Material Changes to Material Events

by Matthew D. Jessup on June 1, 2010

The Securities and Exchange Commission has adopted amendments to Rule 15c2-12 that impact all issuers of municipal bonds and notes.  The amendments to the secondary market disclosure rule apply to all bonds and notes issued on or after December 1, 2010.  However, given that issuers adopt a bond or form and sale resolution weeks or months in advance of issuing obligations, it is important to think about these changes now.

The following is a summary of the amendments:

  1. Notices of those events listed in 15c2-12(b)(5)(i)(C), otherwise known as “Material Events”, must be submitted to the Municipal Securities Rulemaking Board (MSRB) “in a timely manner not in excess of ten business days after the occurrence of the event”.  Previously, issuers were simply required to provide notice “in a timely manner”.  An identical change is being made to the “small issuer” exception found at 15c2-12(d)(2)(ii)(B).
    This is the only amendment that is likely to impact New Jersey municipal issuers of bonds and notes.  Remember that “ratings changes” are one of the Material Events.  If your municipality receives a ratings upgrade or downgrade, you now have only 10 days to report the change to the MSRB.
  2. The materiality condition is being eliminated for the following Material Events: (1) principal and interest payment delinquencies, (2) unscheduled draws on debt service reserves reflecting financial difficulties, (3) unscheduled draws on credit enhancements reflecting financial difficulties, (4) substitution of credit or liquidity providers, or their failure to perform, (5) defeasances and (6) rating changes.  These events need to be reported to the MSRB no matter how minor or insignificant.
  3. The Material Event “adverse tax opinions or events affecting the tax-exempt status of the security” is being amended in its entirety to “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”.
  4. The previous list of 11 Material Events is being expanded to include four additional events: (1) tender offers, (2) bankruptcy, insolvency, receivership, or similar proceeding of the obligated person, (3) 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 (4) appointment of a successor or additional trustee, or the change of name of a trustee, if material.
  5. The exemption from the Rule (15c2-12(d)(1)(iii)) for demand securities is being eliminated.  There is a limited grandfather provision, which those who deal with demand obligations should explore further.

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