[Federal Register Volume 83, Number 170 (Friday, August 31, 2018)]
[Rules and Regulations]
[Pages 44700-44743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18279]



[[Page 44699]]

Vol. 83

Friday,

No. 170

August 31, 2018

Part II





Securities and Exchange Commission





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17 CFR Part 240





Amendments to Municipal Securities Disclosure; Final Rule

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

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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.

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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, Attorney-
Adviser; Office of Municipal Securities, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-6628 or at (202) 551-
5680.

SUPPLEMENTARY INFORMATION: The Commission is 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

[[Page 44701]]

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.
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    \1\ See 17 CFR 240.15c2-12(a), (b)(5)(i), (b)(5)(i)(C).
    \2\ Other 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.
    \3\ See 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.
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    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\
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    \4\ The 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.
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    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\
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    \5\ See 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.
    \6\ SEC 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-advisory-committee-2012/iac061418-market-structure-subcommittee-recommendation.pdf.
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    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\
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    \7\ 15 U.S.C. 78o(c).
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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

[[Page 44702]]

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\
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    \8\ See 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'').
    \9\ See 1989 Adopting Release, supra note 8.
    \10\ See 17 CFR 240.15c2-12(b).
    \11\ See 1994 Amendments Adopting Release, supra note 8.
    \12\ See 2008 Amendments Adopting Release, supra note 8.
    \13\ See 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.
    \14\ The term ``obligated person'' means any person, including 
an issuer of municipal securities, who is either generally or 
through an enterprise fund, or account of such person committed by 
contract or other 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).
    \15\ On 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.
    \16\ See 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \17\ See 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).
    \18\ See 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event 
notices, and failure to file notices are referred to collectively 
herein as ``continuing disclosure documents.''
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    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\
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    \19\ See 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/munireport073112.pdf.
    \20\ Id.
    \21\ Id.
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    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 exchange-traded 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\
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    \22\ See 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.
    \23\ See 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.
    \24\ See MSRB, 2017 Fact Book (Mar. 18, 2018), available at 
http://www.msrb.org/~/media/Files/Resources/MSRB-Fact-Book-
2017.ashx?la=en.
    \25\ See MSRB, Self-Regulation and the Municipal Securities 
Market (Jan. 2018), available at http://www.msrb.org/Market-Topics/
~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx.
    \26\ See Registration of Municipal Advisors, Exchange Act 
Release No. 34-70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013).
    \27\ See 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/CRPT-110hrpt835.htm).
    \28\ The 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.
    \29\ E.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-news-hartford-oversight-board-20180208-story.html.
    \30\ See 2012 Municipal Report, supra note 19.
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    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\

[[Page 44703]]

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.
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    \31\ For example, an investor purchasing a municipal security 
directly from an issuer or obligated person.
    \32\ For example, a lender entering into a bank loan, loan 
agreement, or other type of financing agreement with an issuer or 
obligated person.
    \33\ See Proposing Release, supra note 3, 82 FR at 13929.
    \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-and-Events/Press-Releases/2016/MSRB-Improves-Bank-Loan-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/
0E3E9F81C7BA4EB38EE80857FE378F18.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.
    \35\ See 1989 Adopting Release, supra note 8.
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    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\
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    \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).
    \37\ See Proposing Release, supra note 3, 82 FR at 13931.
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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\
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    \38\ See, e.g., Houston Letter; Denver Letter; DFW Letter; GFOA 
Letter; BDA Letter; MSRB Letter.
    \39\ See, 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&acceptedDisclaimer=true.
    \40\ See Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131 
Stat. 2054 (2017).
    \41\ See NABL III Letter.
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    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.
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    \42\ See Proposing Release, supra note 3, 82 FR at 13929.
    \43\ Id.
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    Additionally, the Commission understands that to the extent 
information about financial obligations is disclosed and accessible to 
investors and other market participants, such

[[Page 44704]]

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.
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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'').
    \45\ See 2012 Municipal Report, supra note 19.
    \46\ Municipal 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.
    \47\ See Arlington SD Letter.
    \48\ See NABL Letter.
    \49\ Id.
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    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\
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    \50\ For a discussion of the definition of the term ``financial 
obligation,'' see infra Section III.A.2.
    \51\ For 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.
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    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\
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    \52\ For 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.
---------------------------------------------------------------------------

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

[[Page 44705]]

