New Sec Amendments Mandate Secondary Market Disclosure for Municipal Issuers
| Publication year | 1995 |
| Pages | 2359 |
1995, October, Pg. 2359. New SEC Amendments Mandate Secondary Market Disclosure for Municipal Issuers
Beginning July 3, 1995,(fn2) subject to certain exemptions, brokers, dealers and municipal securities dealers ("underwriters") may not underwrite or place any primary offering of municipal securities without first determining that the issuer or an obligated person has covenanted to provide to certain central repositories three kinds of information: audited financial information, annual financial information and material event notices. Prior to the amended Rule, municipal issuers had a limited obligation to provide ongoing disclosure. Thus, the new disclosure requirements constitute a fundamental change in municipal securities disclosure law and practice.(fn3)
Since the original federal securities laws were enacted in the 1930s, municipal issuers have been exempt from all but certain "antifraud provisions."(fn4) In 1975, the exempt status of municipal issuers was further entrenched by the passage of what became known as the Tower Amendment.(fn5) Because of this amendment, the SEC lacks jurisdiction to order governmental entities to file disclosure statements. However, the SEC does have power to regulate underwriters, which, as the SEC recently discovered, permits indirect regulation of governmental issuers.
The indirect regulation began in earnest in 1989 with the SEC's promulgation of Rule 15c2-12 ("original Rule"). The original Rule, which covers only primary offerings with an aggregate principal amount of $1 million or more, makes it unlawful for any underwriter to act as such without first reviewing a "final official statement" prepared by the issuer.(fn6) The final official statement is a document prepared in connection with an offering of municipal securities, setting forth "financial or operating data" that are material to an evaluation of the offering.(fn7)
By requiring that such information be provided to the underwriter, the SEC has, in effect, indirectly required municipal issuers to prepare primary market disclosure information. However, the amended Rule extends the process one step further---into the realm of secondary market disclosure---once again employing underwriters as a lever to obtain additional disclosure from municipal issuers.
In general, the amended Rule enhances disclosure about municipal securities trading in the secondary market through two key prohibitions placed on under-writers. Subject to certain exemptions, underwriters: (1) may not underwrite or place any primary offering of municipal securities without first determining that the issuer thereof or an "obligated person" (as defined in the amended Rule, discussed below) has covenanted to provide audited financial information, annual financial information and material event notices to the market ("underwriting prohibition")(fn8) and (2) may not recommend that any customer buy or sell a particular municipal security unless they have procedures in place to monitor any material event disclosure distributed to the market regarding that security ("recommendation prohibition").(fn9)
Although the amended Rule itself became effective on July 3, 1995, compliance with the "annual financial information" portion of the underwriting prohibition and the entire recommendation prohibition need not commence until January 1, 1996.(fn10) As with the original Rule, the amended Rule will apply to all primary offerings of $1 million or more,(fn11) subject to the exemptions described below.
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