[Federal Register Volume 83, Number 170 (Friday, August 31, 2018)]
[Rules and Regulations]
[Pages 44700-44743]
[FR Doc No: 2018-18279]

Vol. 83

Friday,

No. 170

August 31, 2018

Part II

Securities and Exchange Commission

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17 CFR Part 240

Amendments to Municipal Securities Disclosure; Final Rule

Federal Register / Vol. 83 , No. 170 / Friday, August 31, 2018 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-83885; File No. S7-01-17]
RIN 3235-AL97

Amendments to Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is adopting amendments to the Municipal Securities Disclosure
Rule under the Securities Exchange Act of 1934 (``Exchange Act''). The
amendments add transparency to the municipal securities market by
increasing the amount of information that is publicly disclosed about
material financial obligations incurred by issuers and obligated
persons. Specifically, the amendments revise the list of event notices
that a broker, dealer, or municipal securities dealer (each a
``dealer,'' and collectively, ``dealers'') acting as an underwriter
(``Participating Underwriter'') in a primary offering of municipal
securities with an aggregate principal amount of $1,000,000 or more
(subject to certain exemptions set forth in the Rule) (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 Municipal
Securities Rulemaking Board (``MSRB'').

DATES:
    Effective Date: October 30, 2018.
    Compliance Date: February 27, 2019.

FOR FURTHER INFORMATION CONTACT: Rebecca Olsen, Acting Director; Ahmed
Abonamah, Senior Counsel to the Director; Mary Simpkins, Senior Special
Counsel; Hillary Phelps, Senior Counsel; or William Miller, Attorney-
Adviser; Office of Municipal Securities, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-6628 or at (202) 551-
5680.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 17
CFR 240.15c2-12 (``Rule 15c2-12'' or ``Rule'') under the Securities
Exchange Act of 1934. The amendments (a) amend the list of events for
which notice is to be provided to include (i) 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 (ii) 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; and (b)
define the term ``financial obligation'' to mean a (i) debt obligation;
(ii) derivative instrument entered into in connection with, or pledged
as security or a source of payment for, an existing or planned debt
obligation; or (iii) a guarantee of (i) or (ii). 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.

I. Executive Summary
II. Background
III. Description of the Amendments to Rule 15c2-12
    A. Introduction
    1. 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
    i. Materiality
    a. Use of Materiality Standard
    b. Guidance
    c. Burden of Materiality Determinations
    d. Materiality and a Series of Related Financial Obligations
    ii. Incurrence of a Financial Obligation
    iii. Form of Event Notice
    2. ``Financial Obligation''
    i. Debt Obligation
    ii. Derivative Instrument Entered Into in Connection With, or
Pledged as Security or a Source of Payment for, an Existing or
Planned Debt Obligation
    iii. Guarantee of a Debt Obligation or a Derivative Entered Into
in Connection With, or Pledged as Security or a Source of Payment
for, an Existing or Planned Debt Obligation
    iv. Monetary Obligation Resulting From a Judicial,
Administrative, or Arbitration Proceeding
    v. Exclusion of Municipal Securities as to Which a Final
Official Statement Has Been Provided to the MSRB Consistent With
Rule 15c2-12 From Definition of ``Financial Obligation''
    3. 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
    i. Default
    ii. Modification of Terms
    iii. Other Similar Events
    iv. Reflect Financial Difficulties
    v. Scope of Financial Obligations Subject to Paragraph
(b)(5)(i)(C)(16)
    B. Technical Amendment
    C. Compliance Date and Transition
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Collection of Information Prior to Amendments
    2. Proposed Amendments to Rule 15c2-12
    3. Adopted Amendments to Rule 15c2-12
    B. Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Dealers
    i. Amendments to Events To Be Disclosed Under a Continuing
Disclosure Agreement
    a. Estimates in Proposing Release
    b. Comments Received
    c. Revised Estimates of Burden
    ii. One-Time Paperwork Burden
    iii. Total Annual Burden for Dealers
    2. Issuers
    i. Amendments to Event Notice Provisions of the Rule
    ii. Total Burden on Issuers for Amendments to Event Notices
    iii. Comments Related to Estimated Paperwork Burden on Issuers
    iv. Total Burden for Issuers
    3. MSRB
    4. Total Burden for Dealers Effecting Transactions in the
Secondary Market
    5. Annual Aggregate Burden for Amendments to Rule 15c2-12
    E. Total Annual Cost
    1. Dealers and the MSRB
    2. Issuers
    F. Retention Period of Recordkeeping Requirements
    G. Collection of Information Is Mandatory
    H. Responses to Collection of Information Will Not Be Kept
Confidential
V. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. The Current Municipal Securities Market
    2. Rule 15c2-12
    3. MSRB Rules
    4. GASB Statement No. 88
    5. Federal Tax Law Changes
    6. Existing State of Efficiency, Competition, and Capital
Formation
    C. Benefits, Costs and Effects on Efficiency, Competition, and
Capital Formation
    1. Anticipated Benefits of Rule 15c2-12 Amendments
    i. Benefits to Investors
    ii. Benefits to Issuers or Obligated Persons
    iii. Benefits to Rating Agencies and Municipal Analysts
    2. Anticipated Costs of the Rule 15c2-12 Amendments
    i. Costs to Issuers and Obligated Persons
    ii. Costs to Dealers
    iii. Costs to Lenders
    iv. Costs to the MSRB
    3. Effects on Efficiency, Competition, and Capital Formation
    D. Alternative Approaches
    1. Voluntary Disclosures
    2. Alternative Timeline
    3. Relief for Small Issuers and Obligated Persons
    4. Adopt as Proposed, the Broader Definition of Financial
Obligation
VI. Regulatory Flexibility Certification
VII. Statutory Authority
Text of Rule Amendments

I. Executive Summary

    In March 2017, the Commission published for comment proposed
amendments to Exchange Act Rule 15c2-12 \1\ designed to facilitate
investors' and other market participants' \2\ access to important
information in a timely manner, help enhance transparency in the
municipal securities market, and improve investor protection.\3\ The
proposed amendments would have amended the list of event notices that a
dealer acting as 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 (``continuing disclosure
agreement''), to provide to the MSRB. Specifically, the proposed
amendments would have amended the list of events for which notice is to
be provided to include: (i) 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 (ii) 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.
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    \1\ See 17 CFR 240.15c2-12(a), (b)(5)(i), (b)(5)(i)(C).
    \2\ Other market participants include dealers, analysts, and
vendors of information regarding municipal securities. Though
investors and dealers are the intended beneficiaries of improved
access to information about the financial obligations of issuers and
obligated persons, the Commission expects that both groups will also
benefit indirectly due to the improved ability of analysts and
vendors of information regarding municipal securities to access this
information.
    \3\ See Exchange Act Release No. 80130 (Mar. 1, 2017), 82 FR
13928 (Mar. 15, 2017) (``Proposing Release''). The comment period
for the proposed amendments expired on May 15, 2017.
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    In addition, the Commission proposed a definition of the term
``financial obligation.'' As proposed, the term financial obligation
would have meant a (i) debt obligation; (ii) lease; (iii) guarantee;
(iv) derivative instrument; and (v) monetary obligation resulting from
a judicial, administrative, or arbitration proceeding. The term
financial obligation would not have included municipal securities as to
which a final official statement has been provided to the Municipal
Securities Rulemaking Board consistent with this rule.
    The Commission also proposed a technical amendment to paragraph
(b)(5)(i)(C)(14) of the Rule.\4\
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    \4\ The Commission proposed a technical amendment to paragraph
(b)(5)(i)(C)(14) of the Rule to remove the term ``and'' since new
events were proposed to be added to paragraph (b)(5)(i)(C) of the
Rule.
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    A wide range of commenters sent comment letters \5\ to the
Commission in response to the proposed amendments. Commenters included
issuers, dealer associations, investor associations, attorneys,
organizations representing industry participants, the SEC Investor
Advisory Committee (``IAC''), the MSRB, and others. While commenters
generally supported enhanced transparency in the municipal securities
market, many encouraged the Commission to consider narrowing the scope
of the proposed amendments to avoid overburdening market participants.
Common themes raised in the comment letters include: (i) The perceived
vague meaning and overly broad scope of the term ``financial
obligation''; (ii) the desire for additional guidance with respect to
the materiality qualifier in paragraph (b)(5)(i)(C)(15) of the Rule;
and (iii) the anticipated burdens and costs associated with complying
with the proposed amendments. In addition, the IAC stated its support
for the central purpose of the proposed amendments to Rule 15c2-12 and
encouraged the Commission to work toward passage of the amendments
after considering comments received.\6\
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    \5\ See SEC Comments on Proposed Rule: Proposed Amendments to
Exchange Act Rule 15c2-12, available at https://www.sec.gov/comments/s7-01-17/s70117.htm.
    \6\ SEC Investor Advisory Committee, Recommendation of Market
Structure Subcommittee of IAC: Select Enhancements to Protect Retail
Investors in Municipal and Corporate Bonds (June 5, 2018) (``IAC
Recommendation'') (adopted by the IAC on June 14, 2018), available
at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-market-structure-subcommittee-recommendation.pdf.
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    The Commission has carefully considered all of the comments and, as
discussed below, is adopting the amendments substantially as proposed,
with some modifications to address issues raised by commenters.
    The amendments address the need for timely disclosure of important
information related to an issuer's or obligated person's financial
obligations. The Commission believes that the amendments will
facilitate investors' and other market participants' access to
important information in a timely manner, enhance transparency in the
municipal securities market, and improve investor protection. For the
reasons discussed in this Adopting Release, the Commission believes
that the amendments are consistent with the Commission's mandate to,
among other things, adopt rules reasonably designed to prevent
fraudulent, deceptive, or manipulative acts or practices in the
municipal securities market.\7\
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    \7\ 15 U.S.C. 78o(c).
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II. Background

