The new SEC disclosure rule 15c-12: questions and answers.

To assist issuers who are in the process of determining what impact, if any, the changes to Securities and Exchange Commission (SEC) Rule 15c2-12 concerning primary and secondary market disclosure will have on their disclosure practices, the GFOA Federal Liaison Center has developed the following questions and answers concerning the rule's implementation. For a fuller understanding of the "Final Rule," which was approved by the SEC on November 10, 1994, and its impact, GFOA members are urged to consult with their financial advisor or bond counsel. Issuers should also refer to the SEC's "Adopting Release" (Release No. 34-34961), which explains the rule changes, and the GFOA Washington Update on the "New SEC Municipal Securities Disclosure Rule," dated December 9, 1994, which offers a general description of the rule.

The new provisions of Rule 15c2-12 were adopted by the SEC under the antifraud provisions of the federal securities laws, which apply to issuers and other market participants, to prevent the underwriting and recommendation of municipal securities about which little or no information is provided on an ongoing basis. Technically, the rule addresses underwriter requirements and responsibilities in the offering of municipal securities and does not directly regulate municipal securities issuers. However, since the offering of securities by an underwriter is conditioned upon the existence of a binding commitment by the issuer or other parties to provide annual financial information and material events disclosure, issuers should review their disclosure practices so that appropriate disclosure is available on a timely basis.

To complement this effort, the SEC used its interpretive authority and issued Interpretive Release No. 33-7049 and 34-33741 on March 9, 1994, which provides the SEC's views regarding disclosure by municipal market participants in meeting their responsibilities under the antifraud provisions of the federal securities laws. The antifraud provisions in the Securities Act of 1933 and the Securities Exchange Act of 1934 generally prohibit fraudulent and deceptive practices in the offer, purchase and sale of municipal securities. Any person, including municipal issuers, brokers and dealers, who makes any false or misleading statement of material fact or omits any material facts that cause such statements to be misleading in the context in which the statements are made, violates the federal law. The commission has previously warned issuers that any information reasonably expected to reach investors, even if it does not take the normal form of a disclosure document and is not directed specifically at market participants, may be viewed as a statement subject to the antifraud provisions. Information may include documents, public statements and press releases. Penalties for violations of the federal securities laws and rules promulgated thereunder include cease and desist orders, injunctions, monetary damages, and fines and imprisonment, or both.

The Interpretive Release, which should be reviewed by all market participants, deals with broad concerns such as

* ways to improve official statement disclosure, including disclosures about political contributions and derivatives;

* mechanisms for issuers to use to provide ongoing disclosures about outstanding debt to investors to avoid violations of the antifraud rules; and

* broker/dealers' responsibilities for reviewing issuers' disclosure documents and other information about issuers and their issues before recommending securities to investors.

Since the Interpretive Release provides the SEC's interpretation of existing law, in effect, it provides guidance about disclosure responsibilities pertaining to all debt - both outstanding and newly issued debt. Issuers therefore are encouraged to review their disclosure practices generally and not just those for new issues.

The SEC strongly recommends that issuers consult the GFOA's Disclosure Guidelines for State and Local Government Securities and other guidance, such as the National Federation of Municipal Analysts' (NFMA) Disclosure Handbook for Municipal Securities, which contains recommendations about the type of information that is needed on a sector-by-sector basis to evaluate specific credit risks in the primary and secondary markets.

The following questions and answers are intended to help issuers understand the new rule and the Interpretive Release and their impact on state and local governments. Issuers are cautioned that there will be many unanswered questions as the new disclosure system evolves, but they should be assured that GFOA is working with other market participants and the SEC to facilitate the implementation process.

What are the requirements of the rule that affect issuers?

In general, the rule prohibits dealers from underwriting municipal securities of $1.0 million or more unless the issuer or an obligated person has undertaken in a written agreement (an "undertaking") or contract to provide annual financial information and material events disclosure. The information must be provided on a timely basis to information repositories, as described below, by the issuer or obligated person, either individually or in combination.

The rule is very flexible and leaves to the issuer and its advisors the determination of what kind of annual financial information and event notices will be disclosed. There is no requirement that issuers prepare financial statements according to generally accepted accounting principles (GAAP) or have their statements audited in accordance with generally accepted auditing standards (GAAS). The Interpretive Release, however, strongly urges issuers to follow GAAP and to have their statements audited in conformance with GAAS. If financial statements are prepared, they must be sent to repositories.

Undertakings may be included in a trust indenture, bond resolution or a separate written agreement. They also may be included in the bond itself. A description of the undertaking for a particular issue also must be provided in the issuer's final official statement.

When does the rule take effect?

For issuers, there are two key dates.

* July 3, 1995 - Starting on this date, an undertaking to provide information must be made for newly issued bonds if the bonds are not eligible for an exemption, and the issuer must include a covenant in newly prepared official statements describing the undertaking. This means that issuers must identify the entities about which information will be provided and the type of information to be provided. Issuers must specify accounting principles used, if audited financial statements will be provided and when information will be provided. Material events disclosure must begin on this date for these issuers.

* January 1, 1996 - Bonds eligible for the small-issuer exemption do not have to make a "limited undertaking" or include information about their "limited undertaking," which is described below, in their official statements until this date. Material events disclosure must begin for issuers eligible for the small-issuer exemption on this date. For all issuers who must provide annual financial information, that information must be provided for fiscal years ending on or after January 1, 1996.

How are outstanding bonds affected by the new rule?

Outstanding bonds are not directly affected by the new rule, but issuers should remember that the continuing disclosure required by the new rule also may be applicable to previous issues. Thus issuers should ensure that any...