

state and local governments follow 

GASB standards for their annual 

financial reports.352

5. Federal Tax Law Changes 

Recent changes to federal tax laws 353

could impact, or may have already 

impacted, the municipal securities 

market in several ways. First, because 

the new law caps the state and local tax 

deduction allowed to be taken on an 

individual federal income tax return, 

the law may increase the demand for 

tax-free investments such as municipal 

bonds, driving up bond prices and 

driving down bond yields.354

Second, a decline in the federal 

corporate income tax rate may increase 

the interest rates on issuers’ or obligated 

persons’ direct placements, reducing the 

demand for direct placements. Prior to 

the changes in the federal tax law, 

municipal issuers and obligated persons 

enjoyed lower interest rates than their 

corporate counterparts in part because 

banks benefitted from tax-free interest 

income. The reduction in the corporate 

income tax rate diminishes the relative 

benefit for the municipal tax exemption, 

making direct placements less 

attractive.355 In addition, as discussed 

above, interest rates on issuers’ and 

obligated persons’ direct placements 

may also increase as a result of certain 

provisions being triggered by the 

reduction in the federal corporate 

income tax rate,356 reducing the demand 

for direct placements. 

Third, as discussed above, because 

the new tax law eliminated state and 

local governments’ ability to use taxexempt bonds to advance refund 

outstanding bonds, some issuers and 

obligated persons may be incentivized 

to use complex strategies and derivative 

products to refund outstanding bond 

issues,357 potentially increasing these 

issuers’ and obligated persons’ credit 

risk. 

6. 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. 

As discussed above and in the 

Proposing Release, currently investors 

and other market participants may not 

learn about the new information related 

to the issuer’s or obligated person’s 

financial obligations for months or over 

a year after the end of the issuer’s or 

obligated person’s fiscal year. Since the 

market is not able to incorporate into 

prices the most recent credit risk 

information about issuers and obligated 

persons, the securities offered by issuers 

or obligated persons of different credit 

risks could be priced identically. For 

example, all else equal, an issuer or 

obligated person that incurs a large 

amount of undisclosed financial 

obligations may be more likely to 

default on its payment obligations than 

one that does not. However, in the 

absence of public disclosure, market 

participants could assign the same price 

to both issuers’ or obligated persons’ 

securities. Mispricing on the basis of 

undisclosed risks could lead to 

inefficiency in the allocation of 

financial resources across high- and 

low-risk issuers and obligated persons. 

Rule 15c2–12 prior to these 

amendments may create competitive 

advantages for certain market 

participants. As discussed above and in 

the Proposing Release, because the 

market might not be able to differentiate 

securities offered by high-risk issuers 

and obligated persons from those 

offered by low-risk issuers and obligated 

persons because of lack of disclosures 

under Rule 15c2–12 prior to these 

amendments, low-risk issuers and 

obligated persons could be subject to 

disadvantages if they are unable to 

credibly demonstrate to market 

participants that they are low-risk. As 

another example, municipal securities 

investors are also in a disadvantageous 

position relative to private lenders. As 

discussed above and in the Proposing 

Release, the terms of a financial 

obligation incurred by an issuer or 

obligated person may include covenants 

that alter the debt payment priority 

structure of the issuer’s or obligated 

person’s outstanding securities, or give 

the lender a lien on assets or revenues 

that were previously pledged to secure 

repayment of an issuer’s or obligated 

person’s outstanding municipal 

securities, effectively diluting existing 

security holders’ claims and adversely 

affecting their contractual rights without 

their knowledge. In the Commission’s 

view, the existence of these scenarios 

does not represent a fully competitive 

market. 

The price inefficiencies in the 

municipal securities market and the 

disparity in available information for 

different types of investors could result 

in inefficient allocation of capital. For 

example, as mentioned above, the 

inability of the market to differentiate 

high-risk issuers or obligated persons 

from low-risk ones could lead to a 

mismatch of investors to securities 

appropriate for their risk preferences, 

leading to suboptimal allocation of 

capital. 

C. Benefits, Costs and Effects on 

Efficiency, Competition, and Capital 

Formation 

The Commission has considered the 

potential costs and benefits associated 

with the amendments and the 

comments received regarding the 

proposed amendments.358 The 

Commission continues to believe that 

the primary economic benefits of the 

amendments stem from the potential 

improvement in the timeliness and 

informativeness of municipal securities 

disclosure. The Commission believes 

that the Rule 15c2–12 amendments will 

facilitate investors’ access to more 

timely and informative disclosure, help 

investors make more informed 

investment decisions, and enhance 

investor protection. The Commission 

also believes that improved disclosure 

can assist other market participants, 

including rating agencies and municipal 

securities analysts, in providing more 

accurate credit ratings and credit 

analyses as they will have more timely 


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44734 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

359See Proposing Release supra note 3, 82 FR at 

13935–36. 360See id. at 13940. 

361See supra note 336. For academic evidence on 

pricing effect of credit rating agencies’ actions, see 

John R. M. Hand, Robert W. Holthausen, and 

Richard W. Leftwich, The Effect of Bond Rating 

Agency Announcements on Bond and Stock Prices, 

47 J. Fin. 733 (1992). 

362See supra Section III.A.1.iii. 

access to information regarding an 

issuer’s or obligated person’s 

outstanding debt. Disclosure that is both 

more timely and informative can 

positively affect efficiency, competition, 

and capital formation. 

At the same time, the Commission 

continues to recognize that the 

amendments will introduce costs to 

relevant parties, including issuers, 

obligated persons, dealers, and lenders. 

However, it is the Commission’s belief 

that the costs are justified in light of the 

benefits. A discussion of the economic 

costs and benefits of the amendments, 

including the effects on efficiency, 

competition, and capital formation, is 

set forth in more detail below. 

1. Anticipated Benefits of Rule 15c2–12 

Amendments 

i. Benefits to Investors 

The Commission believes that these 

amendments may yield several benefits 

to municipal securities investors. First, 

the amendments will facilitate 

investors’ access to more timely and 

informative disclosures about an 

issuer’s or obligated person’s financial 

obligations, and thereby assist them in 

making more informed investment 

decisions when trading in the secondary 

market. 

As discussed in the Proposing 

Release, the information regarding the 

events described in the amendments is 

relevant for investors’ investment 

decision making. For example, the 

incurrence of a financial obligation that 

results in an increase or change in an 

issuer’s or obligated person’s 

outstanding debt may impact the 

issuer’s or obligated person’s liquidity 

and overall creditworthiness. For 

another example, an agreement to 

covenants, events of default, remedies, 

priority rights, or other similar terms of 

a financial obligation, any of which 

affect security holders, may result in, 

among other things, contingent liquidity 

and credit risks that potentially impact 

the issuer’s or obligated person’s 

liquidity and overall creditworthiness 

and reduce value for existing security 

holders.359 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 reflects financial 

difficulties, could provide relevant 

information regarding whether the 

financial condition of the issuer or the 

obligated person has changed or 

worsened, and whether 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.360

All these events contain relevant 

information about the underlying risk of 

a municipal security, and can have a 

direct impact on its pricing. Without 

such information, the prices of 

municipal securities could be distorted 

from their fundamental value in both 

the primary and secondary markets. 

However, currently, 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 

included in the amendments. For 

example, investors and other market 

participants may not learn of these 

events if the issuer or obligated person 

does not provide annual financial 

information or audited financial 

statements to EMMA 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. Further, even if 

investors and other market participants 

have access to disclosure about these 

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 to EMMA in a 

timely manner or does not frequently 

issue debt that results in a final official 

statement being provided to EMMA. 

Typically, as discussed above and in the 

Proposing Release, 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. 

Moreover, to the extent the 

information about financial obligations 

is disclosed and accessible to investors 

and other market participants, such 

information currently may not include 

certain details. Specifically, 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 obligation that can 

affect security holders, including those 

terms that, for example, affect security 

holders’ priority rights. Therefore, 

existing security holders could be 

making investment decisions without 

the knowledge that the value of the 

securities and their contractual rights 

have been adversely impacted, and 

potential investors could be buying 

these securities at an inflated price. As 

such, the current level of disclosure 

regarding an issuer’s or obligated 

person’s financial obligations is neither 

timely nor adequately informative. 

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.361 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. 

