Last November, the Securities and Exchange Commission (SEC) adopted amendments to Rule 15c2-12 concerning the ongoing disclosure obligations of municipal issuers and underwriters. The rules usher in a new era of disclosure obligations that will have a direct impact on local governments.

The amendments encompass two key prohibitions. Underwriters and dealers may not buy or sell municipal securities without determining that the issuer has agreed to provide annual financial information and notices of material events to the market, for the life of the debt. The new rules also make it illegal for underwriters and dealers to recommend the purchase or sale of any municipal security unless the dealer has procedures in place to monitor the disclosure of any material events regarding that municipality.

In other words, local governments must promise in a written agreement or contract, to provide financial information on an annual basis and information about material events on a timely basis, for the benefit of bondholders. Issuers that do not enter into these agreements will find their access to public debt markets severely limited. Municipal dealers and underwriters cannot buy, sell, or recommend municipal securities unless they can show that they are monitoring the disclosure of all this information.

Although the SEC did not specify what annual information issuers should provide, it indicated that it should mirror the information in the primary market offering statements. For example, if a hospital includes in its offering statement information about annual admissions, it must continue to provide that information on an annual basis. The SEC also said that issuers should not simplify their offering statements in an attempt to make their ongoing reporting easier. The level of information currently provided in the offering statement must be maintained.

All local governments that bring debt to market starting July 3, 1995, must provide the specified financial and operating information for fiscal years beginning on January 1, 1996, or later. Local governments that contract with an underwriter for a debt issuance prior to July 3 do not have to comply with the requirement — even if the securities are issued after that date.

Municipal securities broker dealers must have procedures in place to monitor ongoing disclosure by January 1,1996.

Focus on Huge Secondary Market
With these amendments, regulatory focus has made a major shift to the secondary market.

The SEC has chosen to focus on the secondary market because of its size — $1.2 trillion of tax-exempt bonds are outstanding — and because individual investors own the lion's share of the market, directly or through mutual funds.

With the shift come a host of entities — some new and some not so new — positioning themselves to gather all this information from tens of thousands of issuers, and preparing to distribute it as the marketplace calls for it.

NRMSIRs: The New Game in Town
In 1990, the SEC designated three organizations as Nationally Recognized Municipal Security Information Repositories (NRMSIRs): the Bond Buyer, Bloomberg, L.P., and J.J. Kenny. Their primary function was to relieve broker-dealers from the responsibility of providing official statements and escrow documents to the public for 90 days from the offering date. If the broker-dealer filed the documents with one of the NRMSIRs and to the Municipal Securities Rulemaking Board, the broker-dealer only had to make the documents available for 25 days.

In the new world of ongoing disclosure, however, NRMSIRs have a much broader role and must meet specific operating criteria. All three existing NRMSIRs will have to reapply for NRMSIR designation.

Municipal entities will be required to provide annual financial information and operating information to each and every NRMSIR — no one knows yet how many there will be — and to State Information Depositories, if there is one in their state.

In addition, information about material events must be sent to each NRMSIR or to the Municipal Securities Rulemaking Board and the appropriate state depository, if there is one. •

Steve Schrager is a vice president in the Investor Relations group. Diane Schenkman is a vice president and manager of the Great Lakes Region ratings group.

June 1995 / Illinois Municipal Review / Page 11