help facilitate investors' ability to obtain such information. Further,
the Commission seeks comment regarding the impact of the proposed
amendments on Participating Underwriters, dealers, issuers, obligated
persons, investors, the MSRB, information vendors, and others that may
be affected by the proposed amendments. In addition, the Commission
seeks comment on whether there are alternative approaches or
modifications to the Commission's proposed approach to achieve our
objectives with regard to the two events proposed here to be included
in Rule 15c2-12(b)(5)(i)(C). Commenters are requested to indicate their
views and to provide any other suggestions that they may have.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to the Rule contain
``collection of information requirements'' within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\122\ In accordance with 44
U.S.C. 3507 and 5 CFR 1320.11, the Commission has submitted revisions
to the currently approved collection of information titled ``Municipal
Securities Disclosure'' (17 CFR 240.15c2-12) (OMB Control No. 3235-
0372) to the Office of Management and Budget (``OMB''). An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
---------------------------------------------------------------------------

    \122\ 44 U.S.C. 3501 et. seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    Under paragraph (b) of Rule 15c2-12, a Participating Underwriter
currently is required: (1) To obtain and review an official statement
deemed final by an issuer of the securities, except for the omission of
specified information, prior to making a bid, purchase, offer, or sale
of municipal securities; (2) in non-competitively bid offerings, to
send, upon request, a copy of the most recent preliminary official
statement (if one exists) to potential customers; (3) to contract with
the issuer to receive, within a specified time, sufficient copies of
the final official statement to comply with the Rule's delivery
requirement, and the requirements of the rules of the MSRB; (4) to
send, upon request, a copy of the final official statement to potential
customers for a specified period of time; and (5) before purchasing or
selling municipal securities in connection with an offering, to
reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of
holders of such municipal securities, to provide annual filings, event
notices, and failure to file notices (i.e., continuing disclosure
documents) to the MSRB in an electronic format as prescribed by the
MSRB.\123\ In addition, under paragraph (c) of the Rule, a dealer that
recommends the purchase or sale of a municipal security must have
procedures in place that provide reasonable assurance that it will
receive prompt notice of any event specified in paragraph (b)(5)(i)(C)
of the Rule and any failure to file annual financial information
regarding the security.\124\
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    \123\ 17 CFR 240.15c2-12(b).
    \124\ 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    Under paragraph (b)(5)(i)(C) of the Rule, Participating
Underwriters are required to reasonably determine that the issuer or
obligated person has undertaken in a continuing disclosure agreement to
provide event notices to the MSRB, in an electronic format as
prescribed by the MSRB, in a timely manner not in excess of ten
business days, when any of the following events with respect to the
securities being offered in an offering occurs: (1) Principal and
interest payment delinquencies; (2) non-payment related defaults, if
material; (3) unscheduled draws on debt service reserves reflecting
financial difficulties; (4) unscheduled draws on credit enhancements
reflecting financial difficulties; (5) substitution of credit or
liquidity providers, or their failure to perform; (6) adverse tax
opinions, the issuance by the I.R.S. of proposed or final
determinations of taxability, Notices of Proposed Issue or other
material notices or determinations with respect to the tax status of
the security, or other material events affecting the tax status of the
security; (7) modifications to rights of security holders, if material;
(8) bond calls, if material, and tender offers; (9) defeasances; (10)
release, substitution, or sale of property securing repayment of
securities, if material; (11) rating changes; (12) bankruptcy,
insolvency, receivership or similar event of the obligated person; (13)
the consummation of a merger, consolidation, or acquisition involving
an obligated person or the sale of all or substantially all of the
assets of the obligated person, other than in the ordinary course of
business, the entry into a definitive agreement to undertake such an
action or the termination of a definitive agreement relating to any
such actions, other than pursuant to its terms, if material; and (14)
appointment of a successor or additional trustee or the change of a
name of a trustee, if material.\125\
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    \125\ 17 CFR 240.15c2-12(b)(5)(i)(C).
---------------------------------------------------------------------------

    Under the proposed amendments, the Commission proposes to add two
additional event notices that a Participating Underwriter in an
Offering must reasonably determine that an issuer or an obligated
person has undertaken, in a written agreement or contract for the
benefit of holders of the municipal securities, to provide to the MSRB.
Specifically, the proposed amendments would amend the list of events
for which notice is to be provided to include the proposed events.
    For purposes of the proposed amendments, the Commission is
proposing to define the term ``financial obligation'' to mean a (i)
debt obligation, (ii) lease, (iii) guarantee, (iv) derivative
instrument, or (v) monetary obligation resulting from a judicial,
administrative, or arbitration proceeding. As proposed to be defined,
the term financial obligation does not include municipal securities as
to which a final official statement has been provided to the MSRB
consistent with Rule 15c2-12.

B. Proposed Use of Information

    The proposed amendments would provide dealers with timely access to
important information about municipal securities that they can use to
carry out their obligations under the securities laws, thereby reducing
the likelihood of antifraud violations. This information could be used
by individual and

institutional investors; underwriters of municipal securities; other
market participants, including dealers; analysts; municipal securities
issuers; the MSRB; vendors of information regarding municipal
securities; the Commission and its staff; and the public
generally.\126\ The proposed amendments would enable market
participants and the public to be better informed about material events
that occur with respect to municipal securities and their issuers and
would assist investors in making decisions about whether to buy, hold
or sell municipal securities.
---------------------------------------------------------------------------

    \126\ See supra, Section II.B.
---------------------------------------------------------------------------

C. Respondents

    In November 2015, OMB approved an extension without change of a
currently approved collection of information associated with the Rule.
The currently approved paperwork collection associated with Rule 15c2-
12 applies to dealers, issuers of municipal securities, and the MSRB.
The paperwork collection associated with these proposed amendments
would apply to the same respondents.
    The proposal would add two additional event disclosure items that a
Participating Underwriter in an Offering is required to reasonably
determine that the issuer or an obligated person has undertaken in a
continuing disclosure agreement to submit event notices to the MSRB in
a timely manner not in excess of ten business days of their occurrence.
The Commission gathered updated information regarding the paperwork
burden associated with Rule 15c2-12 in connection with the 2015
extension of its currently approved collection and is using these
estimates in preparing the paperwork collection estimates associated
with its current proposal because it believes they continue to be
reasonable estimates as of the date of this proposal. In 2015, the
Commission estimated that the number of respondents impacted by the
paperwork collection associated with the Rule consists of approximately
250 dealers and 20,000 issuers.\127\ The Commission expects that the
proposed amendments would not change the number of dealer respondents
described in the currently approved PRA collection. The Commission also
expects that the proposed amendments would not change the number of
issuer respondents in comparison to the Rule's currently approved PRA
collection. The number of respondents would not change because the
proposed amendments would not expand the types of securities covered
under subparagraphs (b)(5) and (c) of the Rule, and thus would not
increase the number of dealers or issuers having a paperwork burden.
The Commission's currently approved PRA collection included a paperwork
collection burden for the MSRB and, for purposes of the proposed
amendments, the Commission expects that the MSRB also would be a
respondent.
---------------------------------------------------------------------------

    \127\ See Submission for OMB Review; Comment Request (Extension:
Rule 15c2-12, SEC File No. 270-330, OMB Control No. 3235-0372), 80
FR 9758 (Feb. 24, 2015) (``PRA Notice''). The number of issuers in
the estimate reflects those issuers that are subject to a continuing
disclosure agreement.
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

    In the currently approved PRA collection, the Commission included
estimates for the hourly burdens that the Rule imposes upon dealers,
issuers of municipal securities, and the MSRB. Because the proposed
amendments do not change the structure of the rule or who it applies
to, the Commission has relied on these estimates to prepare the
analysis discussed below for each of the aforementioned entities.
    The Commission estimates the aggregate information collection
burden for the amended Rule would consist of the following:
1. Dealers
    Consistent with the Commission's estimates in 2015, the Commission
estimates that approximately 250 dealers potentially could serve as
Participating Underwriters in an offering of municipal securities.
Therefore, the Commission estimates that, under the proposed
amendments, the maximum number of dealer respondents would be 250.
    Under the current Rule, the Commission has estimated that the total
annual burden on all 250 dealers is 22,500 hours. This estimate
includes an estimate of (1) 2,500 hours per year for 250 dealers (10
hours per year per dealer) to reasonably determine that the issuer or
obligated person has undertaken, in a written agreement or contract,
for the benefit of holders of such municipal securities, to provide
continuing disclosure documents to the MSRB, and (2) 20,000 hours per
year for 250 dealers (80 hours per year per dealer) serving as
Participating Underwriters to determine whether issuers or obligated
persons have failed to comply, in all material respects, with any
previous undertakings in a written contract or agreement specified in
paragraph (b)(5)(i) of the Rule.\128\
---------------------------------------------------------------------------

    \128\ Id.
---------------------------------------------------------------------------

i. Proposed Amendments to Events To Be Disclosed Under a Continuing
Disclosure Agreement
    Under the current Rule, the Commission has estimated that 250
dealers would spend an average of 10 hours per year per dealer to
reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of
holders of such municipal securities, to provide continuing disclosure
documents to the MSRB. The proposed amendments to paragraph
(b)(5)(i)(C) of the Rule would not alter a dealer's obligation to
reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of
holders of such municipal securities, to provide continuing disclosure
documents to the MSRB.
    The Commission does not believe that the proposed amendments would
change the number of issuers with municipal securities offerings that
are subject to the Rule. The proposed changes to the Rule would result
in a need for issuers to make changes to certain provisions of their
continuing disclosure agreements,\129\ and a need for dealers to
reasonably determine that the issuer or obligated person in an offering
subject to the Rule has undertaken, in a written agreement or contract
that includes the changes required by the proposed amendments, for the
benefit of holders of such municipal securities, to provide continuing
disclosure documents to the MSRB. Because the continuing disclosure
agreements that are reviewed by dealers as part of their obligation
under the Rule tend to be standard form agreements and the proposed
amendments would require targeted changes to those agreements to
incorporate the proposed events, the Commission does not believe that
the proposed amendments would increase the annual hourly burden for
dealers to reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of
holders of such municipal securities, to provide continuing disclosure
documents to the MSRB.\130\
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    \129\ See infra, Section IV.D.2. for a discussion of issuers'
reporting and recordkeeping burden and Section IV.E.2. for a
discussion of issuers' total annual cost, including the one-time
costs for issuers to update their standard form continuing
disclosure agreements to reflect the proposed amendments.
    \130\ See infra, Section IV.E.1. for a discussion of dealers'
total annual cost associated with the proposed amendments.
---------------------------------------------------------------------------

    Thus, the Commission estimates that pursuant to the Rule as
proposed to be amended, 250 dealers would continue to incur an
estimated average burden of