    Rule 15c2-12 is designed to address fraud by enhancing disclosure
in the municipal securities market by establishing standards for
obtaining, reviewing, and disseminating information about municipal
securities by their underwriters.\8\ In 1989, the Commission adopted
paragraphs (a) and (b)(1) through (4) of Rule 15c2-12 \9\ to require
dealers acting as Participating Underwriters in Offerings to obtain,
review, and distribute to potential customers copies of the issuer's
official statement.\10\ In 1994, the Commission adopted paragraph
(b)(5) of the Rule,\11\ which became effective in 1995, and was amended
in 2008 \12\ and 2010.\13\ Paragraph (b)(5) of the Rule prohibits a
Participating Underwriter from purchasing or selling municipal
securities covered by the Rule in an Offering unless the Participating
Underwriter has reasonably determined that an issuer or obligated
person \14\ of

municipal securities has undertaken in a continuing disclosure
agreement to provide specified information to the MSRB in an electronic
format as prescribed by the MSRB.\15\ The information to be provided
consists of: (i) Certain annual financial and operating information and
audited financial statements, if available (``annual filings''); \16\
(ii) timely notices of the occurrence of certain events (``event
notices''); \17\ and (iii) timely notices of the failure of an issuer
or obligated person to provide required annual financial information on
or before the date specified in the continuing disclosure agreement
(``failure to file notices'').\18\
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    \8\ See Exchange Act Release No. 34-26985 (June 28, 1989), 54 FR
28799 (July 10, 1989) (``1989 Adopting Release''). For additional
information relating to the history of the Rule, see Exchange Act
Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590 (Nov. 17, 1994)
(``1994 Amendments Adopting Release''), Exchange Act Release No. 34-
59062 (Dec. 5, 2008), 73 FR 76104 (Dec. 15, 2008) (``2008 Amendments
Adopting Release''), and Exchange Act Release No. 34-62184A (May 27,
2010), 75 FR 33100 (June 10, 2010) (``2010 Amendments Adopting
Release'').
    \9\ See 1989 Adopting Release, supra note 8.
    \10\ See 17 CFR 240.15c2-12(b).
    \11\ See 1994 Amendments Adopting Release, supra note 8.
    \12\ See 2008 Amendments Adopting Release, supra note 8.
    \13\ See 2010 Amendments Adopting Release, supra note 8. The
2010 Amendments (a) require Participating Underwriters to reasonably
determine that an issuer or obligated person has agreed to provide
event notices in a timely manner not in excess of ten business days
after the event's occurrence; (b) include new events for which a
notice is to be provided; (c) modify the events that are subject to
a materiality determination before triggering a requirement to
provide notice to the MSRB; and (d) revise an exemption for certain
offerings of municipal securities with put features. The Commission
also provided interpretive guidance on Participating Underwriter
responsibilities under the antifraud provisions of the federal
securities laws in response to market participants' concerns that
some issuers and obligated persons were not consistently submitting
continuing disclosure documents in accordance with the undertakings
made in their continuing disclosure agreements.
    \14\ The term ``obligated person'' means any person, including
an issuer of municipal securities, who is either generally or
through an enterprise fund, or account of such person committed by
contract or other arrangements to support payment of all, or part of
the obligations of the municipal securities to be sold in the
Offering (other than providers of municipal bond insurance, letters
of credit, or other liquidity facilities). 17 CFR 240.15c2-
12(f)(10).
    \15\ On December 5, 2008, the Commission adopted amendments to
Rule 15c2-12 to provide for the Electronic Municipal Market Access
(``EMMA'') system. EMMA is established and maintained by the MSRB
and provides free public access to disclosure documents. The 2008
Amendments designated the EMMA system as the single centralized
repository for the electronic collection and availability of
continuing disclosure information about municipal securities. The
2008 Amendments require the Participating Underwriter to reasonably
determine that the issuer or obligated person has undertaken in its
continuing disclosure agreement to provide continuing disclosure
documents: (i) Solely to the MSRB; and (ii) in an electronic format
and accompanied by identifying information, as prescribed by the
MSRB. See 2008 Amendments Adopting Release, supra note 8. See also
Exchange Act Release No. 34-58255 (July 30, 2008), 73 FR 46138 (Aug.
7, 2008) (``2008 Proposing Release''). The 2008 Amendments became
effective on July 1, 2009.
    \16\ See 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \17\ See 17 CFR 240.15c2-12(b)(5)(i)(C). Under the Rule prior to
these amendments, the following events require notice in a timely
manner not in excess of ten business days after the occurrence of
the event: (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 Internal Revenue Service of proposed or final determinations of
taxability, Notices of Proposed Issue (IRS Form 5701-TEB) 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 the 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 name of a
trustee, if material. In addition, Rule 15c2-12(d) provides full and
limited exemptions from the requirements of Rule 15c2-12. See 17 CFR
240.15c2-12(d).
    \18\ See 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event
notices, and failure to file notices are referred to collectively
herein as ``continuing disclosure documents.''
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    In July 2012, the Commission issued a Report on the Municipal
Securities Market, following a broad review of the municipal securities
market that included a series of public field hearings and numerous
meetings with market participants.\19\ The 2012 Municipal Report
states, among other things, that the Commission could consider further
amendments to Rule 15c2-12 to mandate more specific types of secondary
market event disclosures, including disclosure relating to new
indebtedness (whether or not such debt is subject to Rule 15c2-12 and
whether or not arising as a result of a municipal securities
issuance).\20\ The Commission further stated that market participants
raised concerns that issuers and obligated persons may not properly
disclose the existence or the terms of bank loans, particularly when
the terms of the bank loans may affect the payment priority from
revenues in a way that adversely affects bondholders.\21\
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    \19\ See Securities and Exchange Commission, Report on the
Municipal Securities Market (July 31, 2012) (``2012 Municipal
Report''), available at https://www.sec.gov/news/studies/2012/munireport073112.pdf.
    \20\ Id.
    \21\ Id.
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    Currently, the municipal securities market has over $3.844 trillion
in principal outstanding.\22\ At the end of the first quarter of 2018,
individuals held, either directly or indirectly through mutual funds,
money market funds, closed-end funds, and exchange-traded funds,
approximately $2.587 trillion of outstanding municipal securities (over
65 percent of the total amount outstanding).\23\ According to the MSRB,
approximately $2.98 trillion of municipal securities were traded in
2017 in approximately 9.89 million trades.\24\ There are approximately
50,000 \25\ state and local issuers of municipal securities, ranging
from villages, towns, townships, cities, counties, territories, and
states, as well as special districts, such as school districts and
water and sewer authorities.\26\ Municipal securities defaults
historically have been rarer than those involving corporate and foreign
government bonds.\27\ Nevertheless, six of the seven largest municipal
bankruptcy filings in U.S. history have occurred since 2011,\28\ and
some issuers and obligated persons continue to experience declining
fiscal situations and steadily increasing debt burdens.\29\ These
defaults may negatively impact investors in ways other than non-
payment, including delayed payments and pricing disruptions in the
secondary market.\30\
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    \22\ See Federal Reserve Board, Financial Accounts of the United
States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic
Accounts (First Quarter 2018) (June 7, 2018), available at https://www.federalreserve.gov/releases/z1/20180308/z1.pdf.
    \23\ See id. As of the first quarter of 2018, the amount of
municipal securities held directly by the household sector was $1.64
trillion and mutual funds, money market funds, closed-end funds, and
exchange-traded funds collectively held $946.4 billion.
    \24\ See MSRB, 2017 Fact Book (Mar. 18, 2018), available at
http://www.msrb.org/~/media/Files/Resources/MSRB-Fact-Book-
2017.ashx?la=en.
    \25\ See MSRB, Self-Regulation and the Municipal Securities
Market (Jan. 2018), available at http://www.msrb.org/Market-Topics/
~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx.
    \26\ See Registration of Municipal Advisors, Exchange Act
Release No. 34-70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013).
    \27\ See 2012 Municipal Report, supra note 19 (citing Moody's,
The U.S. Municipal Bond Rating Scale: Mapping to the Global Rating
Scale and Assigning Global Scale Ratings to Municipal Obligations
(Mar. 2007), available at https://www.moodys.com/sites/products/DefaultResearch/102249_RM.pdf; and Report to Accompany H.R. 6308,
H.R. Rep. No. 110-835, at section 205 (Feb. 14, 2008), available at
https://www.gpo.gov/fdsys/pkg/CRPT-110hrpt835/html/CRPT-110hrpt835.htm).
    \28\ The six largest municipal bankruptcies, ranked by amount of
debt, are Puerto Rico, in 2017 ($73 billion in debt); Detroit,
Michigan, in 2013 ($18 billion in debt); Jefferson County, Alabama,
in 2011 ($4.2 billion in debt); Orange County, California, in 1994
($2.0 billion in debt); Stockton, California, in 2012 ($1.0 billion
in debt); and San Bernardino, California, in 2012 ($492 million in
debt). See Detroit's Bankruptcy Is the Nation's Largest, N.Y. Times
(July 18, 2013), available at http://www.nytimes.com/interactive/2013/07/18/us/detroit-bankruptcy-is-the-largest-in-nation.html; see
also Mary Williams Walsh, Puerto Rico Declares a Form of Bankruptcy,
N.Y. Times (May 3, 2017), available at https://www.nytimes.com/2017/05/03/business/dealbook/puerto-rico-debt.html.
    \29\ E.g., City of Hartford, Connecticut. See Jenna Carlesso,
State Leaders: Hartford Bailout Imminent, Hartford Courant (Feb. 9,
2018), available at http://www.courant.com/community/hartford/hc-news-hartford-oversight-board-20180208-story.html.
    \30\ See 2012 Municipal Report, supra note 19.
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    As the Commission discussed in the Proposing Release, in recent
years issuers and obligated persons have increasingly used direct
purchases of municipal securities \31\ and direct loans \32\
(collectively, ``direct placements'') as alternatives to public
offerings of municipal securities.\33\

