SEC Proposal on Continuing Disclosure Requirements for Governments
Author: Deborah Beams
State and local governments have traditionally used public debt, such as bonds and certificates of obligation, for their financing needs. In recent years, governments have increasingly turned to private debt, such as direct bank loans. The process of obtaining such debt often is faster, less burdensome and less costly than a public debt offering. However, this trend has caused concern in the municipal bond market. Analysts and bondholders may not learn a government has increased its debt burden until well after the fact; knowing that information could have affected their investment decisions.
The U.S. Securities and Exchange Commission (SEC) issued on March 1, 2017, a proposal regarding continuing disclosure requirements for private debt. The SEC doesn’t have the authority to regulate municipal issuers, as provided by the Tower Amendment to the Securities Act of 1933. However, Exchange Act Rule 15c2-12 (Rule 15c2-12) provides regulations on dealers who act as underwriters in municipal offerings. These dealers are required to determine that an issuer has agreed to make certain disclosures to the Municipal Securities Rulemaking Board (MSRB).
The proposal would amend Rule 15c2-12 to add two items to the list of required continuing disclosures:
- Incurrence of a financial obligation or agreement to covenants or other similar terms, if material
- Events that reflect financial difficulties, such as default, acceleration or modification of terms
Of note is the proposed definition of financial obligation that includes a “debt obligation, lease, guarantee, derivative instrument, or monetary obligation resulting from a judicial, administrative, or arbitration proceeding.” The term doesn’t include public debt offerings, which already are reported to the MSRB. With the proposal, governments that make continuing disclosures to the MSRB would be required to report any new material financial obligation within 10 business days.
The SEC is requesting comments on the proposed rule. Comments are due 60 days after the proposal’s publication in the Federal Register.
The SEC isn’t the only organization exploring private debt disclosures. The Governmental Accounting Standards Board has a project underway to re-examine debt disclosures; the scope includes evaluating what disclosures should be required in financial statements related to direct borrowings. An exposure draft for public comment is expected in summer 2017.
Contact your BKD advisor if you have questions.