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.
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    \53\ See, e.g., NFMA Letter; Vanguard Letter; and ICI Letter.
    \54\ Several 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.
    \55\ For further discussion of the term financial obligation, 
including comments received, see infra Section III.A.2.
    \56\ See, 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).
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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\
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    \57\ See, e.g., DFW Letter; BDA Letter; Kutak Rock Letter; PFM 
Letter; Houston Letter; NABL Letter.
    \58\ See 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'').
    \59\ See 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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \60\ See 1994 Amendments Adopting Release, supra note 8.
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    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.
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    \61\ See Proposing Release, supra note 3, 82 FR at 13935-36.
    \62\ See 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.
    \63\ See, 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.
---------------------------------------------------------------------------

    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

[[Page 44706]]

total mix of information made available to the reasonable investor.\67\
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    \64\ See 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.
    \65\ See 1994 Amendments Adopting Release, supra note 8; see 
also 17 CFR 240.15c2-12(b)(5)(i)(A) and (f)(3).
    \66\ See 1994 Amendments Adopting Release, supra note 8 at 
59593.
    \67\ See 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'').
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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\
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    \68\ See, 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.
    \70\ See, e.g., DFW Letter.
    \71\ See, 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'').
    \72\ See, 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).
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    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.
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    \73\ See Proposing Release at supra note 3, 82 FR at 13930 and 
note 15.
    \74\ The 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.
    \75\ See 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.
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    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.
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    \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).
    \77\ See note 63 and accompanying text.
---------------------------------------------------------------------------

    Due to the flexible facts-and-circumstances 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

[[Page 44707]]

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\
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    \78\ See, e.g., Portland Letter; Denver Letter; ACI Letter.
    \79\ See, e.g., Portland Letter; ACI Letter; Kutak Rock Letter; 
San Jose Letter.
    \80\ See, 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'').
    \81\ See, 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'').
    \82\ See ABA Letter; East Bay Letter.
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    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.
---------------------------------------------------------------------------

    \83\ See, 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).
    \84\ For a discussion of the term ``incurred,'' see infra 
Section III.A.1.ii.
    \85\ Relevant 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.
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    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\
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    \86\ See 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%20Advanced%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 Sec.  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'').
    \87\ U.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 tax-exempt financing in 
a manner that is inconsistent with the purposes of section 141 [of 
the Internal Revenue Code].'' See 26 CFR 1.141-14.
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ii. Incurrence of a Financial Obligation
    Some commenters recommended that the Commission provide guidance on

[[Page 44708]]

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\
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    \88\ See SIFMA AMG Letter; see also NABL Letter.
    \89\ This 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.
    \90\ See 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'').
    \91\ The 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.
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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\
---------------------------------------------------------------------------

    \92\ See 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).
    \93\ See 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).
    \94\ See DAC Letter.
    \95\ See 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 anti-
competitive 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
    \97\ See Proposing Release, supra note 3, 82 FR at 13937.
    \98\ Id.
    \99\ Id.
    \100\ The Commission further notes that information about 
financial obligations, including transaction documents, would likely 
be available under state sunshine laws.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \101\ See Proposing Release, supra note 3, 82 FR at 13957.
    \102\ See id.
---------------------------------------------------------------------------

    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

[[Page 44709]]

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\
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    \103\ See, e.g., AAPA Letter; ABA Letter, Form Letter.
    \104\ See GFOA Letter; Brookfield Letter; GFOA TX Letter; 
Kissimmee Letter.
    \105\ See 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'').
    \106\ With 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.
    \107\ See 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'').
    \108\ See, 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'').
    \109\ See, 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).
    \110\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \111\ See, 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.
    \112\ See BM Letter; ICI Letter; Doty Letter.
    \113\ See ICI Letter.
---------------------------------------------------------------------------

    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 debt-related 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

[[Page 44710]]

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\
---------------------------------------------------------------------------

    \114\ Cf. 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.
    \115\ Several 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.
    \116\ See 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.
    \117\ Compare 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \118\ See Proposing Release, supra note 3, 82 FR at 13937.
    \119\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \120\ See, 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).
    \121\ See, 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.
---------------------------------------------------------------------------

    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 tax-related 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.
---------------------------------------------------------------------------

    \122\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \123\ See NABL Letter (arguing that the Commission has not 
provided adequate evidence of investor harm related to undisclosed 
debt obligations).
    \124\ See 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-rate-may-spike-with-drop-in-corporate-tax-rate.
    \125\ See Tax Cuts and Jobs Act of 2017, supra note 40.
    \126\ These 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-banks-may-calculate-the-gross-up-on-direct-placement-bonds (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).
    \127\ See supra Section III.A.1.iii (discussion of information 
that should be included in an event notice).
---------------------------------------------------------------------------

    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 lease-purchase 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.
---------------------------------------------------------------------------

    \128\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \129\ Id. at 13937.
    \130\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \131\ For 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&acceptedDisclaimer=true.
---------------------------------------------------------------------------