Despite continued efforts by market participants to encourage
disclosure of certain financial obligations, the MSRB has stated that
the number of actual disclosures made is limited.\34\ The Commission
believes that investors and other municipal market participants should
have access to continuing disclosure information regarding financial
obligations to improve their ability to analyze their investments and,
ultimately, make more informed investment decisions. Access to
continuing disclosure information also furthers the Commission's
original intent behind adopting Rule 15c2-12, which was to prevent
fraudulent, deceptive, or manipulative acts or practices in the
municipal securities market.\35\ Accordingly, the Commission believes
that amendments to the Rule requiring a Participating Underwriter in an
Offering to reasonably determine that an issuer or an obligated person
has undertaken, in a continuing disclosure agreement, to provide to the
MSRB within ten business days, the event notices specified in new
paragraphs (b)(5)(i)(C)(15) and (16), are necessary.
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    \31\ For example, an investor purchasing a municipal security
directly from an issuer or obligated person.
    \32\ For example, a lender entering into a bank loan, loan
agreement, or other type of financing agreement with an issuer or
obligated person.
    \33\ See Proposing Release, supra note 3, 82 FR at 13929.
    \34\ In 2016, the MSRB enhanced EMMA to allow submitters of
continuing disclosure to efficiently identify ``Bank Loan/
Alternative Financing Filings'' as the type of filing. See MSRB,
MSRB Improves Bank Loan Disclosure on EMMA website (Sept. 26, 2016),
available at http://msrb.org/News-and-Events/Press-Releases/2016/MSRB-Improves-Bank-Loan-Disclosure-on-EMMA-website. In a letter to
the SEC Investor Advocate in October 2017, the MSRB stated its
concern that although the number of bank loan disclosures made to
EMMA had increased substantially from prior years, only 1,100 bank
loan documents were posted to the EMMA website (as of October 2017),
representing only a small fraction of bank loans outstanding. See
Letter from Lynnette Kelly, Executive Director, MSRB, to Rick
Fleming, Investor Advocate, Securities and Exchange Commission (Oct.
17, 2017), available at http://www.msrb.org/Market-Topics/~/media/
0E3E9F81C7BA4EB38EE80857FE378F18.ashx.
    According to information received by Commission staff from MSRB
staff, the MSRB received 648 filings during calendar year 2017 under
the ``Bank Loan/Alternative Financing Filing'' category.
    \35\ See 1989 Adopting Release, supra note 8.
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    As discussed in detail below, the Commission is adopting,
substantially as proposed, amendments to Rule 15c2-12. The amendments
add the following events, as proposed, as paragraphs (b)(5)(i)(C)(15)
and (16) of the Rule for which a Participating Underwriter in an
Offering must reasonably determine that the issuer or obligated person
has agreed to provide in its continuing disclosure agreement: (1)
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 securities holders, if
material; and (2) 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.
    In addition, the Commission is adding, substantially as proposed,
to paragraph (f) of the Rule, the following definition: The term
financial obligation means a (i) debt obligation; (ii) derivative
instrument entered into in connection with, or pledged as security or a
source of payment for, an existing or planned debt obligation; or (iii)
guarantee of (i) or (ii). 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.
    The Commission is also adopting, as proposed, a technical amendment
to paragraph (b)(5)(i)(C)(14) of the Rule.
    In keeping with the objectives set forth in the Exchange Act,
including Section 15(c)(2),\36\ and the antifraud provisions of the
federal securities laws, the Commission believes the amendments to Rule
15c2-12, as adopted, are reasonably designed to prevent fraudulent,
deceptive, or manipulative acts or practices in the municipal
securities market. The Commission believes the amendments are
consistent with the limitations set forth in Exchange Act Section
15B(d)(1) because the amendments do not require an issuer of municipal
securities to make any filing with the Commission or MSRB prior to the
sale of municipal securities.\37\
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    \36\ 17 CFR 240.15c2-12 was adopted under a number of Exchange
Act provisions, including Section 15(c); 15 U.S.C. 78o(c).
    \37\ See Proposing Release, supra note 3, 82 FR at 13931.
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III. Description of the Amendments to Rule 15c2-12

A. Introduction

    Commenters were generally supportive of increased transparency in
the municipal securities market.\38\ Nevertheless, some commenters
suggested that the proposed amendments were unnecessary because
information about issuer and obligated person financial obligations is
already available in audited financial statements, other publicly
available documents, and through voluntary disclosures to EMMA.\39\ One
commenter suggested that the proposed amendments were not needed
because the Tax Cuts and Jobs Act of 2017 \40\ has increased the cost
of tax-exempt bank direct placements as compared to publicly offered
debt, resulting in a likely reversal of the recent growth of direct
placements.\41\
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    \38\ See, e.g., Houston Letter; Denver Letter; DFW Letter; GFOA
Letter; BDA Letter; MSRB Letter.
    \39\ See, e.g., Arlington SD Letter (stating that its audited
financial statements contain information about financial obligations
and state law requires disclosure of audited financial statements
within 150 days of the end of the fiscal year); NABL Letter (stating
that (i) information about financial obligations is already
available due to state sunshine laws and improvements in technology,
(ii) bond documents prohibit the grant of superior interests in the
trust estate or such terms are permitted by outstanding bond
contracts, and the risks of such terms are priced into the value of
outstanding bonds, and (iii) that voluntary disclosure initiatives
should be allowed to further develop); NABL III Letter (stating that
Government Accounting Standards Board (``GASB'') Statement No. 88--
Certain Disclosures Related to Debt, including Direct Borrowings and
Direct Placement (March 2018) (``GASB Statement No. 88'') requires
additional information related to debt be disclosed in audited
financial statements reducing the disclosure benefits of the
amendments). GASB Statement No. 88 is available at http://www.gasb.org/jsp/GASB/Document_C/DocumentPage?cid=1176170308047&acceptedDisclaimer=true.
    \40\ See Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131
Stat. 2054 (2017).
    \41\ See NABL III Letter.
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    The Commission acknowledges the efforts of many issuers and
obligated persons to be transparent. However, as stated in the
Proposing Release, investors and other market participants may not
learn that the issuer or obligated person has incurred a financial
obligation if the issuer or obligated person does not provide annual
financial information or audited financial statements to EMMA or does
not subsequently issue debt in a primary offering subject to Rule 15c2-
12 that results in the provision of a final official statement to
EMMA.\42\ Further, even if investors and other market participants have
access to disclosure about an issuer's or obligated person's incurrence
of a financial obligation, such access may not be timely if, for
example, the issuer or obligated person has not submitted annual
financial information or audited financial statements to EMMA in a
timely manner or does not frequently issue debt that results in the
provision of a final official statement to EMMA.\43\ In many cases,
this lack of access or delay in access to disclosure means that
investors could be making investment decisions, and other market
participants could be undertaking credit analyses, without important
information.
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    \42\ See Proposing Release, supra note 3, 82 FR at 13929.
    \43\ Id.
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    Additionally, the Commission understands that to the extent
information about financial obligations is disclosed and accessible to
investors and other market participants, such