Under the amendments to Rule 15c2– 

12, Participating Underwriters in an 

Offering are required to reasonably 

determine that an issuer or obligated 

person has agreed in its continuing 

disclosure agreement to provide notices 

for the new events within ten business 

days. Consequently, pursuant to the 

amendments, municipal securities 

investors and other market participants 

will have access to the specified 

disclosures within ten business days as 

opposed to waiting for the issuer’s or 

obligated person’s next primary offering 

subject to Rule 15c2–12, waiting for the 

release of annual financial information 

or audited financial statements, or 

having no access to such information at 

all. In addition, the event notices 

generally should include a description 

of material terms of the financial 

obligations, which might include the 

date of incurrence, principal amount, 

maturity and amortization, interest rate, 

if fixed, or method of computation, if 

variable (and any default rates),362 so 

the disclosures provided to the MSRB 

should be informative about not just the 

existence of the incurred financial 

obligation, but generally should also 

include additional details about the 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44735 

363As discussed above in Section V.B.5, the 

amendments could be particularly informative in 

light of the recent changes to federal tax law. The 

tax reform bill passed in December 2017 eliminated 

state and local governments’ ability to use taxexempt bonds to advance refund outstanding 

bonds, which may incentivize some issuers to use 

complex strategies and derivative products to 

refund outstanding bond issues. See supra note 309 

and accompanying text. These derivatives entered 

into in connection with a debt obligation would be 

disclosed under the amendments, and keep 

investors and other market participants informed 

about the credit risk associated with the derivatives. 

364See Lisante Letter. 

365See Proposing Release, supra note 3, 82 FR at 

13952. 

366See Proposing Release, supra note 3, 82 FR at 

13952 (citing Douglas W. Diamond and Robert E. 

Verrecchia, Disclosure, Liquidity, and the Cost of 

Capital, 46 J. Fin. 1325 (1991)). 

367See Proposing Release, supra note 3, 82 FR at 

13952. 

368See William R. Baber and Angela K. Gore, 

Consequences of GAAP Disclosure Regulation: 

Evidence from Municipal Debt Issues, 83 Acct. Rev. 

565 (2008). See also Robert W. Ingram and Ronald 

M. Copeland, Municipal Market Measures and 

Reporting Practices: An Extension, 20 J. Acct. Res. 

766 (1982). See also Earl D. Benson, Barry R. Marks 

and Krishnamurthy K. Raman, State Regulation of 

Accounting Practices and Municipal Borrowing 

Costs, 3 J. Acct. & Pub. Pol’y 107 (1984). See also 

Lisa M. Fairchild and Timothy W. Koch, The 

Impact of State Disclosure Requirements on 

Municipal Yields, 51 Nat’l Tax J. 733 (1998). 

For additional reference to borrowing costs in 

corporate securities markets, see also Christian 

Leuz and Peter D. Wysocki, The Economics of 

Disclosure and Financial Reporting Regulation: 

Evidence and Suggestions for Future Research, 54 

J. Acct. Res. 525 (2016); Thomas E. Copeland and 

Dan Galai, Information Effects on the Bid-Ask 

Spread, 38 J. Fin. 1457 (1983); David Easley and 

Maureen O’Hara, Price, Trade Size, and Information 

in Securities Markets, 19 J. Fin. Econ. 69 (1987); 

David Easley and Maureen O’Hara, Information and 

the Cost of Capital, 59 J. Fin. 1553 (2004); Yakov 

Amihud and Haim Mendelson, Asset Pricing and 

the Bid-Ask Spread, 17 J. Fin. 223 (1986). 

369See Proposing Release, supra note 3, 82 FR at 

13954. 

370See Sumon C. Mazumdar and Partha 

Sengupta, Disclosure and the Loan Spread on 

Private Debt, 61 Fin. Analysts J. 83 (2005). 

371See David W. Blackwell, Thomas R. Noland 

and Drew B. Winters, The Value of Auditor 

Assurance: Evidence from Loan Pricing, 36 J. Acct. 

Res. 57 (1998). 

incurred financial obligation. More 

timely and informative disclosure can 

help reduce mispricing in the municipal 

securities market, and allow investors to 

make more accurate assessments of the 

risks associated with their investments, 

and ultimately allow them to make more 

informed investment decisions.363

Second, more timely and informative 

disclosures may reduce the information 

disadvantage investors have relative to 

other more informed parties such as 

issuers, obligated persons, 

counterparties, and lenders, and 

enhance their protection. As discussed 

above and in the Proposing Release, for 

example, a bank loan agreement could 

alter the debt payment priority structure 

of the issuer’s or obligated person’s 

outstanding securities, or 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, diluting existing 

security holders’ claims and adversely 

affecting their contractual rights. 

However, under the Rule prior to these 

amendments, existing security holders 

may not learn about such events and 

may therefore be unable to take any 

actions they might have taken had they 

been informed, such as exiting their 

position. More timely and informative 

disclosure of the events covered in the 

amendments should promote a fairer 

information environment that allows 

current investors to monitor whether 

their contractual rights have been 

negatively impacted by undisclosed 

financial obligations and take 

appropriate actions. 

ii. Benefits to Issuers or Obligated 

Persons 

In the Proposing Release, the 

Commission discussed that the 

amendments would benefit issuers and 

obligated persons because greater 

transparency regarding an issuer’s or 

obligated person’s financial obligations 

might lead to a decrease in borrowing 

costs, particularly the costs associated 

with their public debt. One comment 

the Commission received urged the 

Commission to further study borrowing 

costs, because the commenter asserted 

that the Commission ‘‘does not 

genuinely address systemic increased 

borrowing costs that may result from 

this rule.’’ 364 The Commission 

discussed the potential for increased 

borrowing costs in its proposal for 

amendments to Rule 15c2–12.365

As discussed in the Proposing 

Release, in the context of corporate 

disclosure, economic theories suggest 

information asymmetry can lead to an 

adverse selection problem and reduce 

the level of liquidity.366 In an 

asymmetric information environment, 

uninformed investors recognize that 

they may be disadvantaged when 

trading with privately or better informed 

counterparties, and therefore either 

price-protect or exit the market to 

minimize possible losses from trading 

under such circumstances. Both of these 

actions can reduce the liquidity in the 

corporate securities market. Because 

illiquidity and high bid-ask spreads 

impose transaction costs on investors, 

and investors demand compensation for 

the transaction costs they bear, high 

illiquidity and information asymmetry 

lead to high cost of capital.367 Therefore, 

by committing to increased levels of 

disclosure, a firm can reduce 

information asymmetry, and thereby 

mitigate the risk of adverse selection 

faced by investors and the discount they 

demand, and ultimately decrease the 

firm’s cost of capital. The arguments 

linking information asymmetry and 

adverse selection to cost of capital apply 

to financial markets more generally. In 

particular, the Commission believes that 

a similar analysis can be applied to 

municipal securities, and therefore, the 

amendments should result in greater 

municipal securities disclosures and 

may decrease the cost of public debt for 

issuers and obligated persons. 

The Commission continues to believe 

that the additional disclosures are likely 

to reduce borrowing costs for issuers or 

obligated persons. The Commission has 

further examined academic studies on 

the relationship between disclosures 

and municipal borrowing costs in light 

of commenter concerns. While relatively 

limited, most of the available studies on 

disclosure and municipal borrowing 

costs provide evidence that more 

disclosure regulation or stringent 

accounting and auditing requirements 

are associated with lower municipal 

borrowing costs. This literature also 

supports the Commission’s view that 

disclosure reduces information 

asymmetry and the cost of capital.368

Also in response to the commenter’s 

concern, the Commission further 

considered the amendments’ impact on 

the cost of issuers’ and obligated 

persons’ private debt, including direct 

placements and other financial 

obligations. As discussed in the 

Proposing Release, the amendments 

should promote competition for 

investment opportunities between 

municipal securities investors and 

private lenders by reducing information 

asymmetry.369 Accordingly, it is 

possible that increased disclosure from 

municipal issuers and obligated persons 

may result in lower costs of privately 

placed debt for them. Additionally, the 

potential decrease in the cost of public 

debt as a result of the amendments 

could also put competitive pressure on 

loan pricing, and drive down the cost of 

private debt including direct placements 

and other financial obligations. Limited 

existing research on the cost of private 

debt finds that companies that 

consistently make detailed, timely, and 

informative disclosures face lower 

interest costs on private debt 

contracts.370 Other publicly available 

information such as auditor assurance is 

also shown to be used by private lenders 

to determine loan rates.371 These 

findings suggest that, despite lenders’ 

ability to gather private information 


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44736 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

372See supra note 370. 

373See infra Section V.C.2.i. 

374See Moody’s Investors Service, Special 

Comment: Direct Bank Loans Carry Credit Risks 

Similar to Variable Rate Demand Bonds for Public 

Finance Issuers (Sept. 15, 2011); see also Proposing 

Release, supra note 3, 82 FR at 13934 note 81. 