2,500 hours per year (10 hours per year per dealer) to reasonably
determine that the issuer or obligated person has undertaken, in a
written agreement or contract, for the benefit of holders of such
municipal securities, to provide continuing disclosure documents to the
MSRB.
    Under the current Rule, the Commission has also estimated that each
of the 250 dealers serving as a Participating Underwriter will expend
an average of 80 hours per year per dealer to determine whether issuers
or obligated persons have failed to comply, in all material respects,
with any previous undertakings in a written contract or agreement
specified in paragraph (b)(5)(i) of the Rule. Determining whether an
issuer or obligated person has filed continuing disclosure documents
will usually include an examination of the filings made over a five-
year period on the MSRB's EMMA system. An underwriter may also ask
questions of an issuer, and, where, appropriate, obtain certifications
from an issuer, obligated person, or other appropriate party about
facts such as the occurrence of specific events listed in paragraph
(b)(5)(i)(C) of the Rule and the timely filing of annual filings and
any required event notices or failure to file notices.
    The Commission does not believe that the proposed amendments would
change the number of Participating Underwriters that are subject to the
Rule. However, the Commission has estimated that the amendments to the
Rule would result in an average expenditure of an additional 10 hours
per year per dealer for each dealer to determine whether issuers or
obligated persons have failed to comply, in all material respects, with
any previous undertakings in a written contract or agreement specified
in paragraph (b)(5)(i) of the Rule.
    Accordingly, including the additional hourly burden resulting from
the proposed amendments, the Commission estimates that 250 dealers
would incur an estimated average burden of 25,000 hours per year to
comply with the Rule, as proposed to be amended.\131\
---------------------------------------------------------------------------

    \131\ (22,500 hours (total estimated annual hourly burden for
all dealers under the current Rule) + 2,500 hours (total estimated
additional annual hourly burden for all dealers under the proposed
amendments to the Rule) = 25,000 hours.
---------------------------------------------------------------------------

ii. One-Time Paperwork Burden
    The Commission estimates that a dealer would incur a one-time
paperwork burden to have its internal compliance attorney prepare and
issue a notice advising its employees about the proposed revisions to
Rule 15c2-12, including any updates to policies and procedures affected
by the proposed amendments. In the 2010 Amendments Adopting Release,
the Commission estimated that it would take a dealer's internal
compliance attorney approximately 30 minutes to prepare and issue a
notice describing the dealer's obligations in light of the 2010
Amendments to the Rule.\132\ The Commission believes that this 30
minute estimate to prepare a notice is also a reasonable estimate of
the amount of time required for a dealer's internal compliance attorney
to prepare such a notice for these proposed amendments to the Rule
because the types of changes that would be necessitated by the proposed
amendments are similar to the types of changes necessitated by the 2010
Amendments. The Commission believes that the task of preparing and
issuing a notice advising the dealer's employees about the proposed
amendments, including any updates to policies and procedures affected
by the proposed amendments, is consistent with the type of compliance
work that a dealer typically handles internally. Accordingly, the
Commission estimates that 250 dealers would each incur a one-time,
first-year burden of 30 minutes to prepare and issue a notice to its
employees regarding the dealer's new obligations under the proposed
amendments, including any updates to policies and procedures affected
by the proposed amendments, for a total one-time, first-year burden of
125 hours.
---------------------------------------------------------------------------

    \132\ See 2010 Amendments Adopting Release, supra note 54, at
33128.
---------------------------------------------------------------------------

iii. Total Annual Burden for Dealers
    Under the proposed amendments, the total burden on dealers would be
25,125 hours for the first year \133\ and 25,000 hours for each
subsequent year.\134\
---------------------------------------------------------------------------

    \133\ (250 (dealers impacted by the proposed amendments to the
Rule) x 100 hours (10 hours + 80 hours + 10 hours)) + (250 (dealers
impacted by the proposed amendments to the Rule) x .5 hour (estimate
for one-time burden to issue notice regarding dealer's obligations
under the proposed amendments to the Rule)) = 25,125 hours.
    \134\ 250 (dealers impacted by the proposed amendments to the
Rule) x 100 hours = 25,000 hours.
---------------------------------------------------------------------------

2. Issuers
    The proposed amendments would result in a paperwork burden on
issuers of municipal securities. For this purpose, issuers include
issuers of municipal securities described in paragraph (f)(4) of the
Rule and obligated persons described in paragraph (f)(10) of the Rule.
    In its currently approved collection, the Commission estimates that
approximately 20,000 issuers will annually submit to the MSRB
approximately 62,596 annual filings, 73,480 event notices, and 7,063
failure to file notices.\135\
---------------------------------------------------------------------------

    \135\ See PRA Notice, supra note 127.
---------------------------------------------------------------------------

i. Proposed Amendments to Event Notice Provisions of the Rule
    The Commission proposes to modify paragraph (b)(5)(i)(C) of the
Rule, which presently requires Participating Underwriters in an
Offering to reasonably determine that an issuer or obligated person has
entered into a continuing disclosure agreement that, among other
things, contemplates the submission of an event notice to the MSRB in
an electronic format upon the occurrence of any events set forth in the
Rule. The current Rule contains fourteen such events. The proposed
amendments to this paragraph of the Rule would add two new event
disclosure items. In 2015, the Commission estimated that approximately
20,000 issuers of municipal securities with continuing disclosure
agreements would prepare and submit approximately 73,480 event notices
annually. The Commission believes that the proposed amendments to
paragraphs (b)(5)(i)(C) of the Rule would increase the current annual
paperwork burden for issuers because they would result in an increase
in the number of event notices to be prepared and submitted.
    Under the proposed amendments, subparagraph (b)(5)(i)(C)(15) would
be added to the Rule and would contain a new disclosure event in the
case of the incurrence of a financial obligation of the obligated
person, if material, or agreement to covenants, events of default,
remedies, priority rights, or other similar terms of a financial
obligation of the obligated person, any of which affect security
holders, if material. The proposed addition to the Rule would expand
the circumstances in which issuers would submit an event notice to the
MSRB. The Commission estimates that the proposed amendment in
subparagraph (b)(5)(i)(C)(15) of the Rule would increase the total
number of event notices submitted by issuers annually by approximately
2,100 notices.\136\
---------------------------------------------------------------------------

    \136\ The Commission based its estimate on the number of events
that would result from an incurrence of a financial obligation of
the obligated person, if material, on the following: (i) Estimates
of the size of the municipal bank loan market vary, but range as
high as $80 billion per year. See Jack Casey, How the SEC Could Help
with Issuer Bank Loan Disclosure, The Bond Buyer (May 25, 2016)
(``How the SEC Could Help''), available at http://www.bondbuyer.com/news/washington-securities-law/how-the-sec-could-help-with-issuer-bank-loan-disclosure-1104508-1.html (``How the SEC Could Help'');
(ii) In 2015, S&P evaluated 126 bank loans totaling $5.2 billion.
See Martin Z. Braun, Regulators Warn Banks about Compliance Risks
for Muni Bank Loans, Bloomberg (Apr. 4, 2016), available at http://www.bloomberg.com/news/articles/2016-04-04/regulators-warn-banks-about-compliance-risks-for-muni-bank-loans (bank loans reviewed by
S&P in 2015 averaged approximately $41.3 million); and (iii) $80
billion (estimated size of annual municipal bank loan market)/$40
million average loan size of loans = 2,000 loans. In Section III.A.
of this proposing release, the Commission notes that a particular
municipal bank loan may not be material because of the bank loan's
relative size or other factors. However, to provide an estimate for
the paperwork burden that would not be under-inclusive the
Commission has elected to use this estimate. In addition, the
Commission estimates that up to 100 additional notices per year may
be attributable to the incurrence of other types of financial
obligations. For example, two derivative or other transactions were
reported to the MSRB's EMMA system during 2015 and three derivative
or other transactions were reported to the MSRB's EMMA system during
the first half of 2016. However, the Commission believes that many
non-bank financial obligations of obligated persons currently are
not reported to the MSRB and that many may not be made public at
all. Therefore, 2,000 events related to material bank loans annually
+ 100 other types of material financial obligations annually = 2,100
total events annually for the incurrence of a material financial
obligation of the obligated person.

---------------------------------------------------------------------------

    Under the proposed amendments, subparagraph (b)(5)(i)(C)(16) of the
Rule would be amended to include default, event of acceleration,
termination event, modification of terms, or other similar events under
the terms of a financial obligation of the issuer or obligated person,
any of which reflect financial difficulties. The inclusion of such
event in this subparagraph of the Rule would result in an expansion of
the circumstances in which issuers would submit an event notice to the
MSRB. The Commission estimates that proposed amendments to subparagraph
(b)(5)(i)(C)(16) of the Rule would increase the total number of event
notices to be submitted by issuers annually by approximately 100
notices.\137\
---------------------------------------------------------------------------

    \137\ The Commission based this estimate on the following: (i)
420 principal/interest payment delinquencies and non-payment related
defaults were reported to the MSRB's EMMA system in 2015; (ii) The
bank loan market may be as much as 20 percent of the municipal
securities market (see How the SEC Could Help, supra note 136);
(iii) 420 x .2 = 84; and (iv) some bank loans may not be material to
securities subject to Rule 15c2-12. Based on these factors and
industry sources, the Commission has estimated that there would
typically be no more than 100 events annually. The Commission
preliminarily believes that the actual number of events annually may
be significantly less than 100 because defaults and other events
reflecting financial difficulties are generally a rare occurrence in
the municipal securities market. However, to provide an estimate for
the paperwork burden that would not be under-inclusive the
Commission has elected to use a higher estimate with respect to the
number of events that occur each year.
---------------------------------------------------------------------------

ii. Total Burden on Issuers for Proposed Amendments to Event Notices
    In 2015, the Commission estimated that the process for an issuer to
prepare and submit event notices to the MSRB in an electronic format,
including time to actively monitor the need for filing, would require
an average of approximately two hours per filing. The Commission
estimates that time required for an issuer to prepare and submit the
proposed two additional types of event notices to the MSRB in an
electronic format, including time to actively monitor the need for
filing, would also require an average of approximately two hours per
filing, because the two proposed types of event notices would require
substantially the same amount of time to prepare as those prepared for
existing events. The Commission considered the hourly burdens placed on
both issuers that use designated agents to submit continuing disclosure
filings to the MSRB and the burdens placed on issuers that do not use
designated agents in computing this overall average. Under the proposed
amendments to paragraph (b)(5)(i)(C) of the Rule, the Commission
estimates that the 20,000 issuers of municipal securities with
continuing disclosure agreements would prepare an additional 2,200
event notices annually,\138\ raising the total number of event notices
prepared by issuers annually to approximately 75,680.\139\ This
increase in the number of event notices would result in an increase of
4,400 hours in the annual paperwork burden for issuers to submit event
notices.\140\ This increase would result in an annual paperwork burden
for issuers to submit event notices of approximately 151,360 hours
(146,960 hours + 4,400 hours).
---------------------------------------------------------------------------

    \138\ 2,100 (estimated number of incurrence of a financial
obligation event notices under proposed amendments) + 100 (estimated
number of event notices reflecting financial difficulties under
proposed amendments) = 2,200 (total number of additional event
notices that would be prepared under the proposed amendments to the
event notice provisions of the Rule).
    \139\ 73,480 (current estimated number of annual event notices)
+ 2,200 (total number of additional event notices that would be
prepared under the proposed amendments to the event notice
provisions of the Rule) = 75,680 annual event notices. The
Commission is therefore estimating that the proposed amendments
would increase the number of issuers' annual event notices by
approximately three percent. 2,200 (estimated additional annual
event notices)/73,480 (estimated current annual event notices) =
.299 = approximately three percent. The proposed amendments to the
event notice provisions of the Rule would increase total filings
submitted by approximately 1.5%: 2,200 (estimated additional event
notices under the proposed event notice amendments)/143,139
(estimated number of continuing disclosure documents submitted under
current Rule (73,480 (event notices) + 62,596 (annual filings) +
7,063 (failure to file notices) = 143,139)) = .015 = approximately
1.5%.
    \140\ 2,200 (total number of additional event notices that would
be prepared under the proposed amendments to the event notice
provisions of the Rule) x 2 hours (estimated time to prepare an
event notice under 2015 PRA Notice) = 4,400 hours.
---------------------------------------------------------------------------

iii. Total Burden for Issuers
    Accordingly, under the proposed amendments, the total burden on
issuers to submit continuing disclosure documents would be 603,658
hours.\141\
---------------------------------------------------------------------------