    Commenters criticized the inclusion of leases, without limitation, 
in the definition of ``financial obligation'' as

[[Page 44711]]

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\
---------------------------------------------------------------------------

    \132\ See, e.g., Portland Letter; San Jose Letter; BDA Letter; 
East Bay Letter. See also IAC Recommendation, supra note 6.
    \133\ See, 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.
    \134\ See, 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'').
    \135\ See White Plains Letter; SIFMA AMG Letter.
    \136\ See BDA Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \137\ See id.; White Plains Letter.
    \138\ See BDA Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \139\ See Proposing Release, supra note 3, 82 FR at 13937.
    \140\ See 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'').
    \141\ For 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 lease-revenue 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.
---------------------------------------------------------------------------

    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

[[Page 44712]]

a ``debt obligation'' from one that is not. In the Commission's view, 
any short-term 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.
---------------------------------------------------------------------------

    \142\ A ``similar contract'' could, for example, include a line 
of credit obtained from a bank or other lender.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \143\ See 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.
    \144\ Several 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \145\ See Proposing Release, supra note 3, 82 FR at 13938.
    \146\ Id.
    \147\ See, e.g., LPPC Letter.
    \148\ See 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'').
    \149\ See LPPC Letter.
---------------------------------------------------------------------------

    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

[[Page 44713]]

instrument entered into in connection with, or pledged as security or a 
source of payment for, an existing or planned debt obligation.''
---------------------------------------------------------------------------

    \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-reform-outstanding-and-future-municipal-debt-issuance (highlighting 
derivatives as a tool to simulate tax-exempt 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-is-warning-on-alternatives-to-advance-refundings?brief=00000159-f607-d46a-ab79-fe27f2be0000.
    \151\ See e.g., Ianthe Jeanne Dugan, School District, Bank in 
Swap Clash, Wall St. J. (May 24, 2011), available at https://www.wsj.com/articles/SB10001424052702303654804576341772921133838 
(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/state-college-area-school-district-agrees-to-9-million-payment-in-interest-rate-swap-agreement-with-royal-bank-of-canada,1222044/.
---------------------------------------------------------------------------

    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, 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 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.
---------------------------------------------------------------------------

    \152\ For 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.
    \153\ See Proposing Release, supra note 3, 82 FR at 13938.
---------------------------------------------------------------------------

    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-be-incurred 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.
---------------------------------------------------------------------------

    \154\ See State College Area Swap Statement, supra note 151.
    \155\ For 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \156\ See Proposing Release, supra note 3, 82 FR at 13938.
    \157\ See, e.g., OMPA Letter; Oregon Treasurer Letter; WPPI 
Letter.
---------------------------------------------------------------------------

    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

[[Page 44714]]

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.''
---------------------------------------------------------------------------

    \158\ See BDA Letter; ICI Letter; SIFMA AMG Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \159\ See 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.
    \160\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \161\ See Proposing Release, supra note 3, 82 FR at 13938.
    \162\ See, 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.
    \163\ See DAC Letter.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \164\ See, 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 
non-compliance 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'').
    \165\ See LPPC Letter.
    \166\ See NABL Letter.
---------------------------------------------------------------------------

    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

[[Page 44715]]

creditworthiness or would adversely affect security holders.
---------------------------------------------------------------------------

    \167\ See LPPC Letter (arguing that issuers and obligated 
persons typically have funding reserves and insurance to cover costs 
related to judicial, administrative, or arbitration hearings).
---------------------------------------------------------------------------

    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.
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    \168\ See Proposing Release, supra note 3, 82 FR at 13957.
    \169\ See, e.g., DAC Letter; see also GA Finance Letter.
    \170\ See, e.g., DAC Letter.
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    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.
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    \171\ See id.
    \172\ The 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-interpretive-letter-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)).
    \173\ See 17 CFR 240.15c2-12(f) (emphasis added).
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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.
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    \174\ See Proposing Release, supra note 3, 82 FR at 13941.
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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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    \175\ See Kutak Rock Letter; DAC Letter.
    \176\ See Proposing Release, supra note 3, 82 FR at 13940.