375See Proposing Release, supra note 3, 82 FR at 

13934 note 81. 

376See id. 

377See supra Section V.A. 

378See supra Section IV.D.2 and Section IV.E.2. 

379As discussed in Section IV.E.2, the 

amendments are estimated to generate 2,200 

additional event notices, half of which will be 

prepared internally, at an average of four hours per 

notice, and half of which will require an average of 

four hours of internal work and four hours of 

external work per notice. 1,100 (number of event 

notices solely using internal compliance attorney) 

× 4 (estimated time for internal attorney to assist in 

the preparation of such event notice) × $360 (hourly 

wage for an internal attorney) + 1,100 (number of 

event notices requiring both internal compliance 

attorney and outside counsel) × (4 (estimated time 

for outside attorney to assist in the preparation of 

such event notice) × $400 (hourly wage for an 

outside attorney) + 4 (estimated time for an internal 

attorney to assist in the preparation of such event 

notice) × $360 (hourly wage for an internal 

attorney)) = $4,928,000. The $360 per hour estimate 

for an internal compliance attorney is from SIFMA’s 

Management and 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. For a discussion on the cost of retaining 

outside professionals, see supra note 310. 

380See supra Section IV.E.2. As discussed above, 

the Commission estimated that 65% of issuers may 

use designated agents to submit some or all of their 

continuing disclosure documents to the MSRB. 

Based on the Commission’s revised estimates of the 

number of issuers, the Commission estimates that 

the average total annual cost that would be incurred 

by issuers that use the services of a designated agent 

would be $13,650,000. See supra note 294. The 

Commission estimates that the two amendments 

would cause issuers that use the services of a 

designated agent to incur additional costs of six 

percent, or $819,000 ($13,650,000 × 6% = 

$819,000), for a total of $14,469,000. See supra note 

295. 

381See supra note 302. 

382See Lisante Letter. 

from borrowers, they still incorporate 

the quality of a company’s disclosure in 

their estimation of its default risk, a 

primary determinant of loan pricing.372

Overall, the Commission believes that 

the amendments could benefit issuers 

and obligated persons by reducing the 

cost of both publicly issued and 

privately placed debt including direct 

placements and other financial 

obligations. The Commission also 

recognizes that borrowing costs could 

increase in some cases as a result of the 

amendments, which would constitute a 

cost to issuers and obligated persons. 

More discussion on the cost and overall 

impact of the amendments will be 

provided in a later section.373

iii. Benefits to Rating Agencies and 

Municipal Analysts 

The Commission continues to believe 

that the amendments will 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 discussed in the Proposing 

Release, rating agencies and municipal 

analysts have stated on a number of 

occasions that direct placements can 

have credit implications for ratings on 

an issuer’s or obligated person’s 

outstanding municipal securities.374

Rating agencies must expend resources 

to collect information about financial 

obligations including direct placements 

to provide more accurate ratings. One 

rating agency stated that it would 

suspend or withdraw ratings if issuers 

or obligated persons do not provide 

such notification in a timely manner.375

The process for suspending or 

withdrawing ratings could also be costly 

for a rating agency.376 The amendments 

may reduce the need for rating agencies 

or analysts to separately implement a 

process to gain more timely access to 

the information regarding issuers’ and 

obligated persons’ financial obligations. 

Therefore, under the amendments, 

rating agencies and municipal analysts 

may have access to information they 

need to produce more accurate credit 

ratings and analyses at a lower cost. 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. 

2. Anticipated Costs of the Rule 15c2– 

12 Amendments 

i. Costs to Issuers and Obligated Persons 

The Commission expects that, under 

the amendments, issuers and obligated 

persons will experience an increase in 

administrative costs from undertaking 

in their continuing disclosure 

agreements to produce the additional 

event notices. As discussed above,377 an 

advantage of a direct placement versus 

a public offering of municipal securities 

is the lower costs because, among other 

things, there is no requirement to 

prepare a public offering document for 

the borrowing transaction. Under the 

amendments, Participating 

Underwriters in Offerings will 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 ten business days of the 

events. Issuers and obligated persons 

providing notices in a manner 

consistent with the amendments will 

incur a cost to do so. 

As discussed in Section IV.D.2 and 

Section IV.E.2, after carefully 

considering the comments received, the 

Commission is revising certain 

estimates of the annual paperwork 

burden and related cost for all issuers 

and obligated persons.378 According to 

these new estimates, the Commission 

currently anticipates that issuers and 

obligated persons will incur an annual 

total cost of $4,928,000 in the 

preparation of additional event 

notices.379 The Commission also 

estimates that issuers and obligated 

persons will incur an additional 

estimated annual cost of $819,000 in 

fees for designated agents to assist in the 

submission of event notices.380 In 

addition, the Commission estimates that 

each issuer or obligated person, if it 

employs an outside attorney to update 

its template for continuing disclosure 

agreements, will incur a cost of 

approximately $100, for a one-time total 

cost of $2,800,000 for all issuers and 

obligated persons.381

Another area of inquiry is the 

potential of the amendments and 

resulting disclosures to increase the cost 

of financial obligations for issuers and 

obligated persons. In response to the 

comment mentioned above,382 the 

Commission has also further considered 

whether borrowing costs may increase 

under the amendments. As discussed 

above and in the Proposing Release, 

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 incur a 

financial obligation without disclosing 

this information to the public. Public 

disclosure of such arrangements under 

the amendments, therefore, could 

potentially reduce opportunities for 

lenders to move ahead in the priority 

queue either because issuers and 

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. 

In addition, as also discussed above 

and in the Proposing Release, existing 

banking literature suggests that lenders 

develop proprietary information about 

the borrower during a lending 

relationship because they actively 

engage in information gathering and 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44737 

383See Mitchell A. Petersen and Raghuram G. 

Rajan, The Benefits of Lending Relationships: 

Evidence from Small Business Data, 49 J. Fin. 3 

(1994). 

384See supra Section III.A.1.iii. 

385According to academic literature, it is a 

generally accepted fact that bank debt is typically 

senior to that of other creditors, particularly for 

small-business borrowers. See Stanley D. Longhofer 

and Joa ̃o A. C. Santos, The Importance of Bank 

Seniority for Relationship Lending, 9 J. Fin. Interm. 

57 (2000). See also Ivo Welch, Why Is Bank Debt 

Senior? A Theory of Asymmetry and Claim Priority 

Based on Influence Costs, 10 Rev. Fin. Stud. 1203 

(1997). Recent evidence suggests that this is also 

true for municipalities. See infra note 393. 

386See Lisante Letter. 

387See supra Section V.C.1.ii. 

388See id. 

389See id. 

390See id. 

391See Lisante Letter. 392 Id. 

monitoring.383 Lenders and borrowers 

tend to form stable relationships, and 

such stability provides economies of 

scale for the lenders to offset the costly 

information production and monitoring 

and benefits the borrowers by increasing 

the availability of financing and 

lowering overall borrowing costs. 

Therefore, to the extent that the 

disclosure of material terms of financial 

obligations may reduce lenders’ 

information advantage, there could be 

incentive for lenders to increase loan 

rates as a way of compensating for the 

lost benefit. However, as stated above, 

the amendments do not specify or 

dictate the form and content of the 

disclosure.384 Therefore, the level of 

disclosure’s impact on the lending 

relationship and rate will depend partly 

upon the amount of the disclosure 

issuers and obligated persons actually 

provide in their event notices. The 

Commission also notes that, regardless 

of the amount of the increase in 

disclosure, lenders’ information 

advantage over other investors still 

remains because of the very nature of 

the lending business—lenders actively 

engage in information gathering and 

monitoring of the borrowers and 

develop proprietary information in the 

course of the lending relationship, and 

the loans they make are likely to remain 

senior to other obligations in the debt 

priority queue because of the lending 

relationship they form.385 The 

amendments’ impact on existing 

lending relationships thus may be 

limited. 

One commenter expressed concerns 

over ‘‘the systemic increased borrowing 

costs that may result from this rule 

could drastically affect [the] entire 

municipal direct placement market and 

possibly shut many smaller actors out of 

the market completely.’’ 386 The 

Commission has carefully considered 

the comment and further assessed the 

amendments’ likely effects on issuers’ 

and obligated persons’ borrowing costs. 