    \141\ 438,172 hours (current estimated burden for issuers to
submit annual filings) + 151,360 hours (estimated annual burden for
issuers to submit event notices under the proposed amendments) +
14,126 hours (current estimated annual burden for issuers to submit
failure to file notices) = 603,658 hours.
---------------------------------------------------------------------------

3. MSRB
    In its currently approved collection, the Commission estimated that
the MSRB incurred an annual burden of approximately 12,699 hours to
collect, index, store, retrieve, and make available the pertinent
documents under the Rule.\142\ The Commission staff understands from
MSRB staff that MSRB staff currently estimates that 12,699 hours is
still a reasonable estimate with respect to operating the primary
market and continuing disclosure submission platform, managing those
submissions securely and deploying educational resources and other
tools that make the submissions meaningful and useful. The Commission
estimates, based on preliminary consultations between Commission staff
and MSRB staff, that it would require approximately 1,162 hours for the
MSRB to implement the necessary modifications to EMMA to reflect the
additional mandatory disclosures under Rule 15c2-12 in the proposed
amendments. Thus, the Commission estimates that the total burden on the
MSRB to collect, store, retrieve, and make available the disclosure
documents covered by the proposed amendments to the Rule would be
13,861 hours for the first year,\143\ and 12,699 hours for each
subsequent year.
---------------------------------------------------------------------------

    \142\ See 2015 PRA Notice, supra note 127.
    \143\ First-year burden for MSRB: 12,699 hours (annual burden
under currently approved collection) + 1,162 hours (estimate for
one-time burden to implement the proposed amendments) = 13,861
hours.
---------------------------------------------------------------------------

4. Annual Aggregate Burden for Proposed Amendments
    The Commission estimates that the ongoing annual aggregate
information collection burden for the Rule after giving effect to the
proposed

amendments would be 641,357 hours.\144\
---------------------------------------------------------------------------

    \144\ 25,000 hours (total estimated annual burden for dealers) +
603,658 hours (total estimated annual burden for issuers) + 12,699
hours (total estimated annual burden for MSRB) = 641,357 total
estimated annual burden hours. The initial first-year burden would
be 642,644 hours: 25,125 hours (total estimated burden for dealers
in the first year) + 603,658 hours (total estimated burden for
issuers) + 13,861 hours (total estimated burden for MSRB in the
first year) = 642,644 hours.
---------------------------------------------------------------------------

E. Total Annual Cost

1. Dealers and the MSRB
    The Commission does not expect dealers to incur any additional
external costs associated with the proposed amendments to the Rule
because the proposed amendments do not change the obligation of dealers
under the Rule to reasonably determine that the issuer or obligated
person has undertaken, in a written agreement or contract, for the
benefit of holders of such municipal securities, to provide continuing
disclosure documents to the MSRB, and to determine whether the issuer
or obligated person has failed to comply with such undertakings in all
material respects. As previously noted, the Commission believes that
the task of preparing and issuing a notice advising the dealer's
employees about the proposed amendments is consistent with the type of
compliance work that a dealer typically handles internally,\145\ so
that the Commission does not expect that dealers would incur any
additional external costs.
---------------------------------------------------------------------------

    \145\ See infra Section IV.D.1.(ii).
---------------------------------------------------------------------------

    The Commission does not expect the MSRB to incur any additional
external costs associated with the proposed amendments to the Rule. In
its currently approved collection, the Commission estimated that the
MSRB would expend approximately $10,000 annually in hardware and
software costs for the MSRB's EMMA system.\146\ The Commission believes
that the MSRB would not incur additional external costs specifically
associated with modifying the indexing system to accommodate the
proposed changes to the Rule because the Commission expects that the
MSRB would implement these changes internally; these internal costs
have been accounted for in the hourly burden section in Section IV.D.3.
---------------------------------------------------------------------------

    \146\ See PRA Notice, supra note 127.
---------------------------------------------------------------------------

2. Issuers
    The Commission believes that issuers generally will not incur
external costs associated with the preparation of event notices filed
under these proposed amendments because issuers will generally prepare
the information contained in the continuing disclosures internally;
these internal costs have been accounted for in the hourly burden
section in Section IV.D.2.ii.
    The Commission also expects that some issuers could be subject to
some costs associated with the proposed amendments to the Rule if they
pay third parties to assist them with their continuing disclosure
responsibilities. In its currently approved collection, the Commission
estimated that up to 65% of issuers may use designated agents to submit
some or all of their continuing disclosure documents to the MSRB for a
fee estimated to range from $0 to $1,500 per year depending on the
designated agent an issuer uses.\147\ The Commission estimated that the
average total annual cost that would be incurred by issuers that use
the services of a designated agent would be $9,750,000.\148\
---------------------------------------------------------------------------

    \147\ See 2015 PRA Notice, supra note 127.
    \148\ Id. 20,000 (number of issuers) x .65 (percentage of
issuers that may use designated agents) x $750 (estimated average
annual cost for issuer's use of designated agent) = $9,750,000.
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    The Commission believes this estimate is still reasonable. In 2015,
the Commission estimated that issuers would submit 62,596 annual
filings, 73,480 event notices, and 7,063 failure to file notices, for a
total of 143,139 continuing disclosure documents submitted annually.
Under the proposed amendments to the Rule, some issuers would need to
prepare additional event notices for submission to the MSRB. Some
issuers could use the services of a designated agent to submit these
additional event notices to the MSRB. Under the proposed amendments to
the Rule, the Commission estimates that a high-end estimate of the
number of additional event notices that issuers would need to submit
annually under the proposed amendments would be 2,200.\149\ The two
proposed event disclosure items also would result in the submission of
information regarding each event. The Commission believes that issuers
that use the services of a designated agent for submission of event
notices to the MSRB could incur additional costs of approximately six
percent \150\ associated with the proposed amendments to the Rule, so
that the average total annual cost that would be incurred by issuers
that use the services of a designated agent under the Rule as proposed
to be amended would be $10,335,000.\151\
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    \149\ See supra note 138.
    \150\ The Commission is estimating that the proposed amendments
would increase the number of issuers' annual event filings by
approximately three percent, and would increase the number of
issuers' total annual filings by approximately 1.5 percent. See
supra note 139. The six percent estimate for additional costs
reflects these estimated increases in filings as well as an
estimated reimbursement of approximately 4.5 percent of costs by
issuers to designated agents for the agents' costs of making
necessary changes to their systems.
    \151\ 20,000 (number of issuers) x .65 (percentage of issuers
that may use designated agents) x $795 ($750 x 1.06) (estimated
average annual cost for issuer's use of designated agent under the
proposed amendments to the Rule) = $10,335,000.
---------------------------------------------------------------------------

    There likely would also be some costs incurred by issuers to revise
their current template for continuing disclosure agreements to reflect
the proposed amendments to the Rule. The Commission understands that
models currently exist for continuing disclosure agreements that are
relied upon by legal counsel to issuers and, accordingly, these
documents would likely be updated by outside attorneys to reflect the
proposed amendments. Based on a review of industry sources, the
Commission believes that continuing disclosure agreements tend to be
standard form agreements. In the 2010 Amendments Adopting Release, the
Commission estimated that it would take an outside attorney
approximately 15 minutes to revise the template for continuing
disclosure agreements for an issuer in light of the 2010 Amendments to
the Rule.\152\ The Commission preliminarily believes that this 15
minute estimate to prepare a revised continuing disclosure agreement is
also a reasonable estimate of the average amount of time required for
an outside attorney to revise the template for continuing disclosure
agreements for the proposed amendments to the Rule, because the
proposed amendments would require changes similar to the types of
changes necessitated by the 2010 Amendments. Thus, the Commission
estimates that the approximate average cost of revising a continuing
disclosure agreement to reflect the proposed amendments for each issuer
would be approximately $100,\153\ for a one-time total cost of
$2,000,000\154\ for all issuers, if an outside counsel were used by
each

issuer to revise the continuing disclosure agreement.
---------------------------------------------------------------------------

    \152\ See 2010 Amendments Adopting Release, supra note 54, at
33137.
    \153\ 1 (continuing disclosure agreement) x $400 (hourly wage
for an outside attorney) x .25 hours (estimated time for outside
attorney to revise a continuing disclosure document in accordance
with the proposed amendments to the Rule) = $100. The Commission
recognizes that the costs of retaining outside professionals may
vary depending on the nature of the professional services, but for
purposes of this PRA analysis we estimate that costs for outside
counsel would be an average of $400 per hour.
    \154\ $100 (estimated cost to revise a continuing disclosure
agreement in accordance with the proposed amendments to the Rule) x
20,000 (number of issuers) = $2,000,000.
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F. Retention Period of Recordkeeping Requirements

    As an SRO subject to Rule 17a-1 under the Exchange Act,\155\ the
MSRB is required to retain records of the collection of information for
a period of not less than five years, the first two years in an easily
accessible place. Broker-dealers registered pursuant to Exchange Act
Section 15 are required to comply with the books and records
requirements of Exchange Act Rules 17a-3 and 17a-4.\156\ Participating
Underwriters and dealers transacting business in municipal securities
are subject to existing recordkeeping requirements of the MSRB.\157\
The proposed amendments to the Rule would contain no recordkeeping
requirements for any other persons.
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    \155\ 17 CFR 240.17a-1.
    \156\ 17 CFR 240.17a-3, 17a-4.
    \157\ See MSRB Rules G-8, G-9. Exchange Act Rules 17a-3 and 17a-
4 state that, for purposes of transactions in municipal securities
by municipal securities brokers and municipal securities dealers,
such entities will be deemed in compliance with Exchange Act Rules
17a-3 and 17a-4 if they are in compliance with MSRB Rules G-8 and G-
9, respectively.
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G. Collection of Information Is Mandatory

    Any collection of information pursuant to the proposed amendments
to the Rule would be a mandatory collection of information.

H. Responses to Collection of Information Will Not Be Kept Confidential

    The collection of information pursuant to the proposed amendments
to the Rule would not be confidential and would be publicly
available.\158\ Specifically, the collection of information that would
be provided pursuant to the continuing disclosure documents under the
proposed amendments would be accessible through the MSRB's EMMA system
and would be publicly available via the Internet.
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    \158\ Continuing disclosure agreements may not be available if
they are not subject to state Freedom of Information Act
requirements. Internal dealer notices would not generally be
publicly available but may be available to the Commission, the MSRB
and FINRA.
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I. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2), the Commission solicits comments
regarding: (1) Whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility; (2) the
accuracy of the Commission's estimate of the burden of the revised
collections of information; (3) whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; (4)
whether there are ways to minimize the burden of the collection of
information on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology; and (5) whether there are cost savings associated with the
collection of information that have not been identified in this
proposal.
    The Commission has submitted to OMB for approval the proposed
revisions to the current collection of information titled ``Municipal
Securities Disclosure.'' Persons submitting comments on the collection
of information requirements should direct them to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should also send a copy of their comments to
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090, with reference to File No. S7-
01-17, and be submitted to the Securities and Exchange Commission,
Public Reference Room, 100 F Street NE., Washington, DC 20549. As OMB
is required to make a decision concerning the collection of information
between 30 and 60 days after publication, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication. Requests for materials submitted to OMB by the Commission
with regard to this collection of information should be in writing,
should refer to File No. S7-01-17, and be submitted to the Securities
and Exchange Commission, Public Reference Room, 100 F Street NE.,
Washington, DC 20549.