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[[Page 44716]]

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\
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    \177\ See DAC Letter.
    \178\ See SIFMA Letter.
    \179\ The 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.
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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.
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    \180\ See San Jose Letter.
    \181\ See DAC Letter.
    \182\ See Proposing Release, supra note 3, 82 FR at 13939-40.
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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\
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    \183\ See, e.g., ABA Letter; Brookfield Letter; Bishop Letter; 
Kutak Rock Letter.
    \184\ See 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'').
    \185\ See 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'').
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    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.
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    \186\ See Proposing Release, supra note 3, 82 FR at 13939.
    \187\ For 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.
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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\
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    \188\ See Kutak Rock Letter; NAMA Letter.
    \189\ See SIFMA Letter.
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    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

[[Page 44717]]

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\
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    \190\ For 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.
---------------------------------------------------------------------------

    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.
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    \192\ See id.
    \193\ See Hawkins Letter.
---------------------------------------------------------------------------

    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\
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    \194\ See GFOA Letter; ABA Letter; BDA Letter; NABL Letter.
    \195\ See GFOA Letter; NABL Letter; NAMA Letter.
    \196\ See ABA Letter.
    \197\ See 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

    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

[[Page 44718]]

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.
---------------------------------------------------------------------------

    \200\ Proposed Collection; Comment Request (Extension: Rule 
15c2-12, SEC File No. 270.330, OMB Control No. 3235-0372), 83 FR 
18358 (Apr. 26, 2018).
    \201\ See SIP Letter; NABL III Letter.
    \202\ See Submission for OMB Review; Comment Request (Extension: 
Rule 15c2-12, SEC File No. 270.330, OMB Control No. 3235-0372), 80 
FR 9758 (Feb. 24, 2015) (``2015 PRA Notice'').
    \203\ See, 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.
---------------------------------------------------------------------------

    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 non-
competitively bid offerings, to send, upon request, a copy of the most 
recent preliminary official statement (if one exists) to potential 
customers; (3) to contract with the issuer to receive, within a 
specified time, sufficient copies of the final official statement to 
comply with the Rule's delivery requirement, and the requirements of 
the rules of the MSRB; (4) to send, upon request, a copy of the final 
official statement to potential customers for a specified period of 
time; and (5) before purchasing or selling municipal securities in 
connection with an offering, to reasonably determine that the issuer or 
obligated person has undertaken, in a written agreement or contract for 
the benefit of holders of such municipal securities, to provide annual 
filings, event notices, and failure to file notices (i.e., continuing 
disclosure documents) to the MSRB in an electronic format as prescribed 
by the MSRB.\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\
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    \204\ See 17 CFR 240.15c2-12(b).
    \205\ See 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    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) non-payment related defaults, if 
material; (3) unscheduled draws on debt service reserves reflecting 
financial difficulties; (4) unscheduled draws on credit enhancements 
reflecting financial difficulties; (5) substitution of credit or 
liquidity providers, or their failure to perform; (6) adverse tax 
opinions, the issuance by the I.R.S. of proposed or final 
determinations of taxability, Notices of Proposed Issue or other 
material notices or determinations with respect to the tax status of 
the security, or other material events affecting the tax status of the 
security; (7) modifications to rights of security holders, if material; 
(8) bond calls, if material, and tender offers; (9) defeasances; (10) 
release, substitution, or sale of property securing repayment of 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\
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    \206\ See 17 CFR 240.15c2-12(b)(5)(i)(C).
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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

[[Page 44719]]

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.
---------------------------------------------------------------------------

    \207\ See supra Section I.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \208\ See 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.
    \209\ See NABL OMB Letter.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \210\ See Proposing Release, supra note 3, 82 FR at 13943; 2015 
PRA Notice, supra note 202.
---------------------------------------------------------------------------

    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

[[Page 44720]]

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.
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    \211\ As 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.
---------------------------------------------------------------------------

    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\
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    \212\ This 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \213\ See ABA Letter.
    \214\ See NABL OMB Letter.
    \215\ See id.
    \216\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \217\ As 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.
    \218\ See, e.g., NABL OMB Letter; SIFMA Letter.
    \219\ See NABL OMB Letter.
    \220\ See id.
    \221\ See 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).
---------------------------------------------------------------------------

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

[[Page 44721]]

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\
---------------------------------------------------------------------------

    \222\ See id.
    \223\ See infra Section IV.D.2.
    \224\ According 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \225\ As 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) x .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.
    \228\ Although 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-interpretive-letter-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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \229\ 13,658 (estimated annual issuances) x 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.
    \231\ See supra Section III.A.2.i.
    \232\ See supra Section III.A.2.iv.
---------------------------------------------------------------------------

    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

[[Page 44722]]

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.
---------------------------------------------------------------------------

    \233\ 13,658 (estimated annual issuances) x 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.
    \235\ See MSRB 2017 Fact Book, supra note 24.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
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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 one-time, 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.
---------------------------------------------------------------------------

    \239\ See Proposing Release, supra note 3, 82 FR at 13944.
    \240\ See id.
---------------------------------------------------------------------------

    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 one-time 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 time-consuming to 
interpret and implement.\243\
---------------------------------------------------------------------------

    \241\ See NABL OMB Letter.
    \242\ See id.
    \243\ See supra Sections III.A.1 and III.A.2.
---------------------------------------------------------------------------

    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

[[Page 44723]]

amendments), the Proposing Release, and the Adopting Release.
---------------------------------------------------------------------------

    \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.
    \245\ See supra note 236.