While the Commission recognizes that 

the amendments may potentially 

increase the cost of private debt 

including direct placements and other 

financial obligations as discussed above, 

it has also identified and elaborated on, 

in prior sections, the multiple forces 

that could drive down the borrowing 

costs as a result of the increased 

disclosure, and potentially offset the 

cost increases posited by the 

commenter.387 As stated above, the 

increase in disclosure could decrease 

the information asymmetry in the 

market and therefore the cost of public 

debt.388 Also as stated above, cheaper 

public debt may drive down the cost of 

private debt including direct placements 

and other financial obligations, because 

lenders may consider offering lower 

rates in order to stay competitive.389

Moreover, as discussed before, existing 

empirical research does not provide 

evidence that disclosure increases the 

cost of the privately placed debt, at least 

in the case of corporate debt.390

Therefore, the Commission believes that 

the increase in disclosure would not 

necessarily lead to an increase in 

borrowing costs for issuers and 

obligated persons when the 

countervailing effects of the 

amendments are viewed in totality. The 

Commission continues to believe that 

there is a greater likelihood for the 

overall borrowing costs to decrease than 

increase. 

Regarding the commenter’s concern 

on the amendments’ impact on small 

issuers and obligated persons, the 

Commission recognizes that certain 

small issuers and obligated persons that 

are particularly reliant on private debt 

including direct placements or other 

financial obligations may choose to stay 

out of the public debt market should 

they find the additional disclosure 

becomes too burdensome or costly; 

however, the amendments should not 

significantly affect their ability to 

borrow in the private market given that 

this has been their primary funding 

source. Therefore, the Commission 

disagrees with the commenter’s 

assessment that amendments’ impact on 

the municipal direct placement market 

may ‘‘possibly shut many smaller actors 

out of the market completely.’’ 391

Currently, the Commission is unable 

to provide reasonable estimates of the 

potential change in borrowing costs as 

a result of the amendments. The same 

comment also expressed concern that 

the Commission’s attempts to quantify 

the amendments’ potential impact on 

borrowing costs may be insufficient.392

The Commission has carefully 

considered the comment. However, our 

assessment remains unchanged for 

several reasons. 

First, issuers’ and obligated persons’ 

borrowing costs include two 

components—the cost of public debt 

and the cost of privately placed debt 

including direct placements and other 

financial obligations. Both types of costs 

may vary significantly depending on a 

number of factors. For example, yields 

for municipal bonds offered to the 

public are affected by, among other 

things, the size of the issuance, credit 

rating, underwriter reputation, maturity 

and credit enhancement for bonds. Loan 

rate determinants include the 

characteristics of the issuer or obligated 

person (e.g., size, credit risk, etc.), loan 

characteristics (e.g., size of the loan, 

maturity, priority structure and 

covenants, etc.), and the issuer’s or 

obligated person’s relationship with 

lenders (e.g., the length of the 

relationship and the number of lenders). 

While some of these loan rate 

determinants are observable, many are 

not readily available or are 

unobservable, such as loan level 

characteristics and issuers’ or obligated 

persons’ relationship with lenders. 

Without such information, we are 

unable to provide a reasonable estimate 

on how much borrowing costs may 

increase or decrease. In addition, as 

discussed above, the increase in 

disclosure may have both increasing 

and decreasing effects on borrowing 

costs. 

Second, the amendments’ impact on 

borrowing costs may vary significantly 

across different types of issuers or 

obligated persons. For example, under 

the current Rule, securities issued by 

issuers or obligated persons that have 

incurred a significant amount of 

previously undisclosed financial 

obligations may be priced the same by 

the market as those that did not incur 

such undisclosed financial obligations. 

However, if these financial obligations 

were incurred after the implementation 

of the amendments, the enhanced 

disclosure would allow the market to 

incorporate the credit risk information 

and differentiate the two types of issuers 

or obligated persons when pricing their 

outstanding securities. As a result, all 

else equal, the issuers or obligated 

persons that incurred financial 

obligations could experience an increase 

in borrowing costs (e.g., bond yields) 

while those that did not incur financial 

obligations may not. Similarly, the 

amendments may also have a 


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44738 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

393A recent unpublished working paper finds 

that small municipalities are particularly reliant on 

private bank financing. See Ivan Ivanov and Tom 

Zimmermann, Claim Dilution in the Municipal Debt 

Market, Finance and Economics Discussion Series 

2018–011 (2018), available at https://doi.org/ 

10.17016/FEDS.2018.011. 

394See supra note 125. 

395See supra Section V.B.5. 

396See, e.g., supra note 354 and accompanying 

text. 

397See supra notes 124, 126, and 355. 

398 17 CFR 240.15c2–12(a) and (b)(3). 

399 17 CFR 240.15c2–12(f)(3). 

400See supra Section IV.D.1. 

401See supra Section IV.E.1. 

402First year costs: 1,250 hours (first year burden 

on dealers) × $360 (average hourly cost of internal 

compliance attorney) + 13,658 hours (annual 

increased hourly burden on dealers due to the 

amendments) × $360 (average hourly cost of 

internal compliance attorney) = $5,366,880. 

Subsequent annual costs: 13,658 hours (annual 

increased hourly burden on dealers due to the 

amendments) × $360 (average hourly cost of 

internal compliance attorney) = $4,916,880. 

differential impact on borrowing costs 

for issuers or obligated persons 

depending on their level of reliance on 

private borrowing. Issuers or obligated 

persons that are more reliant on private 

borrowing may experience less benefit 

or more cost than those that are not. For 

example, if some issuers or obligated 

persons are mostly funded by private 

debt, including direct placements and 

other financial obligations, and have 

few public bond issuances outstanding, 

they may disclose more information 

regarding their financial obligations 

under the amendments, assuming they 

keep the same borrowing pattern or debt 

structure, but may have little to gain 

from reductions in the cost of issuing 

public debt, if any, associated with their 

disclosures. On the other hand, if 

issuers or obligated persons are 

primarily funded by public debt, their 

compliance costs under the 

amendments will be relatively lower 

because they incur fewer financial 

obligations, while the potential benefit 

from the decrease in the cost of public 

debt would be larger. To the extent that 

this difference in funding structure 

could be particularly the case for small 

and large issuers and obligated 

persons,393 they may be impacted 

differentially by the amendments. 

Again, we are unable to estimate the 

impact on borrowing costs because of 

the unavailability of loan-level data. In 

addition, borrowing costs could also 

depend on the actual level of the 

disclosure issuers or obligated persons 

committed themselves to provide under 

their continuing disclosure agreements, 

which could vary significantly across 

issuers and obligated persons. 

Finally, recent changes to federal tax 

laws 394 may also impact the borrowing 

costs of issuers and obligated persons in 

ways that complicate assessment of the 

likely impacts of the amendments on 

borrowing costs in the future when 

certain data (e.g., bond yields) become 

available. As discussed above,395 on one 

hand, because the new law caps the 

state and local tax deduction allowed to 

be taken on an individual federal 

income tax return, the law may increase 

the demand for tax-free investments 

such as municipal bonds, driving up 

bond prices and driving down yields.396

On the other hand, as also discussed 

above, a decline in the federal corporate 

income tax rate may increase the 

interest rates on issuers’ or obligated 

persons’ direct placements because of 

the diminished relative benefit for the 

municipal tax exemption as well as 

certain gross-up provisions being 

triggered.397 Because the impacts from 

the tax law changes and the 

amendments are likely to overlap, it 

may not be possible to disentangle the 

two. 

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.398 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.399 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 

promptly receive event notices and 

failure to file notices with respect to the 

recommended securities. Dealers 

typically use EMMA or other third party 

vendors to satisfy this existing 

obligation. 

As a practical matter, dealers’ 

obligations under the Rule 15c2–12 

amendments will include verifying that 

the continuing disclosure agreement 

contains an undertaking by the issuer or 

obligated person to provide the 

additional event notices to the MSRB, 

verifying whether the issuer or obligated 

person has complied with its 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. 

As discussed in Section IV.D.1, the 

Commission is revising its estimate of 

the one-time and annual burden on 

dealers.400 Meanwhile, the Commission 

continues to believe that dealers would 

not incur any additional external costs 

and that the task of preparing and 

issuing a notice advising the dealer’s 

employees about the amendments is 

consistent with the type of compliance 

work that a dealer typically handles 

internally.401 Based on the new 

estimates, as a result of the 

amendments, dealers would incur an 

annual internal compliance cost of 

$5,366,880 for the first year, and 

$4,916,880 in subsequent years.402

iii. Costs to Lenders 

Under the amendments, lenders may 

incur costs stemming from the 

disclosure about financial obligations 

and the terms of the agreements creating 

such obligations. As discussed above 

and in the Proposing Release, 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. However, as discussed above, 

while the increased level of disclosure 

may reduce lenders’ information 

advantage over other investors, it does 

not eliminate this advantage because 

private lenders such as banks actively 

engage in information gathering and 

monitoring of borrowers and thus 

develop proprietary information during 

the lending relationship. Disclosure is 

also unlikely to alter the lender’s senior 

status in the debt priority queue. To the 

extent that the benefits from a 

previously undisclosed financial 

arrangement are reduced by the 

increased disclosure, lenders will incur 

a cost, but such a cost translates into 

benefits to investors, because the benefit 

originally accrued to lenders at the 

expense of investors in municipal 

securities. 