V. Economic Analysis

A. Introduction

    As discussed above, the Commission is proposing amendments to Rule
15c2-12 under the Exchange Act relating to municipal securities
disclosure. The proposed amendments would amend the list of event
notices the Participating Underwriter must reasonably determine that an
issuer or obligated person has agreed to provide to the MSRB in its
continuing disclosure agreement to include the proposed events. In
addition, the Commission proposes an amendment to Rule 15c2-12(f) to
add a definition for ``financial obligation'' and a technical amendment
to subparagraph (b)(5)(i)(C)(14).\159\ The Commission believes the
proposed amendments would facilitate investors' and other market
participants' access to more timely and informative disclosure and help
to enhance transparency in the municipal securities market.
---------------------------------------------------------------------------

    \159\ See supra Section III.
---------------------------------------------------------------------------

    As discussed in Section II.D., the need for more timely disclosure
of information in the municipal securities market about financial
obligations is highlighted by market developments beginning in 2009
which feature the increasing use of direct placements by issuers and
obligated persons as financing alternatives to public offerings of
municipal securities. According to FDIC Call Report data, the dollar
amount of commercial bank loans to state and local governments has more
than doubled since the financial crisis, increasing from $66.5 billion
as of the end of 2010 to $153.3 billion by the end of 2015.\160\ In
comparison, the dollar amount of municipal securities outstanding
remained relatively flat over the same time period.\161\
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    \160\ The dollar amount of commercial bank loans to state and
local governments is computed using Call Report data, available at
https://cdr.ffiec.gov/public/. The dollar amount is the sum of item
RCON2107, ``OBLIGATIONS (OTHER THAN SECURITIES AND LEASES) OF STATES
AND POLITICAL SUBDIVISIONS IN THE U.S,'' across all the depository
institutions for the stated time period. See Federal Reserve Board,
Micro Data Reference Manual (July 1, 2016) (``MDRM''), available at
http://www.federalreserve.gov/apps/mdrm/data-dictionary (includes
detailed variable definition).
    \161\ As of the end of 2010, the dollar amount of municipal
securities outstanding was $3.77 trillion. As of the end of 2015,
the dollar amount of municipal securities outstanding was $3.72
trillion. See Federal Reserve Board, Financial Accounts of the
United States: Historical Data, Annual 2005 to 2015, at 114 Table
L.212 (``Historical Flow of Funds''), available at https://www.federalreserve.gov/releases/z1/current/annuals/a2005-2015.pdf.
---------------------------------------------------------------------------

    The use of direct placements, as well as other financial
obligations, may benefit issuers and obligated persons in the form of
convenience or lower borrowing costs relative to a public offering of
municipal securities. For example, there is typically no requirement to
prepare an offering document or obtain a credit rating, liquidity
facility, or bond insurance for a direct placement or other financial
obligation.\162\ However, benefits to issuers and obligated persons
from raising capital through direct placements and other financial

obligations may negatively affect investors who have previously
invested in the issuer's or obligated person's outstanding municipal
securities. For instance, the incurrence of a financial obligation,
such as a direct placement, if material, could substantially impact an
issuer's or obligated person's overall indebtedness and
creditworthiness and thereby the value of the municipal securities held
by investors. In addition, an issuer or obligated person may agree to
covenants of a financial obligation that alter the debt payment
priority structure of the issuer's or obligated person's outstanding
securities, and the new debt payment priority structure may negatively
affect existing security holders. Events such as a default, event of
acceleration, termination event, modification of terms, or other
similar events under the terms of a financial obligation of the issuer
or obligated person, any of which reflect financial difficulties could
also impact the value of municipal securities held by investors.\163\
---------------------------------------------------------------------------

    \162\ See Daniel Bergstresser & Peter Orr, Direct Bank
Investment in Municipal Debt, 35 Mun. Fin. J. 1, 3 (2014)
(``Bergstresser & Orr''); California Debt and Investment Advisory
Commission, New Frontiers in Public Finance: A Return to Direct
Lending (Oct. 3, 2012), available at http://www.treasurer.ca.gov/cdiac/webinars/2012/20121003/presentation.pdf.
    \163\ Although historically, municipal securities have had
significantly lower rates of default than corporate and foreign
government bonds, as mentioned in Section II.D., defaults by issuers
and obligated persons have occurred in the past. Since 2011, the
municipal securities market has experienced four of the five largest
municipal bankruptcy filings in U.S. history. See supra note 71.
---------------------------------------------------------------------------

    However, under the current regulatory framework, investors and
other market participants may not have any access or timely access to
information related to the incurrence of financial obligations and
other events proposed to be included, despite their potential impact on
investors in municipal securities. More specifically, investors and
other market participants may not have any access to disclosure of the
proposed events if the issuer or obligated person does not provide
annual financial information or audited financial statements to EMMA,
or does not, subsequent to the occurrence of the proposed events, issue
debt in a primary offering subject to Rule 15c2-12 that results in the
provision of a final official statement to EMMA. Further, even if
investors and other market participants have access to information
about the proposed events, such access may not be timely if, for
example, the issuer or obligated person has not submitted annual
financial information or audited financial statements in a timely
manner or does not often issue debt that results in an official
statement being submitted to EMMA. As discussed earlier, such annual
financial information and audited financial statements may not be
available until several months or up to a year after the end of the
issuer's or obligated person's fiscal year, and a significant amount of
time could pass before the issuer's or obligated person's next primary
offering subject to Rule 15c2-12. As a result, investors could be
making investment decisions on whether to buy, sell or hold municipal
securities without the current information about an issuer's or
obligated person's outstanding debt; and other market participants
could also be undertaking credit analyses without such information.
Moreover, even when investors and other market participants do have
access to information about such events in the issuer's or obligated
person's annual financial information or audited financial statements
or in a subsequent official statement, the disclosure typically is
limited.
    Numerous market participants, including the MSRB, FINRA, academics
and industry groups, have encouraged issuers and obligated persons to
voluntarily disclose information about certain financial
obligations.\164\ In particular, the MSRB has noted its concern that
the lack of disclosure of direct placements may hinder an investor's
ability to understand the risks of an investment, and has published
several regulatory notices encouraging voluntary disclosure of
information about certain financial obligations, including bank loan
financings.\165\ However, despite these ongoing efforts, few issuers or
obligated persons have made voluntary disclosures of financial
obligations, including direct placements, to the MSRB.\166\
---------------------------------------------------------------------------

    \164\ See supra notes 76, 77, and 82. See also Bergstresser &
Orr, supra note 162.
    \165\ See supra note 76.
    \166\ See supra Section II.D.
---------------------------------------------------------------------------

    The Commission is mindful of the costs imposed by and benefits
obtained from its rules. The following economic analysis seeks to
identify and consider the likely benefits and costs that would result
from the proposed amendments, including their effects on efficiency,
competition, and capital formation. Overall, the Commission
preliminarily believes that the proposed amendments to Rule 15c2-12
would facilitate investors' and other market participants' access to
more timely and informative disclosure in the secondary market about
financial obligations of issuers and obligated persons, provide
information that could be used to make more informed investment
decisions or produce more informed analyses, and enhance investor
protection. The discussion below elaborates on the likely costs and
benefits of the proposed amendments and their potential impact on
efficiency, competition, and capital formation.
    Where possible, the Commission has attempted to quantify the costs,
benefits, and effects on efficiency, competition, and capital formation
that may result from the proposed rule amendments. However, the
Commission is unable to quantify some of the economic effects. For
example, because most municipal securities trade infrequently, recent
trade prices are generally not available to estimate the value of these
securities.\167\ Even when recent trade information is available,
prices may nevertheless deviate from the fundamental value of these
securities given the existence of an information asymmetry between
issuers or obligated persons and other market participants. In
addition, the current municipal securities disclosures could be delayed
or inadequately informative. Accordingly, information about the terms
of a financial obligation, such as the interest rate paid by the issuer
or obligated person, or how a financial obligation changes the priority
structure of an issuer's or obligated person's outstanding municipal
securities, is of limited availability. Therefore, we are limited in
the extent to which we can reasonably estimate the value of the
municipal securities and the scope of the potential improvement in
pricing of municipal securities under the proposed amendments. Further,
information about some of the factors that could affect borrowing
costs, such as the nature of the relationship between lenders and
issuers or obligated persons, including the length of the relationship,
and the number of lenders from which the issuers or obligated persons
borrow is not readily available.\168\ Therefore, we are unable to
provide a reasonable estimate of the potential change in borrowing
costs issuers or obligated persons may experience, or any costs that
lenders may incur. We are requesting comment on all aspects of our
analysis and estimates, and also request any information or data that
would enable such quantification.
---------------------------------------------------------------------------

    \167\ See 2012 Municipal Report supra note 58.
    \168\ Academic research shows that lending relationship could
affect borrowing costs. See infra note 196.
---------------------------------------------------------------------------

B. Economic Baseline

    To assess the economic impact of the proposed amendments to Rule
15c2-12, we are using as our baseline the existing regulatory framework
for municipal securities disclosure, including current Rule 15c2-12,
and current relevant MSRB rules.

1. The Current Municipal Securities Market
    As discussed earlier, the need for more timely and informative
disclosure of the municipal securities is highlighted by market
developments beginning in 2009, which feature the increasing use of
direct placements by issuers and obligated persons as financing
alternatives to public offerings of municipal securities. As a starting
point of our baseline analysis, we provide an overview of the current
state of the municipal securities market and issuers' and obligated
persons' use of direct placements based on data from the Federal
Reserve Board's Flow of Funds data,\169\ and Call Report data from the
FDIC.\170\
---------------------------------------------------------------------------

    \169\ Municipal securities are defined in the table description
for the Flow of Funds data as follows. ``Municipal securities are
obligations issued by state and local governments, nonprofit
organizations, and nonfinancial corporate businesses. State and
local governments are the primary issuers; detail on both long and
short-term (original maturity of 13 months or less) debt is shown.
This instrument excludes trade debt of, and U.S. government loans
to, state and local governments. Debt issued by nonprofit
organizations includes nonprofit hospital bonds and issuance to
finance activities such as lending to students. Debt issued by the
nonfinancial corporate business sector includes industrial revenue
bonds. Most municipal debt is tax-exempt; that is, the interest
earned on holdings is exempt from federal income tax. Since 1986,
however, some of the debt issued has been taxable, including the
Build America Bonds authorized under the American Recovery and
Reinvestment Act of 2009.'' See Federal Reserve Board, Financial
Accounts of the United States: All Table Descriptions, at 30-31
(Dec. 8, 2016) available at http://www.federalreserve.gov/apps/fof/Guide/z1_tables_description.pdf.
    \170\ Commercial banks report their individual lending to
municipalities in call report. The data item used in the analysis is
item 2107, OBLIGATIONS (OTHER THAN SECURITIES AND LEASES) OF STATES
AND POLITICAL SUBDIVISIONS IN THE U.S. It includes all obligations
of states and political subdivisions in the United States (including
those secured by real estate), other than leases and other than
those obligations reported as securities issued by such entities in
``Securities Issued by States Political Subdivision in the U.S.
(8496, 8497, 8498, and 8499)'' or ``Mortgage-backed securities
(8500, 8501, 8502, and 8503). It excludes all such obligations held
for trading. States and political subdivisions in the U.S. includes:
(1) The fifty states of the United States and the District of
Columbia and their counties, municipalities, school districts,
irrigation districts, and drainage and sewer districts; and (2) the
governments of Puerto Rico and of the U.S. territories and
possessions and their political subdivisions. See MDRM, supra note
160.
---------------------------------------------------------------------------