information currently may not include certain details about the
financial obligations.\44\ In these cases, investors could be making
investment decisions, and other market participants could be
undertaking credit analyses, without important information, including
the debt payment priority structure of the financial obligation.
Furthermore, the Commission understands that investors and other market
participants may not have any access or timely access to disclosure
regarding the occurrence of events reflecting financial difficulties,
including a default, event of acceleration, termination event,
modification of terms, or other similar events under the terms of a
financial obligation.\45\ While it could be true in some cases that
governing documents prohibit the granting of superior lien rights to
other holders of the issuer's or obligated person's debt, there is no
set standard of what provisions are set forth in the legal documents
governing an issuance of municipal securities, and documents and the
covenants they contain vary from issuer to issuer.\46\ Additionally,
there are other terms of financial obligations that could affect the
issuer's or obligated person's liquidity, overall creditworthiness, or
an existing security holder's rights. The amendments would cover any
such terms if material and if they affect security holders. Further,
the Commission recognizes that some states require that issuers and
obligated persons submit their audited financial statements, which
provide information about financial obligations, to a state repository
within a certain number of days after the end of their fiscal year,\47\
and that information about financial obligations may be available under
state sunshine laws and through improved technology.\48\ However,
deadlines for such audited financial statements under state laws may
extend far beyond the ten business days required by the Rule,\49\ and
the procedures for requesting information under sunshine laws may not
result in the timely and widespread delivery of such information to
market participants. While technology has improved the ability to
obtain and disseminate information, EMMA remains the single centralized
repository for the electronic collection and availability of continuing
disclosure information about municipal securities. Accordingly, the
Commission believes these amendments will facilitate investor access to
important information in a timely manner and help to enhance
transparency.
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    \44\ GASB Statement No. 88 has gone into effect for reporting
periods beginning after June 15, 2018. See GASB Statement No. 88,
supra note 39. GASB Statement No. 88 ``requires that additional
essential information related to debt be disclosed in notes to
financial statements, including unused lines of credit, assets
pledged as collateral for the debt, and terms specified in debt
agreements related to significant events of default with finance-
related consequences, significant termination events with finance-
related consequences, and significant subjective accelerations
clauses.'' The Commission understands that those issuers and
obligated persons who adhere to GASB standards when preparing their
financial statements could provide information in their audited
financial statements similar to that covered under new paragraph
(b)(5)(i)(C)(15) of the Rule. However, while GASB establishes
generally accepted accounting principles (GAAP) that are used by
many states and local governments, there are no uniformly applied
accounting standards in the municipal securities market. See 2012
Municipal Report, supra note 19. Further, there is no requirement in
Rule 15c2-12 that an issuer or obligated person undertake in its
continuing disclosure agreement to provide audited financial
statements to the MSRB. See 17 CFR 240.15c2-12(b)(5)(i)(B) (limiting
the requirement of audited financial statements to ``when and if
available''). While the Commission supports efforts to improve the
transparency and usefulness of financial statements, GASB Statement
No. 88 is not a substitute for these amendments. Industry
commentators have expressed a similar view. See generally, Standard
and Poor's Global Ratings, Bank Loan Structures Risk Remain, But
GASB 88 Is A Positive Step Toward Transparency in Financial
Reporting (May 2, 2018), available at https://www.spratings.com/documents/20184/86957/Bank+Loan+Structures+Risks+Remain+But+GASB88+Is+A+Positive+Step+Toward+Transparency+In+Financial+Reporting_May-02-2018.pdf/07d7140a-0019-4907-8ab9-35d7b463e77c (stating ``[m]arkets function most
efficiently when all stakeholders have symmetrical or equal access
to material information. Although the [GASB Statement No. 88]
release speaks to required disclosures, not all public finance
issuers comply with GAAP standards or adopt all GASB statements.
Consequently, we believe the municipal market is not functioning as
effectively as it could around a bank loan structure. Nevertheless,
the [GASB Statement No. 88] release is a significant positive
development that signals even to those who have not adopted GASB
statements that the marketplace is developing higher expectations
about disclosures'').
    \45\ See 2012 Municipal Report, supra note 19.
    \46\ Municipal Market Bank Loan Disclosure Task Force,
Considerations Regarding Voluntary Secondary Market Disclosure About
Bank Loans (May 1, 2013) (``Considerations Regarding Voluntary
Secondary Market Disclosure About Bank Loans''), available at http://www.nfma.org/assets/documents/position.stmt/wp.direct.bank.loan.5.13.pdf, (stating ``Bank loan covenants and
events of default can be different from or set at higher levels than
those applicable to outstanding bonds, thereby enabling the bank to
assert remedies prior to other bondholders (which may effectively
prioritize repayment of the bank loan)'' and also stating
``[c]ertain assets previously available to secure bonds may be
pledged to the bank as security for the bank loan''). The Task Force
was composed of representatives from the American Bankers
Association, Bond Dealers of America, Government Finance Officers
Association, Investment Company Institute, National Association of
Bond Lawyers (``NABL''), National Association of Health and
Educational Facilities Finance Authorities, National Association of
Independent Public Finance Advisors, National Federation of
Municipal Analysts, and Securities Industry and Financial Markets
Association.
    \47\ See Arlington SD Letter.
    \48\ See NABL Letter.
    \49\ Id.
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    Additionally, the Commission recognizes that the Tax Cuts and Jobs
Act of 2017 may impact the municipal debt market, including, but not
limited to the use of direct placements. The amendments are intended to
address the need for timely disclosure of important information related
to an issuer's or obligated person's financial obligations and cover a
variety of obligations incurred by issuers and obligated persons,
including but not limited to direct placements.\50\ Moreover, the
Commission believes that given the diverse reasons for which issuers
and obligated persons engage in direct placements in lieu of a public
offering of municipal securities, it is likely that direct placements
will continue to be utilized in the municipal debt market.\51\
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    \50\ For a discussion of the definition of the term ``financial
obligation,'' see infra Section III.A.2.
    \51\ For example, Federal Deposit Insurance Corporation
(``FDIC'') data show the amount of bank direct lending to state and
local governments and their instrumentalities during the first
quarter of 2018 ($190,533,184,000) remains at a similar level to
that of the fourth quarter of 2017 ($190,531,792,000). For a
discussion of these data, see infra note 319 and related text.
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    The Commission also recognizes the efforts of the MSRB, the
Financial Industry Regulatory Authority (``FINRA''), academics, and
industry groups to promote voluntary disclosure of financial
obligations. However, as described in the Proposing Release, despite
these ongoing efforts, few issuers or obligated persons have made
voluntary disclosures of financial obligations, including direct
placements, to the MSRB.\52\
---------------------------------------------------------------------------

    \52\ For a discussion of market participant efforts to promote
voluntary disclosure of certain financial obligations, see Proposing
Release, supra note 3, 82 FR at 13929-30. See also supra note 34.
---------------------------------------------------------------------------

1. 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 Commission is adopting as proposed new paragraph
(b)(5)(i)(C)(15) to the Rule, which requires that a Participating
Underwriter in an Offering must reasonably determine that the obligated
person has undertaken, in a continuing disclosure agreement, to provide
to the MSRB, within ten business days, notice 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.
i. Materiality
    Commenters raised a number of concerns related to the materiality
qualifier contained in proposed new paragraph (b)(5)(i)(C)(15).
Specifically, commenters (a) questioned the Commission's approach to
the materiality qualifier in the proposed amendments; \53\ (b) asked
the Commission to provide guidance on how to determine the materiality
of a financial obligation; \54\ (c) stated that the broad scope of the
proposed definition of the term ``financial obligation'' would make
materiality determinations challenging and burdensome; \55\ and (d)
requested guidance on how to make materiality determinations in
connection with the incurrence of a series of related financial
obligations.\56\ Each of these categories of comments is discussed
below.
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    \53\ See, e.g., NFMA Letter; Vanguard Letter; and ICI Letter.
    \54\ Several commenters also stated their concern about the lack
of guidance with respect to determining the materiality of
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. See, e.g., LPPC Letter; Kutak Rock
Letter; Brown Letter; NABL Letter. The discussion in this section
regarding materiality applies to these comments.
    \55\ For further discussion of the term financial obligation,
including comments received, see infra Section III.A.2.
    \56\ See, e.g., SIFMA AMG Letter (asking for clarification that
a series of related financial transactions must be aggregated for
the purpose of assessing materiality); GFOA TX Letter (stating the
difficulties in disclosing material derivative instruments as the
amount of the financial obligation can fluctuate with the market).
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a. Use of Materiality Standard
    Several commenters addressed the Commission's use of a materiality
standard in proposed paragraph (b)(5)(i)(C)(15).\57\ Some commenters,
for example, suggested that the Commission eliminate the materiality
qualifier to promote more robust disclosure of financial
obligations,\58\ while other commenters recommended that the Commission
provide mechanical tests for determining when a financial obligation
needs to be disclosed.\59\
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    \57\ See, e.g., DFW Letter; BDA Letter; Kutak Rock Letter; PFM
Letter; Houston Letter; NABL Letter.
    \58\ See NFMA Letter (recommending that the disclosure of debt
obligations should not be subject to a materiality qualifier);
Vanguard Letter (recommending disclosure of an issuer's entire debt
portfolio, including terms of direct placements and bank
agreements); ICI Letter (recommending the removal of the second
materiality qualifier and mandating disclosure for ``any terms in
connection with a financial obligation that affect security
holders'').
    \59\ See BDA Letter (stating ``some of those tests could include
a percentage of the financial obligation as compared to total
outstanding bonds, annual debt service as compared to annual
revenues or expenditures, or some other comparable mechanical
measurement'').
---------------------------------------------------------------------------

    Materiality is a core principle that guides the Commission's
approach to securities regulation, and a materiality qualifier has
appeared in Rule 15c2-12 since the Rule was amended in 1994.\60\
---------------------------------------------------------------------------

    \60\ See 1994 Amendments Adopting Release, supra note 8.
---------------------------------------------------------------------------

    The Commission continues to believe that including a materiality
qualifier in the amendments is appropriate as it provides a framework
for issuers and obligated persons to assess their disclosure
obligations in the context of the specific facts and circumstances. As
described in the Proposing Release, the Commission believes that not
every incurrence of a financial obligation or agreement to terms is
material.\61\ For example, an issuer or obligated person may incur a
financial obligation for an amount that, absent material terms that
affect security holders, would not raise the concerns the amendments
are intended to address. Utilizing a materiality standard permits an
issuer or obligated person to assess its disclosure obligation in the
context of the specific facts and circumstances.\62\ For example, it
may be appropriate for issuers and obligated persons to consider not
only the source of security pledged for repayment of the financial
obligation, but also the rights associated with such a pledge (e.g.,
senior versus subordinate), par amount or notional amount (in the case
of a derivative instrument or guarantee of a derivative instrument),
covenants, events of default, remedies, or other similar terms that
affect security holders to which the issuer or obligated person agreed
at the time of incurrence, when determining its materiality.\63\
Removing the materiality qualifier could result in the disclosure of
financial obligations that, absent other facts or circumstances, would
not raise the concerns the amendments are intended to address.
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    \61\ See Proposing Release, supra note 3, 82 FR at 13935-36.
    \62\ See THECB Letter (``[w]hat constitutes materiality can vary
by entity based on the size of the overall balance sheet, the size
of existing obligations or the size of the overall bond
portfolio''). While the Commission agrees with that statement, these
are not the only factors that are relevant in evaluating the
particular facts and circumstances.
    \63\ See, e.g., UHC Letter (requesting that the Commission
``acknowledge that a financial obligation payable primarily or
exclusively from one source of revenues would likely not be material
to security holders of municipal securities payable primarily or
exclusively from a separate or distinct source of revenues of the
same issuer or obligated person''). The Commission believes that an
issuer or obligated person would have to assess a number of factors
when assessing materiality, including the source of security pledged
to the security holders. See also NABL Letter.
---------------------------------------------------------------------------