In addition, since the amendments 

may decrease the costs incurred by 

issuers and obligated persons in 

connection with the issuance of public 

debt and increase the demand for public 

issuance, lenders may experience 

reduced investment opportunities, or 

may have to decrease loan rates in order 

to stay competitive, either of which 


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403See supra Section IV.D.3. 

404This estimate was provided to the Commission 

by MSRB staff and reflects the MSRB’s assessment 

of the costs it expects to incur to implement the 

necessary modifications to EMMA, based on an 

estimated 1,700 hour schedule. In particular, it 

reflects an estimate of 1,700 (estimated hours of 

burden) × $53.74 (the mean hourly wage for a 2,080- 

hour work-year for Software Developers, Systems 

Software as provided in the U.S. Department of 

Labor, Bureau of Labor Statistics, Occupational 

Employment and Wages, May 2017, available at 

https://www.bls.gov/oes/current/ 

oes151133.htm#nat) = $91,358. 

405Specifically, when there is asymmetric 

information about material risks, investors may not 

be able to distinguish low-risk securities from highrisk 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 and Krishna G. 

Palepu, Information Asymmetry, Corporate 

Disclosure, and the Capital Markets: A Review of 

the Empirical Disclosure Literature, 31 J. Acct. & 

Econ. 405 (2001). 

406 Depending on data availability and market 

conditions, some of these effects could be evaluated 

after the implementation of the amendments. For 

example, disclosure of relevant information in 

event notices may manifest as transaction activity, 

as market participants update their valuations for 

municipal securities. Further, reductions in 

information asymmetry may reduce the dispersion 

in prices for transactions that occur close in time. 

407See supra note 336. 

408See ABA Letter (stating ‘‘disclosure of pricing 

on a near ‘‘real time’’ basis (e.g., within ten business 

days of closing) may set an unrealistic expectation 

among other obligated persons as to the appropriate 

pricing for their direct purchase loan transactions’’). 409The Commission has also recognized that to 

the extent that the lenders’ information advantage 

may be reduced, they would incur a cost. See 

Section V.C.2.iii for relevant discussion. 410See Proposing Release, supra note 3, 82 FR at 

13954. 

could generate a cost to them. However, 

the Commission does not believe the 

amendments will significantly alter the 

composition of the existing municipal 

debt market. While some issuers and 

obligated persons, seeing the cost of 

public debt decrease, may have 

incentives to increase public issuance, 

issuers and obligated persons that are 

heavily reliant on direct placements 

may see the increase in disclosure as 

more costly than the benefit from the 

reduced cost of public debt, and 

therefore choose to use private debt 

exclusively. For reasons similar to those 

discussed above, the Commission is 

unable to quantify the amendments’ 

impact on lenders because of the lack of 

data on loan characteristics and lending 

relationships. 

iv. Costs to the MSRB 

The Rule 15c2–12 amendments will 

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 in Section IV.D.3, after 

further discussion with the MSRB, the 

Commission is revising its burden 

estimate for the MSRB to implement the 

necessary modifications to EMMA.403

According to the MSRB, the total 

estimated one-time cost to the MSRB of 

updating EMMA would be $91,358.404

3. Effects on Efficiency, Competition, 

and Capital Formation 

The Rule 15c2–12 amendments have 

the potential to affect efficiency, 

competition, and capital formation by 

improving the timeliness and 

informativeness of municipal securities 

disclosure and reducing information 

asymmetry in the market. 

As discussed above and in the 

Proposing Release, lack of disclosure 

can lead to information asymmetry and 

mispricing. When the market is not able 

to incorporate the most recent credit 

risk information about issuers and 

obligated persons in the pricing of 

municipal securities, such prices will 

not reflect the true risk associated with 

any particular security. The securities 

offered by low-risk issuers or obligated 

persons could be undervalued and the 

ones offered by high-risk issuers or 

obligated persons overvalued, and 

investors may not be able to distinguish 

between the two.405 Moreover, as stated 

in the Proposing Release, the inability of 

the market to differentiate the high-risk 

and low-risk issuers and obligated 

persons could create incentives for some 

high-risk issuers or obligated persons to 

further exploit the mispricing by 

incurring more financial obligations 

because it is relatively cheaper than a 

public offering, a scenario that may 

sustain or even amplify the market 

inefficiency. Because we believe the 

amendments will facilitate investors’ 

and other market participants’ access to 

more timely and informative disclosure 

about financial obligations of issuers 

and obligated persons, we also believe 

that as the credit risk information gets 

incorporated in the pricing of municipal 

securities in a more timely manner, the 

level of mispricing will be mitigated, 

and the municipal securities market will 

become more efficient.406

In addition, as we have also discussed 

before, at least one 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 

a similar process to collect the same 

information, and issuers and obligated 

persons would have to provide identical 

responses multiple times.407 Therefore, 

the amendments may improve 

efficiency in the disclosure process by 

eliminating such potential duplicative 

costs. 

The Commission also believes that by 

potentially reducing information 

asymmetries between municipal 

securities investors and other moreinformed market participants, including 

issuers, obligated persons and lenders, 

the Rule 15c2–12 amendments can 

promote competition in the municipal 

debt market. One commenter expressed 

concern that disclosure of pricing terms 

of loans in ten business days may ‘‘set 

an unrealistic expectation among other 

obligated persons as to the appropriate 

pricing for their direct purchase loan 

transactions’’ and early disclosures may 

have an ‘‘anti-competitive’’ effect that 

may increase pricing by setting a 

‘‘benchmark’’ for certain transactions.408

The Commission disagrees with this 

comment, and believes that, on balance, 

disclosing pricing terms should inform 

issuers and obligated persons about the 

approximate lending rate in the 

market.409 Such disclosure adds to the 

information lenders, issuers, and 

obligated persons can use in their 

negotiations and should help promote 

competition among suppliers of capital. 

The Commission also stated in the 

Proposing Release that more timely and 

informative disclosure could reduce a 

lender’s competitive advantage over 

municipal securities investors under the 

Rule prior to these amendments, and 

facilitate competition for investment 

opportunities in the municipal debt 

market.410 Currently, for example, a 

bank loan agreement could give the 

lender a lien on assets or revenues that 

were previously pledged to secure 

repayment of an issuer’s or obligated 

person’s outstanding municipal 

securities, effectively diluting the cash 

flow claims of existing security holders 

and adversely affecting their contractual 

rights. However, existing security 

holders may not learn about such events 

and therefore would be unable to take 

any action. Accordingly, the 

Commission continues to believe that 

the amendments will promote a fairer, 

more efficient, and more competitive 

municipal securities market. 

In addition, the amendments to Rule 

15c2–12 may also promote competition 

among issuers or obligated persons 

looking for funding. For example, all 

else equal, the issuers or obligated 

persons that have incurred a large 

amount of undisclosed financial 

obligations are likely to be riskier than 

those that have not. However, under the 

Rule prior to these amendments, 


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411See Michael Welker, Disclosure Policy, 

Information Asymmetry, and Liquidity in Equity 

Markets, 11 Contemp. Acct. Res. 801 (1995) (Welker 

provides evidence that disclosure policy reduces 

information asymmetry and increases liquidity in 

equity markets). See also Christian Leuz and Robert 

E. Verrecchia, The Economic Consequences of 

Increased Disclosure, 38 J. Acct. Res. 91 (2000). 

412See Lisante Letter (commenting that the 

rejection of voluntary approaches is potentially 

problematic given that the Commission cannot 

quantify the economic effects). 

413See NABL Letter (‘‘Reviewing filings under the 

subcategory ‘Bank Loan/Alternative Financings 

Filings’ yielded the following results: 79 disclosures 

in 2015, 364 disclosures in 2016 and 338 

disclosures in 2017 (through April 14, 2017)’’ and 

‘‘[a]t this rate of increase, even if the Proposed 

Amendments are not adopted, voluntary 

disclosures may soon reach the Commission’s 

expected number of annual filings under the 

Proposed Amendments (2,200)’’). 