    According to Flow of Funds data, the notional amount of the total
municipal securities outstanding in the U.S. was $3.83 trillion as of
the end of the third quarter 2016.\171\ Prior to (and during) the 2008
financial crisis, the amount of municipal securities outstanding was
increasing steadily, growing from $2.82 trillion in 2004 to a post-
crisis peak of $3.77 trillion in 2010.\172\ Since 2010, the overall
size of the municipal securities market has remained flat.\173\
---------------------------------------------------------------------------

    \171\ Flow of Funds, supra note 64, at 121 Table L. 212.
    \172\ Historical Flow of Funds, supra note 161, at 114 Table L.
212.
    \173\ Id.
---------------------------------------------------------------------------

    However, the involvement of commercial banks in the municipal
capital markets has increased dramatically in terms of purchases of
municipal securities and extensions of loans to state and local
governments and their instrumentalities.\174\ U.S. chartered depository
institutions' holdings of outstanding municipal securities have grown
rapidly, from 6.75% of the total outstanding (or $254.6 billion) in
2010 to 13.43% of the total outstanding (or $498.9 billion) in 2015, a
near two-fold increase.\175\ The fastest growth has been in direct
lending to state and local governments and their instrumentalities. As
discussed above, the dollar amount of bank loans to state and local
governments has more than doubled since the 2008 financial crisis,
increasing from $66.5 billion as of the end of 2010 to $153.3 billion
by the end of 2015, or equivalently, an increase from 1.76% of total
municipal securities outstanding to 4.13%.\176\
---------------------------------------------------------------------------

    \174\ See Bergstresser & Orr, supra note 162, at 1-2.
    \175\ Historical Flow of Funds, supra note 161, at 121 Table L.
212.
    \176\ See MDRM, supra note 160.
---------------------------------------------------------------------------

    The use of direct placements and other financial obligations can
result in an increase in the issuer's or obligated person's outstanding
debt, and negatively impact the liquidity and creditworthiness of the
issuer or obligated person and the prices of their outstanding
municipal securities. However, currently, there is a lack of secondary
market disclosure about these financial obligations which has been
discussed by the MSRB, certain market participants and academics.\177\
As a result, investors and other market participants may not have
timely access to information regarding financial obligations, and such
information may not be incorporated in the prices of issuers' or
obligated persons' outstanding municipal securities. Recognizing the
credit implications of direct placements and other financial
obligations, at least one rating agency, now requires issuers and
obligated persons to notify them of the incurrence of certain financial
obligations, including direct placements, and to provide all relevant
documentation related to such indebtedness, and the Commission
understands that other rating agencies strongly encourage this practice
as well.\178\ This rating agency also stated it may suspend or withdraw
its ratings should issuers and obligated persons fail to provide such
notification in a timely manner.\179\ However, while such voluntary
measures may help mitigate mispricing, they are unlikely to completely
eliminate all potential mispricing in the municipal securities market
that is related to a lack of information about direct placements or
other financial obligations if the measures are costly or difficult to
enforce.
---------------------------------------------------------------------------

    \177\ See MSRB Letter to SEC CIO, supra note 18, NFMA letter to
the Commission's Chair, supra note 19. See also Bergstresser & Orr,
supra note 162, at 2-3.
    \178\ See supra note 81.
    \179\ Id.
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2. Rule 15c2-12
    As discussed above, the Commission first adopted Rule 15c2-12 in
1989 as a means reasonably designed to prevent fraud in the municipal
securities market by enhancing the quality, timing, and dissemination
of disclosure in the municipal securities primary market.\180\
Currently, Rule 15c2-12, most recently amended in 2010, prohibits the
Participating Underwriter from purchasing or selling municipal
securities in connection with an Offering unless the Participating
Underwriter reasonably determines that the issuer or obligated person
has undertaken in a continuing disclosure agreement to provide the MSRB
with: (1) Certain annual financial and operating information and
audited financial statements, if available; (2) notices of the
occurrence of any 14 specific events; and (3) notices of the failure of
an issuer or obligated person to make a timely annual filing, on or
before the date specified in the continuing disclosure agreement. The
current Rule does not impose on a Participating Underwriter any
obligation to reasonably determine that an issuer or obligated person
has undertaken in its continuing disclosure agreement to disclose the
proposed events. As discussed in Section I., investors and other market
participants may not have any access or timely access to disclosure
about the proposed events. Investors and other market participants may
not have access to such information because the issuer or obligated
person may not provide annual financial information or audited
financial statements to EMMA, or does not, subsequent to the occurrence
of the proposed events, issue debt in a primary offering subject to
Rule 15c2-12 that requires provision of a final official statement to
EMMA. Even if investors and other market

participants have access to disclosure about the proposed events, such
access may not be timely if the issuer or obligated person has not
submitted annual financial information or audited financial statements
to EMMA in a timely manner or does not issue debt that requires an
official statement be provided to EMMA for an extended period of time.
Typically, investors and other market participants do not have access
to an issuer's or obligated person's annual financial information or
audited financial statements until several months or up to a year after
the end of the issuer's or obligated person's applicable fiscal year,
and a significant amount of time could pass before an issuer's or
obligated person's next primary offering subject to Rule 15c2-12.\181\
---------------------------------------------------------------------------

    \180\ See supra Section II.B.
    \181\ See supra note 14.
---------------------------------------------------------------------------

    Furthermore, even if it is accessible to investors and other market
participants, the disclosure of the information about the proposed
events in an issuer's or obligated person's official statement, annual
financial information, or audited financial statements may not include
certain details about the financial obligations. Specifically,
disclosure of a financial obligation in an issuer's or obligated
person's financial statements may be a line item about the amount of
the financial obligation, and may not provide investors and other
market participants with information relating to an issuer's or
obligated person's agreement to covenants, events of default, remedies,
priority rights, or other similar terms of a financial obligation, any
of which affect security holders, if material.
3. MSRB Rules
    MSRB rules do not address the disclosure of the events listed in
Rule 15c2-12. However, as described above, the MSRB has highlighted the
increased use of direct placements as a financing alternative.\182\ The
MSRB has encouraged issuers to voluntarily disclose direct placements
on EMMA,\183\ including providing instructions to issuers on how they
may provide such disclosures using EMMA. Despite the MSRB's efforts to
encourage voluntary disclosure, the number of disclosures made using
EMMA has been limited.
---------------------------------------------------------------------------

    \182\ See supra note 76.
    \183\ See MSRB Notice 2012-18, supra note 20.
---------------------------------------------------------------------------

    In March 2016, the MSRB published a regulatory notice requesting
comment on a concept proposal to require municipal advisors to disclose
information regarding the direct placements of their municipal entity
clients to EMMA.\184\ On August 1, 2016, the MSRB announced that it had
decided not to pursue the ideas set forth in the MSRB Request for
Comment. Many who commented on the MSRB's Request for Comment noted
that the best way to ensure disclosure of direct placements is to amend
Rule 15c2-12.\185\
---------------------------------------------------------------------------

    \184\ See MSRB Request for Comment, supra note 76.
    \185\ See Comment Letters in Response to MSRB Request for
Comment, supra note 76.
---------------------------------------------------------------------------

4. Existing State of Efficiency, Competition, and Capital Formation
    Under current rules, certain inefficiencies may arise in the
municipal securities market as a result of the lack of timely
disclosure of information on important credit events. In particular,
because the proposed events need not be included in the issuer's and
obligated person's continuing disclosure agreements, the impact of such
events may not be learned by market participants in a timely manner.
The lack of timely disclosure may cause the prices of certain municipal
securities to not reflect fundamental value.
    As discussed above, there exists an information asymmetry between
lenders and municipal securities investors under the current Rule 15c2-
12. The terms of a financial obligation incurred by an issuer or
obligated person may include covenants that give the lender or
counterparty priority rights over existing security holders. Existing
security holders may be unaware of the change in priority structure of
the issuer's or obligated person's municipal securities for an extended
period of time, and future investors may buy the securities at inflated
prices which do not reflect the change in priority structure. Existing
investors may also be unaware of the occurrence of certain events under
the terms of a financial obligation, such as a default, where the
lender might have renegotiated the terms of lending agreement and which
may reflect the worsened financial condition of the issuer or obligated
person. The information asymmetry between lenders and municipal
securities investors could place investors in a disadvantageous
position relative to lenders when making municipal securities
investment decisions.\186\
---------------------------------------------------------------------------

    \186\ For discussion of the implications of asymmetric
information for market efficiency see infra note 203.
---------------------------------------------------------------------------

    The price inefficiencies in the municipal securities market and the
disparity in available information for different types of investors
could result in obstacles for the efficient allocation of capital. For
example, while some investors may overinvest in municipal securities
due to incomplete information about the amount and priority structure
of an issuer's or obligated person's debt obligations, other municipal
securities investors who are aware of the possible information
asymmetry may underinvest because of a perceived information
disadvantage relative to issuers or obligated persons or risks
associated with making investment decisions.

C. Benefits, Costs and Effects on Efficiency, Competition, and Capital
Formation

    The Commission has considered the potential costs and benefits
associated with the proposed amendments.\187\ The Commission believes
that the primary economic benefits of the proposed amendments stem from
the potential improvement in the timeliness and informativeness of
municipal securities disclosure. In particular, the Commission believes
that the proposed Rule 15c2-12 amendments would provide investors with
more timely access to information that could be used to make more
informed investment decisions, and enhance investor protection. In
addition, improved disclosure would assist other market participants
including rating agencies and municipal securities analysts in
providing more accurate credit ratings and credit analysis as they
would have more timely access to information regarding an issuer's or
obligated person's outstanding debt.\188\ The disclosure produced by
the issuer or obligated person would become more informative under the
proposed amendments, because it would include not only the existence of
the financial obligation that the issuer or obligated person has
incurred, but also specified material terms of the financial
obligations that can affect security holders, including affecting their
priority rights. Disclosure that is both