    Separately, some commenters suggested that the amendments include a
mechanical test for materiality. In 1994, the Commission proposed
amendments to Rule 15c2-12 that would have used a mechanical test to
identify any ``significant obligor'' with respect to an issue of
municipal securities and require that both the final official statement
and the annual financial information provided on an ongoing basis
pursuant to the continuing disclosure agreement include disclosure with
respect to any significant obligor.\64\ In response to a number of
comments, the Commission adopted amendments to Rule 15c2-12 that
eliminated the requirement to provide information about specific
``significant obligors'' in both the final official statement and on an
ongoing basis. Instead, the Commission adopted an approach that leaves
to the parties (including the issuer and the underwriter) the
determination of whose financial information is material to the
offering and required to be included in both the final official
statement and provided on an ongoing basis as part of the annual
financial information.\65\ The 1994 Adopting Release stated that the
standard set forth in the defined term ``final official statement''
provided flexibility that many commenters asserted is necessary in
determining the content and scope of the disclosed financial
information and operating data, given the diversity among types of
issuers, types of issues, and sources of repayment.'' \66\ The
Commission believes this same need for flexibility applies to
assessments of financial obligations and the materiality qualifier
allows for consideration of diverse sets of factors. Therefore, the
Commission does not believe that it would be appropriate to provide a
mechanical test for determining the materiality of a financial
obligation. Rather, the Commission continues to believe that
materiality determinations should be based on whether the information
would be important to the

total mix of information made available to the reasonable investor.\67\
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    \64\ See Exchange Act Release No. 34-33742 (Mar. 9, 1994), 59 FR
12759 (Mar. 17, 1994). The proposed term ``significant obligor'' was
defined to mean any person who, directly or indirectly, is the
source of 20 percent or more of the cash flow servicing obligations
on the municipal securities.
    \65\ See 1994 Amendments Adopting Release, supra note 8; see
also 17 CFR 240.15c2-12(b)(5)(i)(A) and (f)(3).
    \66\ See 1994 Amendments Adopting Release, supra note 8 at
59593.
    \67\ See Statement of the Commission Regarding Disclosure
Obligations of Municipal Securities Issuers and Others, Exchange Act
Release No. 34-33741 (Mar. 9, 1994), 59 FR 12748 (Mar. 17, 1994)
(``1994 Interpretive Release'').
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b. Guidance
    Numerous commenters asked the Commission to provide guidance on how
to determine the materiality of a financial obligation, stating that
without such guidance, issuers, obligated persons, and dealers would
not interpret materiality uniformly.\68\ Commenters pointed to the
challenges faced by issuers and obligated persons when determining
materiality in connection with their participation in the
Municipalities Continuing Disclosure Cooperation Initiative (``MCDC
Initiative'') \69\ as indicative of the lack of clarity that exists
with respect to evaluating materiality.\70\ In particular, commenters
stated that the MCDC Initiative failed to produce clear guidance on
materiality, resulting in additional market confusion about what
constitutes materiality.\71\ They also stated that following the MCDC
Initiative, and absent Commission guidance, Participating Underwriters
have been conservatively applying materiality determinations to limit
potential liability and requiring issuers and obligated persons to
disclose potentially non-material information to EMMA.\72\
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    \68\ See, e.g., GFOA Letter; Denver Letter; THECB Letter
(stating that ``what constitutes an obligation and what is material,
are vague in this amendment'' and ``what constitutes materiality can
vary by entity based on the size of the overall balance sheet, the
size of existing obligations or the size of the overall bond
portfolio''); see also Brown Letter (suggesting definitions of
materiality the Commission could adopt); but see also ACI Letter
(urging the Commission to reject a one-size-fits-all definition of
materiality, since what is material to a small issuer may not be
material to a larger issuer).
    \69\ In March 2014, the Division of Enforcement announced the
MCDC Initiative, a voluntary program to encourage underwriters and
issuers and obligated persons to self-report federal securities law
violations involving inaccurate certifications in primary offerings
where issuers and obligated persons represented in their final
official statements that they had complied with previous continuing
disclosure agreements when they had not. The Commission brought
settled actions against 71 issuers and obligated persons under the
MCDC Initiative. See SEC Charges 71 Municipal Issuers in Muni Bond
Disclosure Initiative (Aug. 24, 2016) (``SEC Charges 71 Municipal
Issuers''), available at https://www.sec.gov/news/pressrelease/2016-166.html.
    \70\ See, e.g., DFW Letter.
    \71\ See, e.g., NABL Letter (stating ``particularly since the
MCDC Initiative, Commission interpretations of `material' are too
vague, ambiguous, and unpredictable to enable issuers and
underwriters to clearly determine when notice of an event must be
filed or when a failure to file must be disclosed'').
    \72\ See, e.g., Granite SD Letter; Portland Letter; NABL Letter
(stating that some compliance departments and investment banks now
refuse to engage in materiality evaluations of prior events and
continuing disclosure deficiencies).
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    The Commission believes that the type of analysis undertaken in
connection with the MCDC Initiative \73\ is distinct from the analysis
required to determine whether a piece of information is material and
must be publicly disclosed to investors in offering materials.\74\ In
the materiality inquiry that issuers, obligated persons, and dealers
must regularly undertake when preparing disclosure documents in
connection with an Offering, they must assess whether a piece of
information at the time of issuance is of a character that there is a
substantial likelihood that, under all the circumstances, ``the omitted
fact would have been viewed by the reasonable investor as having
significantly altered the `total mix' of information available.'' \75\
Compliance with these requirements will be evaluated using the same
standard.
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    \73\ See Proposing Release at supra note 3, 82 FR at 13930 and
note 15.
    \74\ The inquiry undertaken in connection with the MCDC
Initiative required an assessment of whether the issuer or obligated
person materially fulfilled its contractual obligations under its
continuing disclosure agreement, which required a consideration of
applicable state law and basic principles of contract law.
    \75\ See 1994 Interpretive Release, supra note 67 (quoting TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 440 (1976)). The
principles behind this inquiry are consistent each time the question
of whether a piece of information is material is presented, but the
factors considered by issuers and obligated persons while
undertaking such an inquiry are not uniform because it is a facts
and circumstances driven analysis. This inquiry is distinct from the
inquiry issuers, obligated persons, and underwriters conducted as
part of the MCDC Initiative, which required an assessment of the
issuer's or obligated person's performance of its contractual
continuing disclosure obligations.
---------------------------------------------------------------------------

    The Commission believes that the determination by an issuer or
obligated person of whether to submit an event notice under paragraph
(b)(5)(i)(C)(15) requires the same analysis that is regularly made by
such parties when preparing offering documents. Accordingly, under the
Rule, as amended, an issuer or obligated person will need to consider
whether a financial obligation or the terms of a financial obligation,
if they affect security holders, would be important to a reasonable
investor when making an investment decision.\76\ As noted above,\77\ an
issuer or obligated person may consider a number of factors when
assessing the materiality of a particular financial obligation.
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    \76\ Issuers and obligated persons have undertaken this type of
analysis in the context of the Rule since 1994 when the Rule was
amended to prohibit Participating Underwriters from purchasing or
selling municipal securities in connection with an Offering unless
the Participating Underwriter has ``reasonably determined'' that an
issuer or an obligated person has undertaken in a continuing
disclosure agreement to provide continuing disclosure information
regarding the security and the issuer or obligated person for the
life of the municipal security including notices of the occurrence
of certain events, if material. See 1994 Amendments Adopting
Release, supra note 8.
    Since 2010, paragraphs (b)(5)(i)(C)(2), (7), (8), (10), (13),
and (14) of the Rule have required a materiality analysis. See 2010
Amendments Adopting Release, supra note 8. See also supra note 17.
Four of those paragraphs, (b)(5)(i)(C)(2), (7), (8), and (10), have
required a materiality analysis since 1994. See 1994 Amendments
Adopting Release, supra note 8.
    Furthermore, this type of analysis is frequently conducted under
the securities laws, whereby materiality is determined by reference
to whether there is a substantial likelihood that a reasonable
security holder would consider the information important in deciding
whether to buy or sell a security. See Basic, Inc. v. Levinson, 485
U.S. 224 (1988).
    \77\ See note 63 and accompanying text.
---------------------------------------------------------------------------

    Due to the flexible facts-and-circumstances approach to assessing
materiality, the Commission acknowledges, as raised by commenters, that
in the course of providing disclosures to the market about their
financial obligations, some issuers and obligated persons may have
differing opinions with respect to whether a piece of information would
be considered important to a reasonable investor when making an
investment decision. Regardless of these potential differences of
opinion, the Commission does not believe it is necessary to provide
additional guidance at this time. Issuers and obligated persons have
the benefit of experience with making materiality determinations under
the federal securities laws generally and the Rule specifically.
Furthermore, even absent uniformity, the amendments, as discussed
throughout this Release, will result in increased timely disclosure in
the municipal securities market of important information regarding the
financial obligations of issuers and obligated persons. Additionally,
the changes made to the proposed definition of financial obligation
should also alleviate commenter concerns about assessing the
materiality of each financial obligation incurred by issuers and
obligated persons. Forms and guidance that the industry may develop in
this area could also assist issuers and obligated persons in evaluating
which financial obligations should be disclosed pursuant to their
continuing disclosure agreements.
c. Burden of Materiality Determinations
    Many commenters stated that materiality determinations would pose