414 Id. 

415See supra Section II; see also supra note 34. 

securities offered by issuers or obligated 

persons with different levels of credit 

risks may be priced identically by the 

market due to the lack of disclosure, 

placing more creditworthy issuers and 

obligated persons at a competitive 

disadvantage. Since the increase in 

disclosure could improve pricing 

efficiency and reduce mispricing, the 

amendments may promote competition 

for capital among issuers and obligated 

persons. 

The Commission continues to believe 

that the Rule 15c2–12 amendments can 

help facilitate capital formation by 

improving market efficiency and 

liquidity. As illustrated by the example 

above, mispricing and market 

inefficiencies can lead to a situation 

where the securities offered by the highrisk issuers and obligated persons— 

those that incurred a large amount of 

undisclosed financial obligations—are 

priced identically to those offered by the 

low-risk issuers and obligated persons. 

The inability to differentiate the two 

types of investment opportunities by the 

market could lead to underinvestment 

in the low-risk securities and 

overinvestment in the other, leading to 

suboptimal allocation of capital. By 

increasing the timeliness and 

informativeness of disclosure, the 

amendments can reduce mispricing in 

the market and thus reduce potential for 

price inefficiencies, resulting in 

improved allocation of capital. 

More timely and informative 

disclosure could also improve market 

liquidity and therefore 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.411

Therefore, by reducing information 

asymmetry in the municipal securities 

market, the amendments can potentially 

improve liquidity in the municipal 

market, which could allow capital to be 

better deployed at an aggregate level and 

result in more efficient capital 

allocation. Additionally, as the 

municipal securities market becomes 

more transparent, and as investors 

become aware of 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. 

D. Alternative Approaches 

In addition to the Rule 15c2–12 

amendments, the Commission has 

considered several reasonable 

alternatives, which are discussed below. 

1. Voluntary Disclosures 

Instead of these amendments, the 

Commission could encourage issuers 

and obligated persons to voluntarily 

disclose on an ongoing basis the new 

events covered in the amendments. A 

number of commenters recommended 

the Commission further explore this 

approach. For example, one commenter 

challenged the Commission’s 

characterization of the existing level of 

the voluntary disclosure as limited, 

arguing that such conclusion was 

‘‘hastily’’ drawn and recommended 

further exploration of voluntary 

disclosure.412 Another commenter 

pointed out that the volume of the 

voluntary disclosure has increased since 

the MSRB introduced the new EMMA 

features in September 2016 to facilitate 

filings, arguing that the Commission 

understated the efficacy of voluntary 

reporting and suggested postponing the 

amendments for a two-year period to 

allow for voluntary disclosure to 

continue to develop or encourage 

undertakings to include voluntary 

commitments.413 While the Commission 

recognizes that the level of the 

voluntary disclosure has increased since 

the new EMMA features were 

introduced and the Proposing Release 

was issued, the level of the bank loans 

to state and local governments has also 

increased since the estimate set forth in 

the Proposing Release—from $153.3 

billion at the end of 2015 to $190.5 

billion at the end of first quarter 2018, 

a 24% increase. In addition, many of the 

disclosures provided to EMMA come 

from a relatively small number of 

issuers or obligated persons. Therefore, 

the increase is not uniformly distributed 

across issuers or obligated persons. 

Though the Commission recognizes the 

potential for the level of voluntary 

disclosure to continue to increase, it 

believes it is unrealistic to assume that 

it would reach the same level of 

disclosure as under these amendments 

as the commenter suggested.414

While the Commission recognizes the 

benefits of voluntary disclosure for 

issuers and obligated persons, we 

continue to believe that voluntary 

disclosure alone is not sufficient for the 

level of investor protection the 

amendments are designed to achieve. 

The current level of the voluntary 

disclosure of issuers’ and obligated 

persons’ financial obligations is not 

sufficient, and that is why, as discussed 

in Section II, municipal market 

participants, the MSRB, and industry 

groups have made continuous efforts to 

elicit more disclosure.415 It is unclear 

that any efforts to encourage voluntary 

disclosure on the Commission’s part 

would provide greater incentives for 

issuers or obligated persons to disclose 

than these existing voluntary measures. 

Therefore, as discussed above, the 

Commission believes it is unlikely that 

the voluntary disclosure would reach 

the same level of timeliness and 

informativeness as the disclosure under 

the amendments is designed to achieve. 

2. Alternative Timeline 

Issuers and obligated persons could 

be provided additional time (e.g., 15 

days, 30 days, etc.) beyond the ten 

business day requirement that currently 

applies to the disclosure of material 

events under the Rule to provide 

additional event notices resulting from 

the amendments to the MSRB. Under 

the amendments, the new event notices 

must be provided to the MSRB in a 

timely manner not in excess of ten 

business days after the occurrence of the 

event. 

As discussed in Section II and Section 

III.1.i.c, commenters were concerned 

that ten business days was not enough 

time to disclose material financial 

obligations. The Commission is 

adopting a narrower definition of 

‘‘financial obligation’’ than proposed, 

which will reduce the burden on 

issuers, obligated persons, and dealers 

by significantly limiting the number of 

transactions that they will need to 

identify and assess for materiality. The 

narrower definition could partially 

alleviate this concern. 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44741 

416See supra Section V.C.2.i. 

417See supra note 393 and accompanying text. 

418See NABL Letter (‘‘smaller issuers will be less 

able to accommodate the substantial burdens of the 

Proposed Amendments, and the purported investor 

benefit will be more substantially outweighed by 

these burdens’’). See also ABA Letter (pointing out 

that direct bank loans provide access to funding at 

a cost that is lower than accessing the public 

municipal securities market and it is particularly 

the case for smaller municipalities; and smaller 

obligated persons could lack the resources and 

expertise to process the disclosure); Lisante Letter 

(stating that smaller actors could be shut out of the 

market due to the amendments’ impact). 

419See Proposing Release, supra note 3, 82 FR at 

13937. 

420See supra note 81. 

421The Commission’s belief is informed by 

comments received in response to the proposed 

amendments and is reflected in the Commission’s 

decision to narrow the adopted definition of the 

term ‘‘financial obligation’’ to debt, debt-like, and 

debt-related obligations of an issuer or obligated 

person that could impact an issuer’s or obligated 

person’s liquidity, overall creditworthiness, or an 

existing security holder’s rights. See supra Section 

III.A.2. 

422 5 U.S.C. 605(b). 

423See Proposing Release, supra note 3, 82 FR at 

13956. 

Under the alternative timeline 

approach, issuers’ and obligated 

persons’ operational burden could be 

slightly reduced but their substantive 

obligation to provide disclosure would 

remain. Moreover, investors and other 

market participants would receive less 

timely disclosure. The alternative would 

thus provide investors with less 

protection, and the market would not 

operate as efficiently as it might be 

under the amendments. 

3. Relief for Small Issuers and Obligated 

Persons 

As discussed above,416 to the extent 

that some small issuers and obligated 

persons could be more reliant on private 

debt than public debt,417 these issuers 

or obligated persons may experience 

significantly more disclosure-related 

costs, while incurring a relatively 

smaller benefit from a decreased cost of 

public debt. Some commenters 

expressed concerns over this possible 

differential impact.418 In connection 

with these comments, the Commission 

considered an exemption for small 

issuers and obligated persons. 

Under this alternative, the disclosurerelated costs associated with the 

amendments would be eliminated for 

small issuers and obligated persons and 

their disclosure and borrowing practices 

would stay the same as the baseline 

scenario. However, it is possible that 

over time their securities could become 

further mispriced and potentially less 

attractive to investors compared to those 

issued by issuers and obligated persons 

that provide more disclosure. But 

issuers and obligated persons would be 

able to provide voluntary disclosure if 

they believe the benefits of more 

accurate pricing offset the cost of 

disclosure. 

Under this alternative, investors in 

municipal securities that are exempt 

from disclosure requirements under the 

final rules would not experience the full 

benefits discussed above because they 

would not receive more timely and 

informative disclosures about small 

issuers’ and obligated persons’ financial 

obligations than they would otherwise 

receive under the amendments, as 

adopted. 