more timely and informative can positively affect efficiency,
competition, and capital formation. The Commission also notes that the
proposed amendments would introduce costs to other parties, including
issuers, obligated persons, underwriters and lenders, as the
alternative financing option (e.g., direct placements) becomes more
expensive. We discuss the economic costs and benefits of the proposed
amendments in more detail below as well as the effects of proposed
amendments on efficiency, competition, and capital formation.
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    \187\ The Commission understands that it is possible that the
issuer or obligated person may not comply with its previous
continuing disclosure undertakings and may not provide the MSRB with
notice of the proposed events pursuant to proposed Rule 15c2-12
amendments, in which case, the actual costs and benefits of the
proposed amendments would depend on the issuer or obligated person's
commitment to disclosure.
    \188\ As discussed above, at least one credit rating agency
currently is requiring disclosure of information about bank loans.
The benefit to rating agencies of the proposed increased disclosure
exists only to the extent that the proposed amendments provide new
information that the rating agencies are not already collecting as
part of rating a bond issue.
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1. Anticipated Benefits of the Proposed Rule 15c2-12 Amendments
i. Benefits to Investors
    The Commission preliminarily believes that the proposed Rule 15c2-
12 amendments would potentially yield several benefits to municipal
securities investors. First, the proposed amendments would provide
investors with access to more timely and informative disclosure about
an issuer's or obligated person's financial condition, both of which
can assist them in making more informed investment decisions when
trading in the secondary market.
    As discussed in Section III.A., the information regarding the
proposed events is relevant for investors' investment decision making.
The incurrence of a financial obligation can result in an increase in
the issuer's or obligated person's outstanding debt; agreement to a
covenant, event of default or remedy under the terms of a financial
obligation of the issuer or obligated person may create contingent
liquidity and credit risk that could also potentially impact the
issuer's or obligated person's liquidity and overall creditworthiness.
The occurrence of a default, event of acceleration, termination event,
modification of terms, or other similar event under terms of a
financial obligation of the issuer or obligated person, any of which
reflect financial difficulties, could provide relevant information
regarding whether the financial condition of the issuer or the
obligated person has changed or worsened, and if the issuer or
obligated person has agreed to new terms that would provide the
counterparty with superior rights to assets or revenues that were
previously pledged to existing security holders. All these pieces of
information contain relevant information about the cash flows investors
may expect to receive, and can therefore impact the prices of municipal
securities. Without this information, prices of municipal securities
could be distorted from fundamental value in both the primary and
secondary markets.
    However, currently, notice of these events may not be available to
the public at all, because the issuer or obligated person may not
provide annual financial information or audited financial statements to
EMMA, and a Participating Underwriter in an Offering is not currently
required under Rule 15c2-12 to reasonably determine that an issuer or
obligated person has undertaken to provide notices of these events. If
an issuer or obligated person provides such information in their annual
financial information or audited financial statements, this information
may not become available until several months or up to a year after the
end of the issuer's or obligated person's applicable fiscal year, and a
significant amount of time could pass before the issuer or obligated
person's next primary offering subject to Rule 15c2-12. Moreover, the
disclosure information may not include all the proposed events. For
example, the disclosure may include only the existence of the financial
obligation that the issuer or obligated person has incurred, but not
specified material terms of the financial obligations that can affect
security holders, including those terms that, for example, affect
security holders' priority rights. Therefore, investors could be making
investment decisions without knowing that their contractual rights have
been adversely impacted. As such, the current level of disclosure
regarding the proposed events is neither timely nor adequately
informative about the issuer's or obligated person's creditworthiness.
    To the extent that investors in the municipal securities market
rely on credit ratings as a meaningful indicator of credit risk, the
recent efforts of certain credit rating agencies to collect information
from issuers and obligated persons about the incurrence of direct
placements may help improve the accuracy of credit ratings and mitigate
potential mispricing in the municipal securities market.\189\ However,
because not all credit rating agencies require information on direct
placements to provide a rating, and there are other undisclosed
financial obligations and significant events (such as defaults) that
may affect the issuers' and obligated persons' creditworthiness besides
the incurrence of financial obligations, such efforts alone are
unlikely to remove all potential mispricing related to direct
placements.
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    \189\ See supra note 81 for examples of credit rating agency
initiatives. For academic evidence on pricing effect of credit
rating agencies' actions, see John R.M. Hand, Robert W. Holthausen,
& Richard Leftwich, The Effect of Bond Rating Agency Announcements
on Bond and Stock Prices, 47 J. Fin. 733, 733-752 (1992).
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    Under the proposed amendments to Rule 15c2-12, Participating
Underwriters would be required to reasonably determine that an issuer
or obligated person had agreed in its continuing disclosure agreement
to provide notices for the proposed events within 10 business days.
Consequently, pursuant to the proposed amendments, municipal securities
investors and other market participants would potentially have access
to the disclosure within 10 business days as opposed to waiting for the
issuer's or obligated person's next primary offering subject to Rule
15c2-12, or until the release of annual financial information or
audited financial statements, or not receive any information at all.
Therefore, the proposed amendments would provide investors access to
information regarding the issuer's or obligated person's financial
obligations in a more timely manner. In addition, the proposed notices
would include agreement to covenants, events of default, remedies,
priority rights or other similar terms of a direct or contingent
financial obligation of the issuer or obligated person that affect
security holders, so the disclosures provided to MSRB would be
informative about not just the existence of the incurred financial
obligation, but also how they may impact security holders. Overall, the
proposed amendments would provide information investors could use to
better assess the risks involved with an investment in a municipal
security, and therefore make more informed investment decisions.
    Second, improvement in municipal disclosure may reduce information
asymmetries between investors and other more informed parties such as
issuers, obligated persons, counterparties and lenders, and therefore
enhance investor protection. As discussed above, for example, the terms
of a financial obligation may include covenants that give lenders or
counterparties priority rights over existing security holders.
Specifically, for example, a bank loan agreement could give the lender
a lien on assets or revenues that also secure the repayment of an
issuer's or obligated person's outstanding municipal securities which
could adversely affect the rights of existing security holders. If
disclosure is not available to security holders about such events, they
will be unable to take any actions they would have taken had they been
informed, such as exiting

their position. In this situation, the direct lenders enjoy an
information advantage over investors. More timely and informative
disclosure of the proposed events could reduce investors' disadvantage
by providing them with a means to obtain information in a timely manner
if their contractual rights have been negatively impacted and take
appropriate actions.
ii. Benefits to the Issuers or Obligated Persons
    Issuers and obligated persons may also experience a decrease in
borrowing costs that are related to public offerings of municipal
securities under the proposed amendments because of the increased level
of disclosure. For example, in the context of corporate issuers,
economic theories suggest that information asymmetry can lead to an
adverse selection problem and therefore reduced the level of liquidity
for firms' equity.\190\ In an asymmetric information environment,
investors recognize that issuers may take advantage of their position
by issuing securities at a price that is higher than justified by the
issuer's fundamental value. As a result, investors demand a discount to
compensate themselves for the risk of adverse selection. This discount
translates into a higher cost of capital. By committing to increased
levels of disclosure, the firm can reduce the risk of adverse selection
faced by investors, reducing the discount they demand and ultimately
decreasing the firm's cost of capital. The theory of adverse selection
applies broadly to financial markets, or any market that involves
asymmetric information between the participants. Therefore, the
Commission preliminarily believes that a similar analysis can be
applied to municipal securities. As the proposed rule amendments would
result in municipal securities disclosures that provide more
information that is relevant to investors, the costs of raising capital
may decrease for issuers and obligated persons.
---------------------------------------------------------------------------

    \190\ See Douglas W. Diamond & Robert E. Verrecchia, Disclosure,
Liquidity, and the Cost of Capital, 46 J. Fin. 1325, 1325-1359
(1991).
---------------------------------------------------------------------------

    Currently, the Commission is unable to provide reasonable estimates
of the potential change in borrowing costs. Such costs may vary
significantly depending on a number of factors, including the
characteristics of the issuer or obligated person (e.g., size, credit
ratings, etc.), and possible changes in their borrowing behavior.
iii. Benefits to Rating Agencies and Municipal Analysts
    The proposed Rule 15c2-12 amendments would help rating agencies and
municipal analysts gain access to more updated information about the
issuer's and obligated person's credit and financial position at a
lower cost. As rating agencies and municipal analysts have stated on a
number of occasions, direct placements can have credit implications for
ratings on an issuer's or obligated person's outstanding municipal
securities.\191\ Rating agencies must expend resources to collect
information about financial obligations including direct placements to
provide more accurate ratings. A certain rating agency stated that it
would suspend or withdraw ratings if issuers or obligated persons do
not provide such notification in a timely manner. The process for
suspending or withdrawing ratings could also be costly for a rating
agency. \192\ The proposed amendments may reduce the need for rating
agencies or analysts to separately implement a process to gain more
timely access to the information regarding proposed events. Therefore,
under the proposed amendments, rating agencies and municipal analysts
may have access to information they need to produce more accurate
credit ratings and analyses at a cost lower than the baseline scenario.
A portion of any cost savings may be passed through to investors and
represent a benefit to them depending on how much they rely on rating
agencies for information.
---------------------------------------------------------------------------

    \191\ See Moody's, Special Comment: Direct Bank Loans Carry
Credit Risks Similar to Variable Rate Demand Bonds for Public
Finance Issuers (Sept. 15, 2011); see also supra note 81.
    \192\ See supra note 81.
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2. Anticipated Costs of the Proposed Rule 15c2-12 Amendments
i. Costs to Issuers and Obligated Persons
    The Commission expects that, under the proposed amendments, issuers
and obligated persons would experience an increase in administrative
costs from undertaking in their continuing disclosure agreements to
produce the proposed notices. As discussed above,\193\ an advantage of
a direct placement versus a public offering of municipal securities is
the lower costs due to, among other things, no requirement to prepare a
public offering document for the borrowing transaction. Under the
proposed amendments, Participating Underwriters would be required to
reasonably determine that issuers or obligated persons have undertaken
in a continuing disclosure agreement to submit event notices to the
MSRB within 10 days of the events. Issuers and obligated persons
providing notice consistent with the proposed amendments would incur a
cost to do so. As discussed earlier, the Commission assesses that the
increase in the number of event notices would result in an increase of
4,400 hours in the annual paperwork burden for all issuers to submit
event notices. As discussed above in Section IV.E.2., the Commission
has estimated that these hours spent preparing event notices would be
done internally, for an estimated cost of $1,513,600.\194\ The
Commission also believes issuers would incur an additional estimated
cost of $585,000 in fees for designated agents to assist in the
submission of event notices.\195\
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    \193\ See supra Section V.A.
    \194\ This estimate reflects an assumption that issuers perform
this internal work through internal counsel. 4400 hours (estimated
increase in hours for issuers to prepare event notices under the
proposed amendments to the Rule) x $344 (average rate for an
internal compliance attorney) = $1,513,600. The $344 per hour
estimate for an internal compliance attorney is from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified by Commission staff to account for an 1,800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, and adjusted for inflation.
    \195\ See supra Section IV.E.2. See also supra notes 148, 150,
151. As discussed above, the Commission has estimated that 65% of
issuers may use designated agents to submit some or all of their
continuing disclosure documents to the MSRB, and that the average
total annual cost that would be incurred by issuers that use the
services of a designated agent would be $9,750,000. The Commission
has estimated that the two proposed amendments would cause issuers
that use the services of a designated agent to incur additional
costs of six percent, or $585,000 ($9,750,000 x 6% = $585,000). See
supra note 150.
---------------------------------------------------------------------------

