Attorney group warns on muni bond reform plan

NABL estimates that broker-dealers would need to spend more than 14 million hours per year complying with the changes

Clifford Gerber

Clifford Gerber

A group representing more than 2,700 lawyers believes brokerage firms face drastically greater compliance burdens than regulators have acknowledged under plans to boost the transparency of local and state bond markets.

The SEC has proposed changes to Rule 15c2-12, which requires broker-dealers acting as underwriters in primary offerings of municipal securities to ensure that the government issuing the bonds enters into an agreement to provide information about 14 types of events, such as non-payment related defaults on the securities (see Event notices below), to the Municipal Securities Rulemaking Board (MSRB) as they occur. Under the proposal, issuers would have to notify the MSRB about two new types of events relating to the bonds.

The changes are intended to improve investor protection and enhance transparency in the municipal securities market by giving investors timely access to information regarding financial obligations incurred by governments that could impact their liquidity and overall creditworthiness.

Specifically, the changes would require issuers’ agreements with the board to include a promise to notify it in the event of:

  • The ‘[i]ncurrence 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, if material’
  • The ‘[d]efault, 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.’

In a recent comment letter, National Association of Bond Lawyers (NABL) president Clifford Gerber says the group is concerned that the SEC’s ‘estimates of the burdens of complying with the collection of information requirements of the proposed amendments grossly understate the actual burdens that would be imposed.’

Based in part on a survey of NABL members, the group thinks the real burdens would be more than 100 times those estimated by the agency. Gerber, who is also a partner with Norton Rose Fulbright, says this suggests that the Office of Management and Budget should ‘file comments with the Commission and disapprove the collection of information contained in the proposed amendments pending a revised, reasonable estimate of burden and cost/benefit analysis.’

Specifically, NABL estimates that broker-dealers would need to spend, collectively, more than 14 million hours per year complying with the changes – with the SEC not having provided any estimate for the group. Issuers would have to spend more than 1 million hours a year on compliance, the group says, versus the SEC’s prediction of 4,000 hours. Similarly, the NABL estimate for underwriters is more than 300,000 hours per year, compared with the agency’s prediction of 2,500, according to the group.

These burdens would arise for issuers from having to contract file notices of additional events with the MSRB, while underwriters’ burden would arise from having to obtain and review official statements that describe the contract and breaches of previous contracts, NABL says. Brokers would have to obtain and review the filings in connection with each secondary market transaction in affected municipal securities, which the group says is not acknowledged in SEC’s proposal.

According to NABL, these discrepancies arise in part because the commission relied on faulty previous estimates. In predicting underwriter compliance burdens, the SEC also assumed that underwriters would employ procedures that are far less time-consuming than those the agency previously stated must be followed to comply with the anti-fraud provisions of the federal securities laws, the group says.

In addition, NABL writes that the SEC failed to estimate the time required:

  • By issuers to identify and evaluate events for materiality
  • By underwriters to review financial obligation documents to assess materiality
  • By brokers to obtain and review event filings when they conduct secondary market transactions.

Among other things, the NABL says the commission’s actions since it made previous time estimates have dramatically increased the collection of information burdens of the existing rule by: (i) making it more difficult to determine whether an event is ‘material’ in the eyes of the SEC; and (ii) causing underwriters to construe the term broadly to avoid any possible breach of cease-and-desist orders imposed under a recent enforcement initiative.


The events that must currently be tracked and reported are:

  • Principal and interest payment delinquencies
  • Non-payment related defaults
  • Unscheduled draws on debt service reserves reflecting financial difficulties
  • Unscheduled draws on credit enhancements reflecting financial difficulties
  • Substitution of credit or liquidity providers, or their failure to perform
  • Adverse tax opinions or events affecting the tax-exempt status of the security
  • Modifications to rights of security holders
  • Bond calls and tender offers
  • Defeasances
  • Release, substitution or sale of property securing repayment of the securities
  • Rating changes
  • Bankruptcy, insolvency or receivership
  • Merger, acquisition or sale of all issuer assets
  • Appointment of successor trustee.

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