challenges given the broad scope of the proposed definition of
``financial obligation.'' \78\ Commenters argued that ten business days
was not enough time to disclose material financial obligations.\79\
Some commenters stated that without Commission guidance, issuers or
obligated persons would likely utilize outside counsel in order to make
materiality determinations.\80\ Commenters stated that to avoid the
time and expense of reviewing all of their financial obligations for
materiality, and to avoid being second guessed by dealers in the
future, they might disclose all financial obligations, flooding EMMA
with potentially immaterial information of limited value to
investors.\81\ Commenters also stated that they might seek to avoid the
cost, effort, and potential liability associated with summarizing key
terms of a transaction by posting entire financing agreements to
EMMA.\82\
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    \78\ See, e.g., Portland Letter; Denver Letter; ACI Letter.
    \79\ See, e.g., Portland Letter; ACI Letter; Kutak Rock Letter;
San Jose Letter.
    \80\ See, e.g., Denver Letter; San Jose Letter; White Plains
Letter; see also TASBO Letter (stating that ``the analysis of
agreements and instruments captured under the definition of
``financial obligations'' under the proposed regulations will
require subject matter experts to review the financial obligations--
which they otherwise would not be engaged to review--in detail and
make nuanced determinations as to materiality'').
    \81\ See, e.g., ACI Letter; AAPA Letter; see also PFM Letter
(stating that absent clarity from the Commission on materiality,
``issuers and investors will likely be harmed by the potential of
disclosing information that could prove to be irrelevant to the
credit of a particular municipal securities transaction'').
    \82\ See ABA Letter; East Bay Letter.
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    The Commission acknowledges that there will be costs incurred by
issuers, obligated persons, and dealers when evaluating whether a
financial obligation is material. However, as discussed in Section
III.A.2 herein, the Commission is adopting a narrower definition of
``financial obligation'' than proposed, which will reduce the burden on
issuers, obligated persons, and dealers. The adopted definition of
financial obligation significantly limits the types of transactions
that issuers and obligated persons will need to identify and assess for
materiality, and focuses the amendments on debt, debt-like, and debt-
related obligations of issuers and obligated persons. The narrowed
definition of financial obligation, which only covers those obligations
that are debt, debt-like, or debt-related, will result in fewer
financial obligations that issuers and obligated persons will need to
review for materiality, and should help alleviate commenter concerns
about disclosing a material financial obligation within ten business
days. In addition, though the period for reporting the incurrence of a
material financial obligation does not begin until the date on which
the financial obligation is incurred, the Commission understands that
most material terms of a financial obligation are typically known to
the issuer or obligated person prior to the date of its incurrence.
Accordingly, issuers and obligated persons could begin the process of
assessing whether a particular obligation should be disclosed pursuant
to paragraph (b)(5)(i)(C)(15) in advance of its incurrence. As a
result, the Commission believes ten business days is a reasonable
period of time for compliance. Moreover, the ten business day
requirement is already in the Rule and introducing an alternate
timeline for the amendments could cause confusion, add complexity to
the Rule, and increase the compliance burden for issuers, obligated
persons, and dealers.
    With respect to commenter concerns about the burdens of summarizing
the terms of material financial obligations, issuers and obligated
persons could consider amending existing disclosure policies and
procedures to address the process for evaluating the disclosure of
material financial obligations. Amended policies and procedures, in
addition to industry practices that may develop, could help issuers and
obligated persons streamline the process of disclosing material
financial obligations to EMMA, and ease time and cost burdens
associated with identifying, assessing, and disclosing material
financial obligations.
d. Materiality and a Series of Related Financial Obligations
    Commenters asked whether a series of related financial obligations
could be considered material due to their aggregate par amount, though
none of the constituent obligations would be material on its own.\83\
Materiality is determined upon the incurrence of each distinct
financial obligation, taking into account all relevant facts and
circumstances.\84\ For example, if the issuer or obligated person
enters into a series of transactions that, though related,\85\ are
incurred at different points in time for legitimate business purposes--
e.g., to satisfy the necessary conditions for the debt to be considered
tax-exempt under provisions of the Internal Revenue Code of 1986, as
amended (``IRC'')--the issuer or obligated person would need to assess
the materiality of each transaction at the time it was incurred.
---------------------------------------------------------------------------

    \83\ See, e.g., SIFMA AMG Letter (asking for clarification that
a series of related financial transactions must be aggregated for
the purpose of assessing materiality); GFOA TX Letter (stating the
difficulties in disclosing material derivative instruments as the
amount of the financial obligation can fluctuate with the market).
    \84\ For a discussion of the term ``incurred,'' see infra
Section III.A.1.ii.
    \85\ Relevant factors that could indicate that a series of
financial obligations incurred close in time are related include the
following: (i) Share an authorizing document, (ii) have the same
purpose, or (iii) have the same source of security.
---------------------------------------------------------------------------

    When an issuer or obligated person is considering whether a series
of related transactions is a single incurrence or has been incurred at
different points in time for legitimate business purposes for
determining materiality under the amendments, such issuer or obligated
person must consider all relevant facts and circumstances. An example
of the type of facts and circumstances that could indicate that a
series of related transactions were incurred separately for legitimate
business purposes would be if the series of financial obligations
satisfy the requirements set forth in the U.S. Department of Treasury
regulations and guidance governing what constitutes a single issue of
municipal securities under the IRC.\86\ The Commission cautions issuers
and obligated persons against entering into a series of transactions
with a purpose of evading potential disclosure obligations established
by paragraphs (b)(5)(i)(C)(15) and (16) of the Rule in a manner that is
inconsistent with the purposes of the Rule.\87\
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    \86\ See 26 CFR 1.150-1(c); see Internal Revenue Service, Lesson
2: Advanced Topics in Arbitrage, available at https://www.irs.gov/pub/irs-tege/02%20Phase%20II%20Lesson%2002%20-%20%20Advanced%20Topics%20in%20Arbitrage.pdf (IRS educational
materials provided to the public containing the conditions under
which separate bond series are considered to be a single issue for
arbitrage purposes, stating: ``[IRC] Regulations Sec.  1.150-1(c)(1)
provides that the term issue means two or more bonds that meet all
of the following requirements: (i) Sold at substantially the same
time (less than 15 days apart), (ii) sold pursuant to the same plan
of financing, and (iii) reasonably expected to be paid from the same
source of funds. For example, bonds sold to finance a single
facility or related facilities are considered part of the same
financing plan, but short-term bonds to finance working capital and
long-term bonds to finance capital projects would not be considered
part of the same plan. Certificates of participation in a lease and
general obligation bonds secured by tax revenues would not be
considered part of the same plan'').
    \87\ U.S. Department of Treasury regulations similarly warn
against entering ``into a transaction or series of transactions with
respect to one or more issues with a principal purpose of
transferring to nongovernmental persons (other than as members of
the general public) significant benefits of tax-exempt financing in
a manner that is inconsistent with the purposes of section 141 [of
the Internal Revenue Code].'' See 26 CFR 1.141-14.
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ii. Incurrence of a Financial Obligation
    Some commenters recommended that the Commission provide guidance on

the meaning of ``incurrence.'' \88\ The Commission believes that a
financial obligation generally should be considered to be incurred when
it is enforceable against an issuer or obligated person.\89\ Disclosure
of a material financial obligation at such time would provide investors
with important information about the current financial condition and
potential liabilities of the issuer or obligated person, including
potential impacts to the issuer's or obligated person's liquidity and
overall creditworthiness. For example, if an issuer or obligated person
enters into an agreement providing for a material drawdown bond,\90\ or
such agreement contains material terms that affect security holders,
the issuer or obligated person generally should provide notice at the
time the terms of the obligation are legally enforceable against the
issuer or obligated person, instead of each time a draw is made.\91\
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    \88\ See SIFMA AMG Letter; see also NABL Letter.
    \89\ This is consistent with similar concepts in Exchange Act
Form 8-K. Specifically, the instructions for Item 2.03 of Form 8-K
provide that ``[a] registrant has no obligation to disclose
information under this Item 2.03 until the registrant enters into an
agreement enforceable against the registrant, whether or not subject
to conditions, under which the direct financial obligation will
arise or be created or issued.'' See 17 CFR 249.308.
    \90\ See NABL, Direct Purchases of State or Local Obligations by
Commercial Banks and Other Financial Institutions (July 2017),
available at https://www.nabl.org/DesktopModules/Bring2mind/DMX/Download.aspx?portalid=0&EntryId=1118 (``Certain direct purchase
financings are structured as `draw-down bonds.' Under this
structure, the purchaser from time to time makes advances [to the
issuer or obligated person], up to a maximum aggregate principal
amount of the bonds, over a limited period of time, rather than
advancing all proceeds of the bonds at the initial closing, as in a
typical publicly-offered borrowing'').
    \91\ The Commission likewise believes that a financial
obligation is incurred with regard to a derivative instrument when
the derivative instrument is enforceable against an issuer or
obligated person. See infra note 155.
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iii. Form of Event Notice
    Commenters observed that the Commission did not prescribe the form
of a notice made pursuant to new paragraph (b)(5)(i)(C)(15) \92\ and
some recommended that the Commission dictate the form and content of
disclosures made under the new provision.\93\ One commenter, though,
stated that the Commission should avoid being too prescriptive with
respect to the form and content of a material event notice submitted
under paragraph (b)(5)(i)(C)(15) of the Rule.\94\ Other commenters
expressed concern about what they described as the potential negative
impact of the public disclosure of financing documents on competition
among lenders, as well as the possibility for the disclosure of
confidential personally identifiable information.\95\
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    \92\ See Kutak Rock Letter (stating that unlike corporate
issuers, there is no checklist or guidepost to assist issuers and
obligated persons determine what must be included in disclosure);
see also AZ Universities Letter (stating that there are no standard
EMMA disclosure forms provided by the Commission or the MSRB and
issuers will be left on their own to determine the proper format and
scope of event notices posted on EMMA).
    \93\ See Vanguard Letter (recommending that the Commission
require the disclosure of financial covenant reports, similar to
what is provided to banks under loan agreements); BDA Letter
(stating that the amendments should require issuers and obligated
persons to include in any filing a description to investors
describing what is material about the event); NFMA Letter
(encouraging the Commission to require in the rule text that either
all relevant agreements or a detailed summary of terms of the
financial transaction be posted along with the notice of incurrence
to EMMA); and IAC Recommendation, supra note 6 (suggesting that the
Commission clarify that disclosures made under the amendments should
include information about the incurrence and amount of indebtedness
as well as information about financial covenants).
    \94\ See DAC Letter.
    \95\ See ABA Letter (urging the Commission to provide a
mechanism for redacting confidential and personally identifiable
information and stating that disclosure of pricing terms may set
unrealistic expectations for other issuers and may have an anti-
competitive effect by setting a pricing benchmark for certain
transactions); see also LPPC Letter (stating that the disclosure of
covenants, events of default, remedies, priority rights, or other
similar terms could adversely impact an issuer's ability to
effectively negotiate or enter into future agreements and could be
used by the issuer's counterparties to strengthen their negotiating
positions).
---------------------------------------------------------------------------