    Borrowing costs also could potentially increase for issuers and
obligated persons compared to the baseline scenario as lenders might be
less willing to continue engaging in direct placements or other types
of alternative financings in their current form under the proposed
amendments because lenders may be less able to profit from their
information advantage over other investors. Currently, an issuer or
obligated person may agree to provide superior rights to the
counterparty in assets or revenues that were previously pledged to
existing security holders when they enter into a financial obligation
without disclosing the information to the public. Lenders might be
willing to offer lower rates to issuers and obligated persons in return
for the superior rights. A public disclosure of such arrangements under
the proposed amendments, therefore, could potentially reduce
opportunities for lenders to move ahead in the priority queue either
because issuers and

obligated persons are discouraged from providing lenders with priority
at the current level, or because investors demand covenants which
prevent issuers and obligated persons from doing so and reduce the
benefits lenders currently enjoy. Currently, while investors may also
claim their rights under the covenants, they may not be aware that
their rights have been affected without the disclosures, and therefore
may fail to make such claims. Therefore, borrowing costs that are
related to financial obligations may rise for the issuers or obligated
persons.\196\
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    \196\ There is also likelihood that lenders' private information
about the borrowers developed over the course of their lending
relationship with the borrowers could be eroded as a result of a
detailed disclosure by the issuers and obligated persons, which
could impact lenders incentives to continue lending, developing
proprietary information and maintain long-term relationships with
borrowers, and borrowing costs thereby. However, such an impact
would depend upon the level of the disclosure provided by the
issuers and obligated persons in their notices. Lenders generally
develop proprietary information about the borrower during a lending
relationship because they actively engage in information gathering
and monitoring. Lenders and borrowers tend to form stable
relationships. Such stability provides economies of scale for the
lenders to offset the costly information production and monitoring,
and it benefits the borrowers by increasing the availability of
financing and lowering overall borrowing costs. See Mitchell A.
Petersen & Raghuram G. Rajan, The Benefits of Lending Relationships:
Evidence from Small Business Data, 49 J. Fin. 3, 3-37 (1994).
---------------------------------------------------------------------------

    Currently, the Commission is unable to provide reasonable estimates
of the potential change in borrowing costs related to direct
placements, as well as other financial obligations. Similarly, as
discussed earlier, such costs may vary significantly depending on a
number of factors, including both the characteristics of the issuer or
obligated person (e.g., size, credit ratings, etc.) and the level of
the disclosure issuers or obligated persons committed themselves to
provide under their continuing disclosure agreements In addition, as
discussed earlier, since borrowing costs related to municipal
securities might also decrease as disclosure increases, the opposite
effects might neutralize the proposed amendments' ultimate impact on
borrowing costs when viewed in totality.
ii. Costs to Dealers
    Pursuant to Rule 15c2-12, a dealer acting as a Participating
Underwriter in an Offering has an existing obligation to contract to
receive the final official statement.\197\ The final official statement
includes, among other things, a description of any instances in the
previous five years in which the issuer or obligated person failed to
comply, in all material respects, with any previous undertakings in a
written contract or agreement to provide certain continuing
disclosures.\198\ Dealers acting as Participating Underwriters in an
Offering also have an existing obligation under Rule 15c2-12 to
reasonably determine that an issuer or obligated person has undertaken
in its continuing disclosure agreement for the benefit of holders of
the municipal securities to provide notice to the MSRB of specified
events. In addition, dealers are prohibited under Rule 15c2-12 from
recommending the purchase or sale of municipal securities unless they
have procedures in place that provide reasonable assurance that they
will receive promptly event notices and failure to file notices with
respect to the recommended security. Dealers typically use EMMA or
other third party vendors to satisfy this existing obligation.
---------------------------------------------------------------------------

    \197\ 17 CFR 240.15c2-12(a) and (b)(3).
    \198\ 17 CFR 240.15c2-12(f)(3).
---------------------------------------------------------------------------

    As a practical matter, dealers' obligations under the proposed Rule
15c2-12 amendments would include verifying that the continuing
disclosure agreement contains an undertaking by the issuer or obligated
person to provide the proposed new event notices to the MSRB, verifying
whether the issuer or obligated person has complied with their prior
undertakings, and verifying whether the final official statement
includes, among other things, an accurate description of the issuer's
or obligated person's prior compliance with continuing disclosure
obligations. Because the proposed Rule 15c2-12 amendments would not
significantly alter existing dealer obligations, dealers should not be
subject to significant costs. As discussed earlier, the Commission has
estimated that 250 dealers would each incur a one-time, first-year
burden of 30 minutes to prepare and issue a notice to its employees
regarding the dealer's new obligations under the proposed amendments,
and that the proposed amendments would result in an average expenditure
of an additional 10 hours per year per dealer for each dealer to
determine whether issuers or obligated person have failed to comply
with any previous undertakings in a written contract or agreement.
Therefore, under the proposed amendments, the total burden on dealers
would increase 125 hours for the first year and 2500 hours on an annual
basis.\199\ However, as discussed in Section IV.E.1., the Commission
does not believe dealers will incur any additional external costs
associated with the proposed amendments to the Rule because the
proposed amendments do not change the obligation of dealers under the
Rule to reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of
holders of such municipal securities, to provide continuing disclosure
documents to the MSRB. Specifically, the Commission believes that the
task of preparing and issuing a notice advising the dealer's employees
about the proposed amendments is consistent with the type of compliance
work that a dealer typically handles internally. Thus, dealers would
incur an annual internal compliance cost of $903,000 for the first
year, and $860,000 in subsequent years.\200\
---------------------------------------------------------------------------

    \199\ See Section IV.D.1.
    \200\ First year costs: 125 hours (first year burden on dealers)
x $344 (average hourly cost of internal compliance attorney) + 2500
hours (annual hourly burden on dealers) x $344 (average hourly cost
of internal compliance attorney) = $903,000. Subsequent annual
costs: 2500 hours (annual hourly burden on dealers) hours x $344
average hourly cost of internal compliance attorney = $860,000.
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iii. Costs to Lenders
    Under the proposed amendments, lenders may incur a cost from the
disclosure about financial obligations and the terms of the agreements
creating such obligations. The increased level of disclosure may reduce
lenders' information advantage over other investors. As discussed
above, lenders may enjoy certain priority rights in these financial
arrangements, which may not be publicly disclosed, or reflected in the
price of the issuer's or obligated person's outstanding municipal
securities. To the extent that such benefits may be reduced by the
disclosure, lenders would incur a cost. In addition, lenders might have
reduced incentives to provide financing to issuers or obligated
persons, or may only be willing to lend at an increased interest rate,
one that better reflects the risks underlying an issuer's or obligated
person's entire portfolio of issuances and borrowings, both of which
could potentially lead to a loss of investment opportunities and hence
a cost to lenders.\201\ However, as noted above, under the baseline
scenario, benefits of direct placements and other financial obligations
accrue to lenders, as well as issuers and obligated persons, at the
expense of investors in municipal securities. The Commission

preliminarily believes that any loss of investment opportunities or
other costs to lenders as described in this section translate into
benefits to investors such as those described above.
---------------------------------------------------------------------------

    \201\ Lenders' information advantage could also be impacted if
their private information about the borrowers developed over the
course of their lending relationship with the borrowers were eroded
as a result of a detailed disclosure by the issuers and obligated
persons. However, such an impact would depend upon the disclosure
provided by the issuers and obligated persons in their notices.
---------------------------------------------------------------------------

    The Commission is unable to quantify the potential cost to lenders
at this time. Whether the existing lending relationship between lenders
and issuers or obligated persons would be affected and how large the
impact might be would depend on the level of the disclosure and the
nature of the lending relationship, such as the length of the
relationship and the number of banks/lenders from who the issuers or
obligated persons borrow. However, how much issuers or obligated
persons would change in terms of their disclosure behavior, and how
much lenders would change in their lending behavior in response to the
proposed amendment is not predictable. Without such data, the
Commission is unable to provide reasonable estimates of the potential
cost to lenders.
iv. Costs to Municipal Securities Rulemaking Board
    The proposed Rule 15c2-12 amendments would increase the type of
event notices submitted to the MSRB which may result in the MSRB
incurring costs associated with such additional notices. As discussed
earlier, the Commission estimates, based on preliminary consultations
with MSRB staff, that it would require approximately 1,162 hours to
implement the necessary modifications to EMMA to reflect the additional
disclosures under Rule 15c2-12 in the proposed amendments. Accordingly,
the total estimated one-time cost to the MSRB of updating EMMA would be
$373,002.\202\
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    \202\ See supra Section IV.D.3. Estimates are calculated as
follows: 1,162 hours x $321 (hourly rate for Senior Database
Administrator). $321 per hour figure for a Senior Database
Administrator is from SIFMA's Management & Professional Earnings in
the Securities Industry 2013, modified by Commission staff to
account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead, and
adjusted for inflation.
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3. Effects on Efficiency, Competition, and Capital Formation
    The proposed Rule 15c2-12 amendments have the potential to affect
efficiency, competition, and capital formation by improving the
timeliness and informativeness of disclosure to investors, reducing
information asymmetry among market participants, and enhancing
transparency about issuers' and obligated persons' debt structures. As
described above, lack of disclosure can lead to information asymmetries
among different types of investors (i.e., investors in publicly offered
municipal securities and direct lenders), and between investors and
issuers and obligated persons, which can result in securities prices
that do not reflect market value.\203\ The proposed amendments would
require a Participating Underwriter to reasonably determine that an
issuer or obligated person has undertaken in a continuing disclosure
agreement to provide notice to the MSRB of the proposed events. Such
disclosures could provide an investor engaged in investment decision-
making, and ratings agencies and municipal analysts undertaking a
ratings review or credit analysis, with more timely access to
information about the issuer's or obligated person's credit profile and
financial condition, reduce mispricing of municipal securities, and
therefore enhance the efficiency of the municipal securities market.
---------------------------------------------------------------------------

    \203\ Specifically, when there is asymmetric information about
material risks, investors may not be able to distinguish low-risk
securities from high-risk securities. In such cases, market
participants will only value securities as if they bear an average
level of risk, undervaluing low-risk securities and overvaluing
high-risk securities. Such mispricing can harm market efficiency and
distort capital allocation. See, e.g., Paul M. Healy & Krishna G.
Palepu, Information Asymmetry, Corporate Disclosure, and the Capital
Markets: A Review of the Empirical Disclosure Literature, 31 J.
Acct. & Econ. 405, 405-40 (2001).
---------------------------------------------------------------------------

    As discussed above, at least one credit rating agency currently
requires issuers and obligated persons to provide notification and
documentation of the incurrence of certain financial obligations
including direct placements in order to maintain their credit ratings,
a process that may involve duplicative costs, because each rating
agency would have to implement similar process to collect the same
information, and issuers and obligated persons would have to provide
identical responses multiple times.\204\ The proposed amendments may
improve efficiency in the disclosure process by eliminating such
potential duplicative costs. By potentially reducing information
asymmetries between municipal securities investors and other more-
informed market participants, including issuers, obligated persons and
lenders, the proposed Rule 15c2-12 amendments could promote competition
among municipal capital market participants. As discussed earlier, by
allowing lenders to enjoy an information advantage about the proposed
events, existing rules may provide certain lenders with a competitive
advantage over the municipal securities investors because lenders could
be in better position to compete with municipal securities investors
for investment opportunities. Currently, for example, the terms of a
financial obligation incurred by an issuer or obligated person may
include covenants that give the lender or counterparty priority rights
over existing security holders. As a result, for example, the lender or
counterparty may have a senior lien on assets or revenues that were
previously pledged to secure repayment of an issuer's or obligated
person's outstanding municipal securities. Unless an issuer or
obligated person voluntarily discloses this information, existing
investors may be unaware that an issuer's or obligated person's
outstanding debt amount and priority structure has changed. Under the
current Rule, existing investors may also be unaware of the occurrence
of an event such as a default, where the lender might have renegotiated
the terms of lending agreement reflecting financial difficulties of the
issuer or obligated person. In both these scenarios, municipal security
investors are disadvantaged, existing security holders may continue to
hold the municipal securities without learning that the credit quality
of the municipal securities has deteriorated, and future investors may
buy the securities at inflated prices. Therefore, more timely and
informative disclosure of the proposed events by issuers' and obligated
persons' could help reduce the information gap between the lenders and
municipal securities investors, leveling the playing field for market
participants looking for investment opportunities in the municipal
capital market.
---------------------------------------------------------------------------