          Table 1--Summary of PRA Burden Estimates for Dealers
------------------------------------------------------------------------
                                           Annual burden     One-time
                                              (hours)     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
---------------------------------------------------------------------------

    \246\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \247\ See Proposing Release, supra note 3, 82 FR at 13944; 2015 
PRA Notice, supra note 202.
    \248\ See 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \250\ See 2015 PRA Notice, supra note 202.
    \251\ 73,480 (annual number of event notices) x 2 (estimate of 
average hours needed to prepare and submit each) + 62,596 (annual 
number of annual filings) x 7 (estimate of average hours needed to 
prepare and submit each) + 7,063 (annual number of failure to file 
notices) x 2 (estimate of average hours needed to prepare and submit 
each) = 599,258 hours.
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    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

[[Page 44724]]

hours), and a total annual burden on issuers of 603,658 hours.\252\
---------------------------------------------------------------------------

    \252\ 75,680 (annual number of event notices including 
additional 2,200 event notice burden created by amendments) x 2 
(average estimate of hours needed to prepare and submit each) + 
62,596 (average number of annual filings) x 7 (average estimate of 
hours needed to prepare and submit each) + 7,063 (average number of 
failure to file notices) x 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.
---------------------------------------------------------------------------

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 short-
term 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 time-
consuming.\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\
---------------------------------------------------------------------------

    \253\ See GFOA Letter; NABL OMB Letter; Kutak Rock Letter; ABA 
Letter; SIP Letter.
    \254\ See GFOA Letter.
    \255\ See NABL OMB Letter.
    \256\ See Kutak Rock Letter.
    \257\ See, e.g. Houston Letter; Denver Letter.
    \258\ See Denver Letter. See also, e.g. AZ Universities Letter; 
Kutak Rock Letter; NABL OMB Letter; NAHEFFA Letter.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \259\ See NABL OMB Letter.
    \260\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \261\ See 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'').
    \262\ See Kutak Rock Letter.
    \263\ See 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) x .25 (estimated 
percentage of such issuers filing event notices under proposed 
amendment (15)) x 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.''
    \264\ See 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.
    \265\ See 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.
    \266\ See 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.
    \267\ See id.
---------------------------------------------------------------------------

    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

[[Page 44725]]

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 time-consuming 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.
---------------------------------------------------------------------------

    \268\ 75,680 (annual number of event notices) x 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.
    \269\ The 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.
    \270\ See Kutak Rock Letter.
    \271\ According 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \272\ Other 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.
    \273\ See supra Section III.A.2.i.
    \274\ Compare, 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'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.

                              Table 2--Summary of PRA Burden Estimates for Issuers
----------------------------------------------------------------------------------------------------------------
                                                                     Estimated
                                                                      filings      Annual burden     One-time
                                                                   (submissions)      (hours)     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
----------------------------------------------------------------------------------------------------------------


[[Page 44726]]

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.
---------------------------------------------------------------------------

    \276\ See 2015 PRA Notice, supra note 202.
    \277\ First-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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \278\ According 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.
    \279\ According 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.
    \280\ First-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.

          Table 3--Summary of PRA Burden Estimates for the MSRB
------------------------------------------------------------------------
                                           Annual burden     One-time
                                              (hours)     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\
---------------------------------------------------------------------------

    \281\ See NABL OMB Letter and SIFMA Letter.
    \282\ See id.
    \283\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 44727]]

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.
---------------------------------------------------------------------------

    \285\ See Proposing Release, supra note 3, 82 FR at 13946.
    \286\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \287\ Id.
    \288\ According 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.
---------------------------------------------------------------------------

    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         One-time
                                           external cost   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\
---------------------------------------------------------------------------

    \289\ See Proposing Release, supra note 3, 82 FR at 13946. The 
Commission estimated the following: 20,000 (number of issuers) x .65 
(percentage of issuers that may use designated agents) x $750 
(estimated average annual cost for issuer's use of designated agent) 
= $9,750,000. See also 2015 PRA Notice, supra note 202.
    \290\ Id.
---------------------------------------------------------------------------

    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

[[Page 44728]]

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\
---------------------------------------------------------------------------