    The Commission acknowledges commenter concerns regarding what form
the notice should take. However, given the diversity of issuers and
obligated persons, and in light of the structure of the Rule, the
Commission believes at this time that market participants are best
suited to consider developing best practices in this area to assist
issuers and obligated persons and their advisors in carrying out the
objective of the amendments, which is to facilitate the timely delivery
of important information to investors and other market participants
about issuers' and obligated persons' financial obligations.\96\ As
described in the Proposing Release,\97\ a material event notice for the
events described in paragraph (b)(5)(i)(C)(15) generally should include
a description of the material terms of the financial obligation.
Examples of some material terms may be the date of incurrence,
principal amount, maturity and amortization, interest rate, if fixed,
or method of computation, if variable (and any default rates); other
terms may be appropriate as well, depending on the circumstances.\98\ A
description of the material terms would help further the availability
of information in a timely manner to assist investors in making more
informed investment decisions.\99\ The Commission believes that,
depending on the facts and circumstances, it could be consistent with
the requirements of the Rule for issuers and obligated persons to
either submit a description of the material terms of the financial
obligation, or alternatively, or in addition, submit related materials,
such as transaction documents, term sheets prepared in connection with
the financial obligation, or continuing covenant agreements or
financial covenant reports to EMMA. Any such related materials, if
submitted as an alternative to a description of the material terms of
the financial obligation, should include the material terms of the
financial obligation. The amendments do not require the provision of
confidential information such as contact information, account numbers,
or other personally identifiable information to EMMA. Provided the
necessary disclosures are made, the formatting of such disclosures
tailored to avoid disclosure of such confidential information would be
consistent with Rule 15c2-12.\100\
---------------------------------------------------------------------------

    \96\ Industry organizations have developed recommendations for
voluntary disclosure of direct placements. Such groups and others
could, for example, develop a form submission document and guidance
for market participants. See, e.g., Considerations Regarding
Voluntary Secondary Market Disclosure About Bank Loans, supra note
46.
    \97\ See Proposing Release, supra note 3, 82 FR at 13937.
    \98\ Id.
    \99\ Id.
    \100\ The Commission further notes that information about
financial obligations, including transaction documents, would likely
be available under state sunshine laws.
---------------------------------------------------------------------------

2. ``Financial Obligation''
    In the Proposing Release, the Commission defined the term
``financial obligation'' to mean a debt obligation, lease, guarantee,
derivative instrument, or monetary obligation resulting from a
judicial, administrative, or arbitration proceeding,\101\ but not
including municipal securities as to which a final official statement
has been provided to the MSRB consistent with Rule 15c2-12.\102\
---------------------------------------------------------------------------

    \101\ See Proposing Release, supra note 3, 82 FR at 13957.
    \102\ See id.
---------------------------------------------------------------------------

    Many commenters criticized the proposed definition of ``financial
obligation,'' characterizing it as overbroad and vague.\103\ In
particular, commenters argued that the proposed definition would elicit
disclosures of

limited value to investors at a tremendous cost.\104\ With respect to
the value of disclosure, commenters argued that the breadth of the
proposed definition would produce disclosures of limited value because
it did not distinguish between debt and ordinary financial and
operating matters of an issuer or obligated person.\105\ Commenters
also stated that the broad scope of the term ``financial obligation,''
as proposed, would impose substantial burdens on issuers, obligated
persons, and other market participants.\106\ For example, commenters
argued that the breadth of the proposed definition of the term
``financial obligation'' would require a significant amount of issuer
or obligated person time and financial and personnel resources to
monitor and assess materiality of its financial obligations, which for
some issuers or obligated persons could cover thousands of obligations
incurred in the normal course of business.\107\ Commenters argued that
the proposed definition of the term ``financial obligation,'' if
adopted, would make compliance with the Rule unreasonably costly for
some,\108\ and virtually impossible for others.\109\ Ultimately,
however, despite their objections to the proposed definition of
``financial obligation,'' many of these commenters suggested that the
term should at least cover debt and debt-like obligations that could
compete with the rights of existing security holders.\110\
---------------------------------------------------------------------------

    \103\ See, e.g., AAPA Letter; ABA Letter, Form Letter.
    \104\ See GFOA Letter; Brookfield Letter; GFOA TX Letter;
Kissimmee Letter.
    \105\ See BDA Letter; Portland Letter (pertaining to leases);
GFOA Letter (pertaining to derivative instruments). See also IAC
Recommendation, supra note 6 (stating, ``One term that could be
better defined is `financial obligation', which should pick up
indebtedness and similar obligations but should not be so broad as
to pick up items such as ordinary course leases'').
    \106\ With respect to issuers and obligated persons, see
generally GFOA Letter; NAHEFFA Letter; NCHSA Letter; and CA Finance
Letter; and with respect to dealers, see also SIFMA Letter.
    \107\ See AAPA Letter (stating that ``many leases and legal or
administrative proceedings are part of normal business
operations''); ACI Letter (``the term `financial obligation' is very
broad and would include many business and legal obligations that are
not direct placements of municipal securities or bank loans and that
are not generally considered to be indebtedness . . . US airports
are party to well over 50,000 leases''); DAC Letter (``the scope of
financial obligations [covers] obligations well beyond bank loans
and direct sales . . . potentially requir[ing] issuers and obligated
persons to identify, summarize, disclose, track and analyze, within
tight timeframes, the incurrence and performance of a far broader
range of activities''); GFOA Letter (``information suggested in the
proposed requirements (e.g., leases, derivatives) includes
transactions that may occur multiple times a year through the normal
operating activities of state and local governments and are not on
par with debt obligations''); NAHEFFA Letter (``the broad definition
of financial obligation could pick up financial aid contracts,
health insurance contracts, food service contracts, research
agreements, management contracts, sports venue contracts, equipment
and vehicle leases, among other contracts''); NAMA Letter (``the
definition of `financial obligations' is too broad and will require
the consideration of the materiality of many types of financings and
financial obligations that do not affect a government or entity's
ability to pay debt . . . [many] are part of the day-to-day
`operations' of governments''); Denver Letter (``the City is
currently a party to thousands of contracts . . . [and] is involved
in hundreds of administrative and arbitration proceedings every
year''); Portland Letter (``we agree that the incurrence of a bank
loan or other debt obligation is something that should be disclosed
to the market, [but] we are concerned that the definition . . . is
easily interpreted to include varying types of leases, such as those
for the copiers, lawn mowers, and other minor equipment
acquisitions'').
    \108\ See, e.g., THPRD Letter (``the scope [of] `financial
obligations' covered under the Proposed Amendment is overly broad
and would be costly for our organization to monitor''); Port
Portland Letter (``[t]o comply with the proposed amendments, issuers
would have to create a centralized mechanism to monitor the creation
and modification of a wide variety of financial instruments . . .
[d]oing so would be unnecessarily burdensome and expensive'').
    \109\ See, e.g., AZ Universities Letter (stating that ``a
significant investment of time and money by the Universities will be
necessary to monitor the need for filing an event notice under the
Proposed Amendments . . . and the widely publicized lack of funding
for public universities does not permit the necessary funding to
restructure the Universities' processes or hire additional staff and
engage outside legal counsel at significant expense solely to comply
with the Proposed Amendments''); see also SIFMA Letter (arguing that
it would be ``virtually impossible'' for registered representatives
to comply with their obligations under MSRB Rule G-47).
    \110\ See BDA Letter (``BDA believes that the primary investor
desire for information giving rise to the Proposed Amendments is the
way that bank debt competes with publicly traded bonds''); see also
NAMA Letter; Portland Letter; Form Letter.
---------------------------------------------------------------------------

    Not all commenters, however, were critical of the proposed
definition of the term ``financial obligation.'' \111\ Several
commenters stated that the proposed definition of the term would
provide needed transparency to the municipal securities market.\112\
For example, one commenter stated that without timely disclosure of
this information, investors and other market participants may not be
aware that an issuer or obligated person has incurred a material
financial obligation or agreed to certain terms that affect security
holders.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., ICI Letter; BM Letter; NFMA Letter; SIFMA AMG
Letter. For example, one commenter suggested that the Commission add
``crowdfunding campaigns or public projects that pledge future
revenues to backers of the projects'' to the definition of
``financial obligation.'' See BM Letter. In the Commission's view,
the contractual arrangement between the issuer or obligated person
and its backers memorializing the pledge of future revenues derived
from the project could be a ``debt obligation'' for purposes of the
Rule depending on the facts and circumstances. Accordingly, the
Commission does not believe it is necessary to separately include
crowdfunding-related obligations in the adopted definition of
financial obligation.
    \112\ See BM Letter; ICI Letter; Doty Letter.
    \113\ See ICI Letter.
---------------------------------------------------------------------------

    The purpose of the amendments is to facilitate investors' and other
market participants' access to timely disclosure of important
information related to an issuer's or obligated person's material
financial obligations that could impact an issuer's or obligated
person's liquidity, overall creditworthiness, or an existing security
holder's rights (e.g., a bank loan with a senior position in the debt
payment priority structure). With these principles and commenter
concerns in mind, the Commission is narrowing the definition of
``financial obligation.''
    As adopted, ``financial obligation'' means a debt obligation;
derivative instrument entered into in connection with, or pledged as
security or a source of payment for, an existing or planned debt
obligation; or a guarantee of either a debt obligation or a derivative
instrument entered into in connection with, or pledged as security or a
source of payment for, an existing or planned debt obligation. 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.
    As discussed below, the definition of the term ``financial
obligation'' does not include ordinary financial and operating
liabilities incurred in the normal course of an issuer's or obligated
person's business, only an issuer's or obligated person's debt, debt-
like, and debt-related obligations.\114\ The Commission believes that a
definition of the term ``financial obligation'' that distinguishes
debt, debt-like, and debt-related obligations from obligations incurred
in an issuer's or obligated person's normal course of operations
appropriately focuses the amendments on the types of obligations that
could impact an issuer's or obligated person's liquidity, overall
creditworthiness, or an existing security holder's rights.\115\
Moreover, in the Commission's view, the adopted definition of the term
``financial

obligation'' will greatly reduce the burden of complying with the
amendments, while still capturing important information about the
current financial condition of the issuer or obligated person.\116\
Accordingly, the Commission believes that this definition strikes the
appropriate balance between benefits to investors and other market
participants and costs of compliance with the Rule.\117\
---------------------------------------------------------------------------

