Vol. 6, No. 6, Pg. 36. South Carolina Municipal Bond Disclosure.

• Author: By John Van Duys

South Carolina Lawyer

1995.

Vol. 6, No. 6, Pg. 36.

South Carolina Municipal Bond Disclosure

36South Carolina Municipal Bond DisclosureBy John Van DuysBeginning later this year, the state of South Carolina, its agencies and political subdivisions that issue publicly offered debt will be faced with sweeping new requirements relating to continuing disclosure of financial and operating data. On November 17, 1994, the U.S. Securities and Exchange Commission (the Commission) adopted revisions to Rule 15c2-12 (the Rule), which requires issuers or "obligated persons" that issue underwritten securities after July 3, 1995 to provide annual financial information and operating data and, from time to time, notification of the occurrence of certain events to the public securities market.

Background and Purpose

Governmental programs are generally reactionary, and the federal securities laws are certainly no exception. In response to the perceived abuses and weaknesses concerning the regulation of the securities markets that came to light during the Great Depression, Congress enacted the Securities Act of 1933 (the Securities Act). Among many other things, § 5 of the Securities Act provides that it is unlawful for any person, directly or indirectly, to offer or sell any security in interstate commerce unless a registration statement with the Commission is in effect with respect to the security.

Section 10 of the Exchange Act is a broad anti-fraud provision that generally applies to the offer and sale of securities issued by states or political subdivisions.

The Securities Act contains several exemptions, both for certain classci, of securities and certain types of transactions, to which § 5 does not apply. The primary interest of this artide is § 3(a)(2) of the Securities Act which provides, in relevant part, that § 5 shall not apply to "any security, issue or guarantee . . . by any political subdivision of a state or territory, or by any public instrumentality of one or more states or territories . . . ."

The Securities Act regulates the process of the issuance of debt or equity securities into the market. When securities are first offered to the public, the offering is referred to as a "primary offering." During a primary offering, the issuer of the securities obtains money from investors purchasing its securities and then puts the money to use. If the securities or transactions in a primary offering are not exempt from § 5 of the Securities Act, such Act protects the public by requiring registration of the securities as a precondition to their lawful offer or sale.

The issuer and its investment bankers prepare a sale and disclosure document to inform investors of the material details of the securities and the financial and operating condition of the issuer. In registered offerings, this document is called a prospectus. In exempt offerings of municipal securities, it is usually called an official statement. The Securities Act regulates the preparation and distribution of prospectuses.

As a complement to the Securities Act, Congress also enacted the Securities Exchange Act of 1934 (the Exchange Act), which primarily regulates offering, selling and trading securities after they have already been issued. This is often called the "secondary market," where investors buy and sell securities among themselves, and the issuer of the securities does not receive any money. The Exchange Act brought certain reforms to the operation of securities exchanges and the activities of brokers and dealers in connection with soliciting and receiving offers to buy or sell securities in the secondary market. Section 10 of the Exchange Act is a broad anti-fraud provision that generally applies to the offer and sale of securities issued by states or political subdivisions.

The Commission regulates the activities of municipal securities dealers under §§ 15B and 15C of the Exchange Act. Among other things, § 15B establishes the Municipal Securities Rulemaking Board (MSRB)...