    \291\ See supra Section IV.D.2.iii.
    \292\ See 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.
    \293\ Previously, 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) x .65 
(percentage of issuers that may use designated agents) x $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) x .65 (percentage of issuers 
that may use designated agents) x $795 ($750 x 1.06) (estimated 
average annual cost for issuer's use of designated agent under the 
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).
---------------------------------------------------------------------------

    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 one-time 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\
---------------------------------------------------------------------------

    \296\ See 2010 Amendments Adopting Release, supra note 8.
    \297\ See Proposing Release, supra note 3, 82 FR at 13946.
    \298\ Id. 20,000 issuers x $100 = $2,000,000.
    \299\ See Kutak Rock Letter.
    \300\ See NABL 2, supra note 228.
    \301\ See supra Section IV.D.2.
    \302\ 28,000 issuers (revised estimate of issuers affected by 
continuing disclosure requirements under the Rule) x $400 (hourly 
wage for an outside attorney) x .25 hours (estimated time for 
outside attorney to revise a continuing disclosure document in 
accordance with the 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \303\ See NAMA Letter; ABA Letter; Arlington SD Letter; GFOA 
Letter.
    \304\ See GFOA Letter. According to the commenter, it surveyed 
174 GFOA members primarily responsible for debt disclosure in their 
respective jurisdictions.
    \305\ See Arlington SD Letter.
---------------------------------------------------------------------------

    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 debt-related obligations, will reduce the need for issuers to 
obtain outside counsel to assist with an event notice.\306\
---------------------------------------------------------------------------

    \306\ See, 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).
---------------------------------------------------------------------------

    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

[[Page 44729]]

employ outside counsel to assist in the examination, preparation, and 
filing of certain event notices.
---------------------------------------------------------------------------

    \307\ See supra Section IV.D.2.iii.
    \308\ While 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.
    \309\ See 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) 
x 4 (estimated time for outside attorney to assist in the 
preparation of such event notice) x $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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
    \312\ See supra note 302.

           Table 5--Summary of PRA Cost Estimates for Issuers
------------------------------------------------------------------------
                                              Annual         One-time
                                           external cost   external cost
------------------------------------------------------------------------
                      Estimates in 2015 PRA Notice
------------------------------------------------------------------------
Issuers (that use the services of a           $9,750,000             n/a
 designated agent to submit continuing
 disclosure documents)..................
------------------------------------------------------------------------
                     Estimates in Proposing Release
------------------------------------------------------------------------
Issuers (that use the services of a           10,335,000              $0
 designated agent to submit continuing
 disclosure documents)..................
Issuers (to update template for                        0       2,000,000
 continuing disclosure agreements to
 reflect the proposed amendments).......
------------------------------------------------------------------------
                      Estimates in Adopting Release
------------------------------------------------------------------------
Issuers (that use the services of a           14,469,000               0
 designated agent to submit continuing
 disclosure documents)..................
Issuers (to update template for                        0       2,800,000
 continuing disclosure agreements to
 reflect the amendments)................
Issuers (to hire outside counsel to            1,760,000               0
 assist in preparing event notices).....
------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \313\ See MSRB Rules G-8, G-9. Exchange Act Rules 17a-3 and 17a-
4 state that, for purposes of transactions in municipal securities 
by municipal securities brokers and municipal securities dealers, 
such entities will be deemed in compliance with Exchange Act Rules 
17a-3 and 17a-4 if they are in compliance with MSRB Rules G-8 and G-
9, respectively.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \314\ Continuing disclosure agreements may not be available if 
they are not subject to state Freedom of Information Act 
requirements. Internal dealer notices would not generally be 
publicly available but may be available to the Commission, the MSRB, 
and FINRA.
---------------------------------------------------------------------------

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

[[Page 44730]]

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\
---------------------------------------------------------------------------

    \315\ See 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.
    \316\ See 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.
    \317\ See infra Section V.C.2.i and Section V.D.1.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \318\ See Proposing Release, supra note 3, 82 FR at 13929.
    \319\ Federal 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).
    \320\ As 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-market-sifma.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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \321\ See 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.
    \322\ Although 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \323\ See supra Section III.A. See also Proposing Release, supra 
note 3, 82 FR at 13929-30.
    \324\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \325\ See supra note 52. See also Bergstresser and Orr, supra 
note 321.
---------------------------------------------------------------------------

    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

[[Page 44731]]

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.
---------------------------------------------------------------------------