    \204\ See supra note 81.
---------------------------------------------------------------------------

    The proposed amendments to Rule 15c2-12 may also promote
competition among issuers and obligated persons looking for funding.
Under the current rule, issuers or obligated persons who are not
engaged in alternative financings such as direct placements might be
competing for capital in a relatively disadvantaged position--all else
equal, they should be at least as creditworthy as their counterparts
who have incurred undisclosed material financial obligations. However,
the market could be pricing these issues identically, placing more
creditworthy issuers and obligated persons at a competitive
disadvantage. Since the proposed amendments could improve pricing
efficiency and increase the likelihood that prices reflect credit risk,
the proposed amendments may also promote competition for capital among
issuers and obligated persons.
    The proposed Rule 15c2-12 amendments may also positively affect

efficiency by providing issuers and obligated persons with incentives
to make management decisions that promote an efficient market for
municipal securities. For example, when issuers or obligated persons
are considering a direct placement versus a public municipal securities
offering, they may weigh, among other things, the benefits of lower
borrowing costs against future liquidity risk considerations. That is,
issuers and obligated persons might choose financial obligations over a
public offering of municipal securities if, among other things, the
value of lower borrowing costs exceeds the costs of future liquidity
concerns associated with the financial obligations. However, to the
extent that borrowing costs may be priced incorrectly under the
baseline scenario due to information asymmetries, issuers and obligated
persons might be making decisions that, while optimal for themselves
based on available pricing information, do not necessarily take into
account the costs that financial obligations may impose on other
creditors. Moreover, they may have incentives to exploit the mispricing
should it yield lower borrowing costs, which may sustain or even
amplify the market inefficiency. If issuers and obligated persons were
to increase financial obligations and such information was not
incorporated in the market in a timely fashion as is the case under the
baseline, mispricing of municipal securities would also likely
increase. Such concerns might be reduced under the proposed amendments,
which aim to reduce information asymmetries that may lead issuers and
obligated persons to favor direct placements and other financial
obligations over public offerings. To the extent that this reduces the
incentive to exploit mispricing, price inefficiencies in the municipal
securities market may diminish.
    The proposed Rule 15c2-12 amendments may also help facilitate
capital formation. As discussed earlier, under the baseline scenario,
there may be price inefficiencies in the market for municipal
securities that result from asymmetric information between different
sets of municipal securities investors and lenders. By increasing the
timeliness and informativeness of disclosure, the proposed rules could
reduce the potential for price inefficiencies, resulting in improved
allocation of capital. For example, municipal securities investors may
underinvest because of a perceived disadvantage or make investment
decisions based on untimely and incomplete information. Under the
proposed rule amendments, as the municipal securities market becomes
more efficient and investors make more informed decisions, capital
would be better deployed at an aggregate level, resulting in more
efficient capital allocation.
    A more transparent and competitive market could also improve market
liquidity and facilitate capital formation. According to academic
research, disclosure policy influences market liquidity because
uninformed investors concerned about asymmetric information, price
protect themselves in their securities transactions by offering to sell
at a premium or buy at a discount. This price protection could be
manifested in higher bid-ask spreads and reduced market liquidity.\205\
Therefore, by reducing information asymmetry in the municipal capital
market, the proposed amendments can potentially improve liquidity in
the municipal market. As the municipal securities market becomes more
transparent, and investors sense stronger protections, they may be more
likely to participate in the municipal securities market as a result.
Therefore, to the extent that increased participation in the municipal
securities market reflects new investment, as opposed to substitution
away from other securities markets, enhanced disclosure could also
positively affect capital formation.
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    \205\ See Michael Welker, Disclosure Policy, Information
Asymmetry, and Liquidity in Equity Markets, 11 Contemp. Acct. Res.
801, 801-827 (1995). Welker provides evidence that disclosure policy
reduces information asymmetry and increases liquidity in equity
markets. See also Christian Leuz & Robert E. Verrecchia, The
Economic Consequences of Increased Disclosure, 38 J. Acct. Res. 91,
91-124 (2000).
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D. Alternative Approaches

    Instead of the proposed Rule 15c2-12 amendments, the Commission
could encourage issuers and obligated persons to voluntarily disclose
on an ongoing basis information about the 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, if material, and default,
event of acceleration, termination event, modification of terms, or
other similar events under the terms of a financial obligation of the
issuer or obligated person, any of which reflect financial
difficulties. However, it is unclear whether issuers or obligated
persons would have sufficient incentives to do so. As discussed above,
despite previous efforts of municipal securities market participants,
the MSRB and numerous industry groups \206\ to encourage timely
voluntary disclosure regarding financial obligations, issuers and
obligated persons have not consistently disclosed such information.
Voluntary disclosure likely would be less costly for issuers and
obligated persons since they may choose to disclose less frequently or
not at all, but it would fail to yield the same benefits as the
disclosures proposed in the amendments that require a Participating
Underwriter to reasonably determine that an issuer or obligated person
has undertaken in a continuing disclosure agreement to provide to the
MSRB notice of the proposed events. If issuers and obligated persons
were to voluntarily disclose at the level set forth in the proposed
amendments, the costs of the disclosure also would be comparable.
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    \206\ See Section II.D; see also supra note 76.
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E. Request for Comment

    To assist the Commission in evaluating the costs and benefits that
could result from the proposed amendments to the Rule, the Commission
requests comments on the potential costs and benefits identified in
this proposal, as well as any other costs or benefits that could result
from the proposed amendments to the Rule. In addition, the Commission
also seeks comment on alternative approaches to the proposed amendments
and the associated costs and benefits of these approaches.
Specifically, the Commission seeks comment with respect to the
following questions: Are there any costs and benefits to any entity
that are not identified or misidentified in the above analysis? Are
there any effects on efficiency, competition, and capital formation
that are not identified or misidentified in the above analysis? Please
be specific and provide analysis and data in support of your views.
Should the Commission consider any of the alternative approaches
outlined above instead of the proposed amendments? Which approach and
why? Are there any other alternative processes to improve municipal
disclosure related to financial obligations that the Commission should
consider? If so, what are they and what would be the associated costs
or benefits of these alternative approaches?

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of

1996 (``SBREFA''),\207\ the Commission requests comment on the
potential effect of the proposed amendments on the United States
economy on an annual basis. The Commission also requests comment on any
potential increases in costs or prices for consumers or individual
industries, and any potential effect on competition, investment, or
innovation.
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    \207\ Public Law 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
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    Under SBREFA, a rule is considered ``major'' where, if adopted, it
results in or is likely to result in:
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment, or
innovation.
    Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.

VII. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\208\ Section 3(a) \209\ of RFA generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules to determine the impact of such rulemaking on small
entities unless the Commission certifies that the rule amendments, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\210\ For purposes of Commission rulemaking in
connection with the RFA,\211\ a small entity includes: (1) A broker-
dealer that had total capital (net worth plus subordinated liabilities)
of less than $500,000 on the date in the prior fiscal year as of which
its audited financial statements were prepared pursuant to Rule 17a-
5(d) under the Exchange Act,\212\ or, if not required to file such
statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and is not affiliated with any person (other than a natural
person) that is not a small business or small organization; \213\ and
(2) a municipal securities dealer that is a bank (including a
separately identifiable department or division of a bank) if it has
total assets of less than $10 million at all times during the preceding
fiscal year; had an average monthly volume of municipal securities
transactions in the preceding fiscal year of less than $100,000; and is
not affiliated with any entity that is not a ``small business.'' \214\
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    \208\ 5 U.S.C. 601 et seq.
    \209\ 5 U.S.C. 603.
    \210\ 5 U.S.C. 605(b).
    \211\ Although Section 601 of the RFA defines the term ``small
entity,'' the statute permits agencies to formulate their own
definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (January
28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
    \212\ 17 CFR 240.17a-5(d).
    \213\ See 17 CFR 240.0-10(c). See also 17 CFR 240.0-10(i)
(providing that a broker or dealer is affiliated with another person
if: Such broker or dealer controls, is controlled by, or is under
common control with such other person; a person shall be deemed to
control another person if that person has the right to vote 25
percent or more of the voting securities of such other person or is
entitled to receive 25 percent or more of the net profits of such
other person or is otherwise able to direct or cause the direction
of the management or policies of such other person; or such broker
or dealer introduces transactions in securities, other than
registered investment company securities or interests or
participations in insurance company separate accounts, to such other
person, or introduces accounts of customers or other brokers or
dealers, other than accounts that hold only registered investment
company securities or interests or participations in insurance
company separate accounts, to such other person that carries such
accounts on a fully disclosed basis).
    \214\ 17 CFR 240.0-10(f).
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    As discussed above in Section IV, the Commission estimates that
approximately 250 dealers would be Participating Underwriters within
the meaning of Rule 15c2-12. The Commission does not believe that any
Participating Underwriters would be small broker-dealers or municipal
securities dealers. Accordingly, the Commission certifies that the
proposed rule amendments would not have a significant economic impact
on a substantial number of small entities for purposes of the RFA. The
Commission encourages written comments regarding this certification.
The Commission solicits comment as to whether the proposed rule
amendments could have an effect on small entities that has not been
considered. The Commission requests that commenters describe the nature
of any impact on small entities and provide empirical data to support
the extent of such impact.

VIII. Statutory Authority and Text of Proposed Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 2, 3(b),
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j,
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is proposing
amendments to Sec.  240.15c2-12 of Title 17 of the Code of Federal
Regulations in the manner set forth below.

Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II, of
the Code of Federal Regulations is proposed to be amended as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 continues to read in part as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Section 240.15c2-12 is amended by:
0
a. In paragraph (b)(5)(i)(C)(14) removing ``and'';
0
b. Adding new paragraphs (b)(5)(i)(C)(15) and (16);
0
c. Adding new paragraph (f)(11);
    The additions and revisions read as follows.

Sec.  240.15c2-12  Municipal securities disclosure.

* * * * *
    (b) * * *
    (5) * * *
    (i) * * *
    (C) * * *
    (15) Incurrence of a financial obligation of the obligated person,
if material, or agreement to covenants, events of default, remedies,
priority rights, or other similar terms of a financial obligation of
the obligated person, any of which affect security holders, if
material; and
    (16) Default, event of acceleration, termination event,
modification of

terms, or other similar events under the terms of a financial
obligation of the obligated person, any of which reflect financial
difficulties.
* * * * *
    (f) * * *
    (11) The term financial obligation means a (i) debt obligation,
(ii) lease, (iii) guarantee, (iv) derivative instrument, or (v)
monetary obligation resulting from a judicial, administrative, or
arbitration proceeding. The term financial obligation shall not include
municipal securities as to which a final official statement has been
provided to the Municipal Securities Rulemaking Board consistent with
this rule.
* * * * *

    By the Commission.

     Dated: March 1, 2017.
Brent J. Fields,
Secretary.
[FR Doc. 2017-04323 Filed 3-14-17; 8:45 am]
 BILLING CODE 8011-01-P