4. Adopt as Proposed, the Broader 

Definition of Financial Obligation 

Another alternative approach is to 

adopt, as proposed, the broader 

definition of financial obligation. In the 

Proposing Release, the Commission 

defined the term ‘‘financial obligation’’ 

to mean a debt obligation, lease, 

guarantee, derivative instrument, or 

monetary obligation resulting from a 

judicial, administrative, or arbitration 

proceeding, but not include municipal 

securities as to which a final official 

statement has been provided to the 

MSRB consistent with Rule 15c2–12.419

Commenters criticized the definition as 

overbroad and vague and expressed 

concerns that the broad scope of the 

term financial obligation, as proposed, 

would impose substantial burdens on 

issuers, obligated persons, and other 

market participants.420

As discussed above, the Commission 

is narrowing the definition of ‘‘financial 

obligation.’’ As adopted, ‘‘financial 

obligation’’ means a debt obligation; 

derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation; or a 

guarantee of either a debt obligation or 

a derivative instrument entered into in 

connection with, or pledged as security 

or a source of payment for, an existing 

or planned debt obligation. The term 

financial obligation does not include 

municipal securities as to which a final 

official statement has been provided to 

the MSRB consistent with the Rule. 

If the amendments to the Rule were 

adopted as proposed, investors and 

other participants would receive more 

information related to issuers’ and 

obligated persons’ financial obligations 

because of the proposed broader 

definition of ‘‘financial obligation.’’ This 

alternative could allow credit rating 

agencies and municipal analysts to 

produce more accurate ratings and 

forecasts, and could yield greater 

improvements in market efficiency. This 

alternative could also allow those 

investors capable of interpreting broader 

information about issuers’ and obligated 

persons’ obligations to make more 

informed financial decisions. However, 

the Commission also recognizes that a 

higher volume of disclosure may not 

benefit all investors equally. The 

Commission believes that the 

information disclosed under this 

alternative would include information 

about obligations incurred in an issuer’s 

or obligated person’s normal course of 

operations that do not impact an issuer’s 

or obligated person’s liquidity, overall 

creditworthiness, or an existing security 

holder’s rights and thus may not be as 

relevant to investment decisions.421

Additionally, issuers, obligated persons, 

and Participating Underwriters would 

incur higher costs and attendant legal 

exposure associated with disclosing this 

additional information pursuant to the 

amendments under this alternative. 

VI. Regulatory Flexibility Certification 

The Commission certified, under 

section 605(b) of the Regulatory 

Flexibility Act,422 that, when adopted, 

the proposed amendments to the Rule 

would not have a significant economic 

impact on a substantial number of small 

entities. This certification was set forth 

in Section VII of the Proposing Release, 

where the Commission explained that 

no Participating Underwriters would be 

small entities.423 The Commission 

solicited comments regarding this 

certification and received no comments. 

The Commission continues to believe 

this certification is appropriate. 

VII. Statutory Authority 

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 adopting 

amendments to § 240.15c2–12 of title 17 

of the Code of Federal Regulations in 

the manner set forth below. 

Text of 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 amended 

as follows. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The authority citation for part 240 

continues to read in part as follows: 


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44742 Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 

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. 

* * * * * 

■ 2. Section 240.15c2–12 is amended 

by: 

■ a. In paragraph (b)(5)(i)(C)(14), 

removing the word ‘‘and’’; and 

■ b. Adding paragraphs (b)(5)(i)(C)(15) 

and (16) and (f)(11). 

The additions read as follows. 

§ 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 

terms, or other similar events under the 

terms of a financial obligation of the 

obligated person, any of which reflect 

financial difficulties; and 

* * * * * 

(f) * * * 

(11)(i) The term financial obligation 

means a: 

(A) Debt obligation; 

(B) Derivative instrument entered into 

in connection with, or pledged as 

security or a source of payment for, an 

existing or planned debt obligation; or 

(C) Guarantee of paragraph 

(f)(11)(i)(A) or (B). 

(ii) 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: August 20, 2018. 

Brent J. Fields, 

Secretary. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Exhibit A 

Key to Comment Letters Submitted in 

Connection With the Adopting Release 

Amendments to Exchange Act Rule 15c2–12 

(File No. S7–01–17) 

1. Letter from John M. McNally, Hawkins 

Delafield & Wood LLP, to Brent J. Fields, 

Secretary, Commission, dated March 21, 

2017 (‘‘Hawkins Letter’’). 

2. Letter from Jody Johnson, to Brent J. 

Fields, Secretary, Commission, dated April 2, 

2017 (‘‘Johnson Letter’’). 

3. Letter from Clifford M. Gerber, 

President, National Association of Bond 

Lawyers, to Shagufta Ahmed, Desk Officer for 

the Securities and Exchange Commission, 

Office of Information and Regulatory Affairs, 

Office of Management and Budget, and to 

Brent J. Fields, Secretary, Commission, dated 

April 11, 2017 (‘‘NABL OMB Letter’’). 

4. Letter from Lynnette Kelly, Executive 

Director, Municipal Securities Rulemaking 

Board, to Brent J. Fields, Secretary, 

Commission, dated April 14, 2017 (‘‘MSRB 

Letter’’). 

5. Letter from David Lisante, J.D. Candidate 

2017, Cornell Law School, to Brent J. Fields, 

Secretary, Commission, dated April 20, 2017 

(‘‘Lisante Letter’’). 

6. Letter from Ken Martin, Assistant 

Commissioner Financial Services/CFO, Texas 

Higher Education Coordinating Board, to 

Brent J. Fields, Secretary, Commission, dated 

May 1, 2017 (‘‘THECB Letter’’). 

7. Letter from Tyler Brown, J.D. Candidate, 

Boston College Law School, to Brent J. Fields, 

Secretary, Commission, dated May 1, 2017 

(‘‘Brown Letter’’). 

8. Letter from Michael Phemister, Vice 

President, Treasury Management, Dallas Fort 

Worth International Airport, to Brent J. 

Fields, Secretary, Commission, dated May 4, 

2017 (‘‘DFW Letter’’). 

9. Letter from Michael A. Genito, 

Commissioner of Finance, City of White 

Plains, New York, to Brent J. Fields, 

Secretary, Commission, dated May 5, 2017 

(‘‘White Plains Letter’’). 

10. Letter from Brian C. Massey, Finance 

Director, Outagamie County, Wisconsin, to 

Brent J. Fields, Secretary, Commission, dated 

May 5, 2017 (‘‘Outagamie Letter’’). 

11. Letter from Erich Mueller, Finance 

Director, City of Troutdale, Oregon, to Brent 

J. Fields, Secretary, Commission, dated May 

8, 2017 (‘‘Troutdale Letter’’). 

12. Letter from Neal D. Suess, President/ 

CEO, Loup River Public Power District, to 

Brent J. Fields, Secretary, Commission, dated 

May 9, 2017 (‘‘Loup Power Letter’’). 

13. Letter from Tracy Ginsburg, Executive 

Director, Texas Association of School 

Business Officials, to Brent J. Fields, 

Secretary, Commission, dated May 9, 2017 

(‘‘TASBO Letter’’). 

14. Letter from Marina Scott, City 

Treasurer, Salt Lake City, Utah, to Brent J. 

Fields, Secretary, Commission, dated May 9, 

2017 (‘‘Salt Lake City Letter’’). 

15. Letter from Chad D. Gee, 

Superintendent, Yorktown Independent 

School District, Texas, to Brent J. Fields, 

Secretary, Commission, dated May 9, 2017 

(‘‘Yorktown SD Letter’’). 

16. Letter from Julie Egan, Chair, and Lisa 

Washburn, Chair, Industry Practices 

Procedures, National Federation of 

Municipal Analysts, to Brent J. Fields, 

Secretary, Commission, dated May 10, 2017 

(‘‘NFMA Letter’’). 

17. Letter from Robert Scott and Keith 

Dagen, Co-Chairs, Financial Reporting and 

Regulatory Response Committee, 

Government Finance Officers Association of 

Texas, to Brent J. Fields, Secretary, 

Commission, dated May 10, 2017 (‘‘GFOA TX 

Letter’’). 

18. Letter from Jeff N. Heiner, President, 

Board of Education, Ogden City School 

District, Utah, to Brent J. Fields, Secretary, 

Commission, dated May 10, 2017 (‘‘Ogden 

Letter’’). 

19. Letter from Martin W. Bates, Ph.D., J.D., 

Superintendent, and Terry Bawden, Board 

President, Granite School District, Utah, to 

Brent J. Fields, Secretary, Commission, dated 

May 11, 2017 (‘‘Granite SD Letter’’). 

20. Letter from Grant Whitaker, President 

& CEO, Utah Housing Corporation, to Brent 

J. Fields, Secretary, Commission, dated May 

11, 2017 (‘‘UHC Letter’’). 

21. Letter from Ann Mackiernan, Chief 

Financial Officer, Tualatin Hills Park & 

Recreation District of Oregon, to Brent J. 

Fields, Secretary, Commission, dated May 12, 

2017 (‘‘THPRD Letter’’). 