    \326\ See supra notes 124, 125, and 126.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \327\ Municipal securities are defined in the table description 
for the Flow of Funds data as follows. ``Municipal securities are 
obligations issued by state and local governments, nonprofit 
organizations, and nonfinancial corporate businesses. State and 
local governments are the primary issuers; detail on both long and 
short-term (original maturity of 13 months or less) debt is shown. 
This instrument excludes trade debt of, and U.S. government loans 
to, state and local governments. Debt issued by nonprofit 
organizations includes nonprofit hospital bonds and issuance to 
finance activities such as lending to students. Debt issued by the 
nonfinancial corporate business sector includes industrial revenue 
bonds. Most municipal debt is tax-exempt; that is, the interest 
earned on holdings is exempt from federal income tax. Since 1986, 
however, some of the debt issued has been taxable, including the 
Build America Bonds authorized under the American Recovery and 
Reinvestment Act of 2009.'' See Federal Reserve Board, Financial 
Accounts of the United States: All Table Descriptions, at 31-32 
(Mar. 8, 2018) available at http://www.federalreserve.gov/apps/fof/Guide/z1_tables_description.pdf.
    \328\ See Call Report, supra note 319.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \329\ Flow of Funds, supra note 22, at 121 Table L. 212.
    \330\ See SIFMA Bond Data, supra note 320.
    \331\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \332\ See Bergstresser and Orr, supra note 321.
    \333\ See SIFMA Bond Data and Historical Flow of Funds, supra 
note 320.
    \334\ See Call Report, supra note 319. See also SIFMA Bond Data, 
supra note 320.
---------------------------------------------------------------------------

    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

[[Page 44732]]

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.
---------------------------------------------------------------------------

    \335\ See supra note 52. See also Bergstresser and Orr, supra 
note 321.
    \336\ See Proposing Release supra note 3, 82 FR at 13934.
    \337\ See id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \338\ See supra Section II.
    \339\ See supra notes 16, 17, and 18.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \340\ See Proposing Release, supra note 3, 82 FR at 13929.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \341\ See supra note 97.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \342\ See Proposing Release, supra note 3, 82 FR at 13933 and 
note 76.
    \343\ See supra note 52.
    \344\ See supra note 34.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \345\ See id.
    \346\ See Proposing Release, supra note 3, 82 FR at 13933 and 
note 76.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \347\ See GASB Statement No. 88--Certain Disclosures Related to 
Debt, including Direct Borrowings and Direct Placements, supra note 
44.
    \348\ See 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.
    \349\ See GASB Statement No. 88--Certain Disclosures Related to 
Debt, including Direct Borrowings and Direct Placements, supra note 
44.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \350\ Id.
---------------------------------------------------------------------------

    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

[[Page 44733]]

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\
---------------------------------------------------------------------------

    \351\ See supra note 44.
    \352\ See, 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \353\ See supra note 125.
    \354\ See, 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-municipal-bonds-a-new-allure.html.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \355\ See, 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'').
    \356\ See supra notes 124 and 126.
---------------------------------------------------------------------------

    Third, as discussed above, because the new tax law eliminated state 
and local governments' ability to use tax-exempt 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.
---------------------------------------------------------------------------

    \357\ See, e.g., Lynn Hume, Alternatives to Tax-exempt Advance 
Refundings Would Cost Issuers, The Bond Buyer (Nov. 22, 2017), 
available at https://www.bondbuyer.com/news/issuers-have-costlier-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-reform-outstanding-and-future-municipal-debt-issuance; see also supra note 139. See also 
supra note 150.
---------------------------------------------------------------------------

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

[[Page 44734]]

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.
---------------------------------------------------------------------------

    \358\ The Commission understands that it is possible that the 
issuer or obligated person may not comply with its previous 
continuing disclosure undertakings and may not provide the MSRB with 
notice of the 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \359\ See Proposing Release supra note 3, 82 FR at 13935-36.
    \360\ See id. at 13940.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \361\ See 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).
---------------------------------------------------------------------------

    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

[[Page 44735]]

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\
---------------------------------------------------------------------------

    \362\ See supra Section III.A.1.iii.
    \363\ As 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 tax-exempt 
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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \364\ See Lisante Letter.
    \365\ See Proposing Release, supra note 3, 82 FR at 13952.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \366\ See 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)).
    \367\ See Proposing Release, supra note 3, 82 FR at 13952.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \368\ See 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[hyphen]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).
---------------------------------------------------------------------------

    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

[[Page 44736]]

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\
---------------------------------------------------------------------------

    \369\ See Proposing Release, supra note 3, 82 FR at 13954.
    \370\ See Sumon C. Mazumdar and Partha Sengupta, Disclosure and 
the Loan Spread on Private Debt, 61 Fin. Analysts J. 83 (2005).
    \371\ See 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).
    \372\ See supra note 370.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

    \374\ See 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.
    \375\ See Proposing Release, supra note 3, 82 FR at 13934 note 
81.
    \376\ See id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \377\ See supra Section V.A.
---------------------------------------------------------------------------

