Continuing Disclosure Service

While U.S. Securities Exchange Commission Rule 15c2-12 endeavors to increase transparency in the municipal bond market and protect investors, it has also created a large regulatory burden for both underwriters and municipalities. The Baker Group provides ongoing education and guidance regarding the ever-changing regulatory framework imposed on municipal bond issuers with respect to Rule 15c2-12.

As seasoned underwriters, The Baker Group is well aware of the level of research and organization needed to comply with the Rule and is now offering municipalities customized continuing disclosure services to assist with SEC Rule 15c2-12 compliance. These services include:

  • Detailed review of prior continuing disclosure covenants
  • Review of filings made and/or missed related to prior CDAs
  • Monitoring of upcoming disclosure deadlines and material events
  • Procedural audits of current systems
  • Advice pertaining to system implementation
  • Disseminating required documents
  • Educational webinars and workshops
  • Other services as needed to help issuers remain in compliance with SEC Rule 15c2-12


On behalf of municipal issuers, we do the heavy-lifting of identifying CDA requirements, identifying continuing disclosure documents, determining if those documents were filed in a 
timely manner, and preparing a user-friendly report for review. We also maintain weekly communication with municipalities to ensure no material events are missed, which is very important given the strict deadline of 10 business days. Lastly, we can act as a dissemination agent to assist with the preparation and filing of continuing disclosure documents and material event notices.

The introduction of two more “events” to the existing 14 material events included in the Rule, which require disclosures within 10 days of occurrence, compound the responsibility of municipal issuers. The SEC views the omission of financial statements or material events as fraud and could enforce sanctions on municipal issuers directly.  This puts municipal officials at risk, in the absence of policies and procedures that ensure compliance with past and future CDAs.

Municipal officials who need assistance implementing policies and procedures to prepare for the new SEC Rule 15c2-12 amendments or compliance with the Rule in general can reach out to Drew Simmons, Senior Vice President of Public Finance, at 866.214.1153 or drew@gobaker.com.

History

At $3.9 trillion, the municipal bond market is one of the largest fixed income asset classes in the United States. It’s also one of the oldest. The very first municipal bonds were issued by New York City for a canal project in 1812, outdating United States Treasuries by more than a century.  However, in the 200+ years since, financial transparency for municipal bond investors hasn’t kept up with the times.

Unlike other capital market sectors in the U.S., the municipal securities market has not been subject to the same level of regulatory scrutiny. The Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act) were created with broad exemptions for municipal investments. However, due to recent rule amendments by the U.S. Securities and Exchange Commission (the SEC), the compliance burden on municipal officials is set to dramatically increase from the status quo.

Regulatory Expansion

In 1975 the SEC created the Municipal Securities Rulemaking Board (the MSRB), which required firms transacting business in municipal securities to register as broker-dealers. This gave the SEC enforcement authority over broker-dealers but not municipal issuers directly unless it relates to the anti-fraud provisions outlined in the Securities Act and the Exchange Act. Effective July 3, 1995, amendments to SEC Rule 15c2-12 required underwriters to determine that the issuer, or obligated person, has provided municipal bondholders certain financial information and event notices to various information repositories. In short, it became the underwriter’s responsibility to make sure the municipal bond issuer was compliant with their continuing disclosure requirements.

Despite these efforts, failures to comply with the municipal bond issuer’s continuing disclosure agreements (CDAs) continued. A review of The Baker Group’s process for potential municipal underwriting shows that of the 189 competitive bond issues that were evaluated for continuing disclosure compliance, 67 had failed to properly adhere to their CDA. This means that more than 35% of these municipal bond issuers had to “play catch up” in order for a firm to agree to underwrite the bonds. This is a necessary process for underwriters to avoid sanctions by the SEC. However, the review serves as a hindrance to the underwriting process, which can negatively impact the municipality’s net interest cost of issuing the bonds.

Regulatory Aftermath

More than 20 years after the SEC amendments to Rule 15c2-12, transparency in the municipal market finally started to improve. In 2014, the SEC rolled out the Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”), which offered the opportunity for municipal issuers and underwriters to voluntarily disclose any potential violations of prior compliance with their continuing disclosure obligations. Since the MCDC Initiative in 2014, municipal underwriters are acutely aware of the due diligence process necessary to ensure the bond issuer is in compliance with their prior continuing disclosure agreements.

Amendments

The new events that require a material event notice filed on the MSRB’s EMMA system include:

  • Event 15: Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders; and
  • Event 16: Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The compliance date for including events 15 and 16 inclusion in the CDA is February 27, 2019.