22. Letter from Arthur J. ‘‘Grant’’ Lacerte, 

Vice President and General Counsel, 

Kissimmee Utility Authority, Florida, to 

Brent J. Fields, Secretary, Commission, dated 

May 12, 2017 (‘‘Kissimmee Letter’’). 

23. Letter from Dr. Marcelo Cavazos, 

Superintendent, Arlington Independent 

School District, Texas, to Brent J. Fields, 

Secretary, Commission, dated May 12, 2017 

(‘‘Arlington SD Letter’’). 

24. Letter from Cynthia A. Nichol, Chief 

Financial Officer, Port of Portland, Oregon, to 

Brent J. Fields, Secretary, Commission, dated 

May 12, 2017 (‘‘Port Portland Letter’’). 

25. Letter from Kristin M. Bronson, City 

Attorney, City and County of Denver, 

Colorado, to Brent J. Fields, Secretary, 

Commission, dated May 12, 2017 (‘‘Denver 

Letter’’). 

26. Letter from Ted Wheeler, Mayor, City 

of Portland, Oregon, to Brent J. Fields, 

Secretary, Commission, dated May 12, 2017 

(‘‘Portland Letter’’). 

27. Letter from Michele Trongaard, 

Assistant Superintendent for Finance and 

Operation, Wylie Independent School 

District, Texas, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘Wylie SD 

Letter’’). 

28. Letter from Dorothy Donohue, Deputy 

General Counsel, Securities Regulation, 

Investment Company Institute, to Brent J. 

Fields, Secretary, Commission, dated May 15, 

2017 (‘‘ICI Letter’’). 

29. Letter from Dennis M. Kelleher, 

President & CEO, Better Markets, Inc., to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘BM Letter’’). 

30. Letter from David W. Osburn, General 

Manager, Oklahoma Municipal Power 

Authority, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘OMPA 

Letter’’). 

31. Letter from Kurt J. Nagle, President and 

CEO, American Association of Port 

Authorities, to Brent J. Fields, Secretary, 


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Federal Register / Vol. 83, No. 170 / Friday, August 31, 2018 / Rules and Regulations 44743 

Commission, dated May 15, 2017 (‘‘AAPA 

Letter’’). 

32. Letter from Leslie M. Norwood, 

Managing Director and Associate General 

Counsel, Securities Industry Financial 

Markets Association, to Brent J. Fields, 

Secretary, Commission, dated May 15, 2017 

(‘‘SIFMA Letter’’). 

33. Letter from Clifford M. Gerber, 

President, National Association of Bond 

Lawyers, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘NABL 

Letter’’). 

34. Letter from Charisse Mosely, Deputy 

City Controller, City of Houston, Texas, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘Houston Letter’’). 

35. Letter from Joanne Wamsley, Vice 

President for Finance and Deputy Treasurer, 

Arizona State University, to Brent J. Fields, 

Secretary, Commission, dated May 15, 2017 

(‘‘AZ Universities Letter’’). 

36. Letter from Leo Karwejna, Managing 

Director and Chief Compliance Officer, PFM, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘PFM Letter’’). 

37. Letter from Robert W. Doty, to Brent J. 

Fields, Secretary, Commission, dated May 15, 

2017 (‘‘Doty Letter’’). 

38. Letter from Noreen Roche-Carter, Chair, 

Tax and Finance Task Force, Large Public 

Power Council, Sacramento, California, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘LPPC Letter’’). 

39. Letter from Rebecca L. Peace, Deputy 

Executive Director and Chief Counsel, 

Pennsylvania Housing Finance Agency, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘PHFA Letter’’). 

40. Letter from John J. Wagner, Kutak Rock 

LLP, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘Kutak 

Rock Letter’’). 

41. Letter from Michael Nicholas, Chief 

Executive Officer, Bond Dealers of America, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘BDA Letter’’). 

42. Letter from Kevin M. Burke, President 

and CEO, Airports Council International, 

North America, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘ACI 

Letter’’). 

43. Letter from Marty Dreischmeier, Chief 

Financial Officer, WPPI Energy, to Brent J. 

Fields, Secretary, Commission, dated May 15, 

2017 (‘‘WPPI Letter’’). 

44. Letter from Diana Pope, Director, 

Financing and Investment Division, and Lee 

McElhannon, Director, Bond Finance, 

Financing and Investment Division, Georgia 

State Financing and Investment Commission, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘GA Finance Letter’’). 

45. Letter from Ken Miller, NAST 

President, Treasurer, State of Oklahoma, 

National Association of State Treasurers, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘NAST Letter’’). 

46. Letter from Timothy Cameron, Esq. 

Head, and Lindsey Weber Keljo, Esq., 

Managing Director and Associate General 

Counsel, Asset Management Group, SIFMA, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘SIFMA AMG Letter’’). 

47. Letter from Cristeena G. Naser, Vice 

President, Center for Securities, Trust & 

Investments, American Bankers Association, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘ABA Letter’’). 

48. Letter from Robert W. Scott, Director of 

Finance, City of Brookfield, Wisconsin, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘Brookfield Letter’’). 

49. Letter from Richard Doyle, City 

Attorney, City of San Jose, California, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘San Jose Letter’’). 

50. Letter from Donna Murr, President, 

National Association of Health and 

Educational Facilities Finance Authorities, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘NAHEFFA Letter’’). 

51. Form Letter from Issuers in the State of 

Oregon (‘‘Form Letter’’). 

52. Letter from Christopher Alwine, Head 

of Municipal Money Market and Bond 

Groups, The Vanguard Group, Inc., to Brent 

J. Fields, Secretary, Commission, dated May 

15, 2017 (‘‘Vanguard Letter’’). 

53. Letter from Susan Gaffney, Executive 

Director, National Association of Municipal 

Advisors, to Brent J. Fields, Secretary, 

Commission, dated May 15, 2017 (‘‘NAMA 

Letter’’). 

54. Letter from Emily S. Brock, Director, 

Federal Liaison Center, Government Finance 

Officers Association, to Brent J. Fields, 

Secretary, Commission, dated May 15, 2017 

(‘‘GFOA Letter’’). 

55. Letter from Walker R. Stapleton, State 

Treasurer, and Ryan Parsell, Deputy 

Treasurer, State of Colorado, to Brent J. 

Fields, Secretary, Commission, dated May 15, 

2017 (‘‘CO Treasury Letter’’). 

56. Letter from Glenn Hegar, Texas 

Comptroller of Public Accounts, to Brent J. 

Fields, Secretary, Commission, dated May 15, 

2017 (‘‘TCPA Letter’’). 

57. Letter from Tracy Olsen, Business 

Administrator, Nebo School District, Utah, to 

Brent J. Fields, Secretary, Commission, dated 

May 15, 2017 (‘‘Nebo SD Letter’’). 

58. Letter from Garth Rieman, Director of 

Housing Advocacy and Strategic Initiatives, 

National Council of State Housing Agencies, 

to Brent J. Fields, Secretary, Commission, 

dated May 15, 2017 (‘‘NCSHA Letter’’). 

59. Letter from Paula Stuart, Chief 

Executive Officer, Digital Assurance 

Certification, to Brent J. Fields, Secretary, 

Commission, dated May 16, 2017 (‘‘DAC 

Letter’’). 

60. Letter from Sophia D. Skoda, Director 

of Finance, East Bay Municipal Utility 

District, California, to Brent J. Fields, 

Secretary, Commission, dated May 17, 2017 

(‘‘East Bay Letter’’). 

61. Letter from Keith Paul Bishop, Former 

California Commission of Corporations, to 

Brent J. Fields, Secretary, Commission, dated 

June 1, 2017 (‘‘Bishop Letter’’). 

62. Letter from Michael Cohen, Director, 

California Department of Finance, to Brent J. 

Fields, Secretary, Commission, dated June 

28, 2017 (‘‘CA Finance Letter’’). 

63. Letter from Clifford M. Gerber, 

President, National Association of Bond 

Lawyers, to Brent J. Fields, Secretary, 

Commission, dated August 29, 2017 (‘‘NABL 

II Letter’’). 

64. Letter from Alexandra M. MacLennan, 

President, National Association of Bond 

Lawyers, to Brent J. Fields, Secretary, 

Commission, dated June 13, 2018 (‘‘NABL III 

Letter’’). 

65. Letter from School Improvement 

Partnership to Pamela Dyson, Director/Chief 

Information Officer, Commission, dated May 

31, 2018 (‘‘SIP Letter’’). 

[FR Doc. 2018–18279 Filed 8–30–18; 8:45 am] 

BILLING CODE 8011–01–P 


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