    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\
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    \378\ See supra Section IV.D.2 and Section IV.E.2.
    \379\ As 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) x 4 
(estimated time for internal attorney to assist in the preparation 
of such event notice) x $360 (hourly wage for an internal attorney) 
+ 1,100 (number of event notices requiring both internal compliance 
attorney and outside counsel) x (4 (estimated time for outside 
attorney to assist in the preparation of such event notice) x $400 
(hourly wage for an outside attorney) + 4 (estimated time for an 
internal attorney to assist in the preparation of such event notice) 
x $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.
    \380\ See 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 x 6% = $819,000), for 
a total of $14,469,000. See supra note 295.
    \381\ See supra note 302.
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    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.
---------------------------------------------------------------------------

    \382\ See Lisante Letter.
---------------------------------------------------------------------------

    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

[[Page 44737]]

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.
---------------------------------------------------------------------------

    \383\ See Mitchell A. Petersen and Raghuram G. Rajan, The 
Benefits of Lending Relationships: Evidence from Small Business 
Data, 49 J. Fin. 3 (1994).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \384\ See supra Section III.A.1.iii.
    \385\ According 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 Jo[atilde]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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \386\ See Lisante Letter.
    \387\ See supra Section V.C.1.ii.
    \388\ See id.
    \389\ See id.
    \390\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \391\ See Lisante Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \392\ Id.
---------------------------------------------------------------------------

    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

[[Page 44738]]

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.
---------------------------------------------------------------------------

    \393\ A 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \394\ See supra note 125.
    \395\ See supra Section V.B.5.
    \396\ See, e.g., supra note 354 and accompanying text.
    \397\ See supra notes 124, 126, and 355.
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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.
---------------------------------------------------------------------------

    \398\ 17 CFR 240.15c2-12(a) and (b)(3).
    \399\ 17 CFR 240.15c2-12(f)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \400\ See supra Section IV.D.1.
    \401\ See supra Section IV.E.1.
    \402\ First year costs: 1,250 hours (first year burden on 
dealers) x $360 (average hourly cost of internal compliance 
attorney) + 13,658 hours (annual increased hourly burden on dealers 
due to the amendments) x $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) x $360 (average hourly cost of internal compliance 
attorney) = $4,916,880.
---------------------------------------------------------------------------

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

[[Page 44739]]

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\
---------------------------------------------------------------------------

    \403\ See supra Section IV.D.3.
    \404\ This 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) x $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.
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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\
---------------------------------------------------------------------------

    \405\ Specifically, when there is asymmetric information about 
material risks, investors may not be able to distinguish low-risk 
securities from high-risk securities. In such cases, market 
participants will only value securities as if they bear an average 
level of risk, undervaluing low-risk securities and overvaluing 
high-risk securities. Such mispricing can harm market efficiency and 
distort capital allocation. See, e.g., Paul M. Healy 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \407\ See supra note 336.
---------------------------------------------------------------------------

    The Commission also believes that by potentially reducing 
information asymmetries between municipal securities investors and 
other more-informed 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.
---------------------------------------------------------------------------

    \408\ See 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'').
    \409\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \410\ See Proposing Release, supra note 3, 82 FR at 13954.
---------------------------------------------------------------------------

    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,

[[Page 44740]]

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 high-risk 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.
---------------------------------------------------------------------------

    \411\ See 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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \412\ See Lisante Letter (commenting that the rejection of 
voluntary approaches is potentially problematic given that the 
Commission cannot quantify the economic effects).
    \413\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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.

[[Page 44741]]

    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.
---------------------------------------------------------------------------

    \416\ See supra Section V.C.2.i.
    \417\ See supra note 393 and accompanying text.
    \418\ See 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).
---------------------------------------------------------------------------

    Under this alternative, the disclosure-related 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\
---------------------------------------------------------------------------

    \419\ See Proposing Release, supra note 3, 82 FR at 13937.
    \420\ See supra note 81.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \421\ The 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \422\ 5 U.S.C. 605(b).
    \423\ See Proposing Release, supra note 3, 82 FR at 13956.
---------------------------------------------------------------------------

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 Sec.  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

0
1. The authority citation for part 240 continues to read in part as 
follows:


[[Page 44742]]


    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.
* * * * *

0
2. Section 240.15c2-12 is amended by:
0
a. In paragraph (b)(5)(i)(C)(14), removing the word ``and''; and
0
b. Adding paragraphs (b)(5)(i)(C)(15) and (16) and (f)(11).
    The additions read as follows.


Sec.  240.15c2-12   Municipal securities disclosure.

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

[[Page 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