    \114\ Cf. BDA Letter (observing that the ``primary investor
desire for information giving rise to the Proposed Amendments is the
way that bank debt competes with publicly traded bonds, and this
competition is nothing new in the municipal securities market'').
    For a description of commenter arguments that the term
``financial obligation'' should distinguish between debt and
ordinary financial or operating matters, see supra notes 105 and
107.
    \115\ Several commenters supported this type of approach to the
disclosure of ``financial obligations.'' See, e.g., LPPC Letter
(stating ``LPPC believes that the Proposed Amendments should be
narrowly tailored to require municipal issuers only to provide
notice of the incurrence of bank loans, private placements or direct
purchases of debt obligations, and derivative instruments that are
entered into in connection with, and hedge, debt obligations of an
issuer''). See also IAC Recommendation, supra note 6.
    \116\ See generally, Proposing Release, supra note 3, 82 FR at
13936. For the Commission's analysis of the costs and benefits of
the amendments, see infra Section V.C.
    \117\ Compare ICI Letter (arguing that ``timely disclosure'' of
financial obligations is necessary because ``such information may
significantly impact the fundamental value that investors place on a
municipal bond and is therefore necessary to accurately assess,
monitor, and compare credit quality of securities and issuers'')
with GFOA Letter (arguing that the ``proposed additional `financial
obligations' covered by Rule 15c2-12 would be information that is
both superfluous to investors and costly for issuers to present
outside of financial statements''). See generally, infra Section V
for the Commission's economic analysis of the amendments.
---------------------------------------------------------------------------

i. Debt Obligation
    As proposed, the term ``debt obligation'' was intended to capture
the short-term and long-term debt obligations of an issuer or obligated
person under the terms of an indenture, loan agreement, or similar
contract that will be repaid over time.\118\ As examples, the
Commission stated that a direct purchase of municipal securities by an
investor and a direct loan by a bank would be debt obligations of an
issuer or obligated person.\119\
---------------------------------------------------------------------------

    \118\ See Proposing Release, supra note 3, 82 FR at 13937.
    \119\ Id.
---------------------------------------------------------------------------

    A number of commenters supported the Commission's proposal to
require disclosure of debt obligations.\120\ Even commenters that
opposed the Commission's proposed requirement to disclose debt
obligations under the Rule advocated for the Commission to encourage
voluntary disclosure of such obligations.\121\
---------------------------------------------------------------------------

    \120\ See, e.g., Portland Letter (stating ``we agree that the
incurrence of a bank loan or other debt obligation is something that
should be disclosed to the market''); SIFMA Letter (stating ``[w]e
support event notice disclosure of incurrence of debt through a
direct purchase, private placement, or bank loan[s]''); NAST Letter
(stating ``we believe that enhanced and uniform disclosure related
to bank loan debt would be beneficial for issuers and investors'');
NAMA Letter (stating ``the definition of `financial obligation'
should focus only o[n] specific behavior for which the SEC has
expressed concern, namely, bank loans and private placements''). See
also SIFMA AMG Letter (recommending that debt obligation be replaced
with the definition of ``direct financial obligation'' in Item
2.03(c) (``Creation of a Direct Financial Obligation or an
Obligation under an Off-Balance Sheet Arrangement of a Registrant'')
of Form 8-K).
    \121\ See, e.g., NABL Letter; GFOA Letter. Despite the efforts
of the MSRB and other market participants, voluntary disclosures
remain relatively infrequent; moreover, under a voluntary disclosure
regime, investors would not benefit from the uniform requirements of
the Rule. Accordingly, and as discussed in Section III.A. and
Section V.D. infra, and in the Proposing Release, the Commission
does not believe that voluntary disclosure of debt obligations would
fully achieve the Commission's objectives.
---------------------------------------------------------------------------

    The Commission continues to believe that the definition of
``financial obligation'' should include debt obligations because such
obligations and their terms could adversely affect the rights of
existing security holders, including the seniority status of such
security holders, or impact the creditworthiness of an issuer or
obligated person.\122\ Moreover, the Commission believes that
undisclosed debt obligations and their terms could adversely affect
security holders. Contrary to some commenter sentiment,\123\ recent
events in the direct placement market support this belief.\124\
Specifically, recent changes to federal tax laws \125\ have reportedly
triggered provisions commonly found in direct placements relating to
the rate at which a direct placement will bear interest.\126\ In the
Commission's view, these tax-related provisions are illustrative of the
types of terms to which issuers and obligated persons agree when
incurring financial obligations that could impair an issuer's or
obligated person's liquidity or creditworthiness and, thus, adversely
affect the interests of existing security holders. Without paragraph
(b)(5)(i)(C)(15), an issuer or obligated person would not, under the
terms of a continuing disclosure agreement, be required to assess the
materiality of and disclose, if material, either its agreement to such
terms that affect security holders or the incurrence of the underlying
debt obligation. For these reasons, the Commission believes that the
timely disclosure of both the incurrence of a debt obligation, if
material, and the obligation's material terms that affect existing
security holders, such as those related to the rate at which a debt
obligation will bear interest,\127\ would provide important information
about the issuer's or obligated person's current financial condition.
---------------------------------------------------------------------------

    \122\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \123\ See NABL Letter (arguing that the Commission has not
provided adequate evidence of investor harm related to undisclosed
debt obligations).
    \124\ See Lynn Hume, Spike in Issuer Bank Loan Rates Feared as
Drop in Corporate Tax Rate Looms, The Bond Buyer (Dec. 8, 2017),
available at https://www.bondbuyer.com/news/issuers-bank-loan-rate-may-spike-with-drop-in-corporate-tax-rate.
    \125\ See Tax Cuts and Jobs Act of 2017, supra note 40.
    \126\ These terms operate such that a decline in the federal
corporate income tax rate will increase the overall cost of the
related direct placement to the issuer or obligated person, usually
by either: (1) Increasing the interest rate paid by the issuer or
obligated person to the lender, or (2) requiring the issuer or
obligated person to make periodic cash payments to the lender in
addition to any required interest payments. The purpose of these
terms is to allow banks to maintain their after-tax yield regardless
of the corporate income tax rate. The Commission understands that
many of these provisions are automatically triggered upon a
reduction of the federal corporate income tax rate. See Richard A.
Newman et al., How to Calculate the Gross-Up, The Bond Buyer (Jan.
18, 2018), available at https://www.bondbuyer.com/opinion/how-banks-may-calculate-the-gross-up-on-direct-placement-bonds (stating that
interest rates paid by issuers and obligated persons could increase
by as much as 102 basis points as a result of such terms).
    \127\ See supra Section III.A.1.iii (discussion of information
that should be included in an event notice).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission proposed ``lease'' as a
separate element of the definition of ``financial obligation.'' \128\
Specifically, the Commission stated that the term ``lease'' was
intended to capture a lease that is entered into by an issuer or
obligated person, including an operating or capital lease.\129\ The
Commission stated, for example, that if an issuer or obligated person
entered into a lease-purchase agreement to acquire an office building
or an operating lease to lease an office building for a stated period
of time, both would potentially be subject to disclosure under the
Proposing Release.\130\ However, in light of the GASB decision to
discontinue use of the ``capital lease'' and ``operating lease'' labels
in government accounting, the Commission believes it is appropriate to
also discontinue its use of such labels in connection with the
amendments.\131\ Thus, although the Commission used the ``capital
lease'' and ``operating lease'' terminology in the Proposing Release,
it is discontinuing the use of such terms in connection with the
definition of the term ``financial obligation.'' Instead, as discussed
below, the Commission is providing guidance that the term ``debt
obligation'' generally should be considered to include lease
arrangements entered into by issuers and obligated persons that operate
as vehicles to borrow money.
---------------------------------------------------------------------------

    \128\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \129\ Id. at 13937.
    \130\ See Proposing Release, supra note 3, 82 FR at 13937-38.
    \131\ For a description of GASB's decision to discontinue its
use of the ``capital lease'' and ``operating lease'' terminology,
see Governmental Accounting Standards Board, Statement No. 87--
Leases (June 2017), available at http://www.gasb.org/jsp/GASB/Document_C/DocumentPage?cid=1176169170145&acceptedDisclaimer=true.
---------------------------------------------------------------------------

    Commenters criticized the inclusion of leases, without limitation,
in the definition of ``financial obligation'' as

overbroad and argued that the Commission should exclude ``operating
leases'' from the definition of ``financial obligation.'' \132\ For
example, commenters argued that information about an issuer's or
obligated person's non-debt-related leases would not provide useful
information to bondholders, while others stated that the inclusion of
leases in the proposed definition of ``financial obligation'' would
result in a ``deluge of filings'' without adding any significant value
to the municipal securities market.\133\ Commenters also argued that
requiring disclosure of all material leases would impose significant
burdens on issuers and obligated persons.\134\ As an alternative to the
Commission's proposed treatment of leases, some commenters suggested
that the disclosure of ``capital leases'' under the Rule would be
appropriate because such obligations could compete with existing
security holders.\135\ Specifically, one commenter recommended that,
subject to the materiality qualifier, the Commission should only
require disclosure of leases that operate as a vehicle to borrow
money.\136\
---------------------------------------------------------------------------

    \132\ See, e.g., Portland Letter; San Jose Letter; BDA Letter;
East Bay Letter. See also IAC Recommendation, supra note 6.
    \133\ See, e.g., GFOA Letter (suggesting that disclosure of
operating leases would be ``superfluous to investors''); East Bay
Letter (stating that it ``does not believe the minutiae of day to
day operations would be helpful information for bond holders'').
See, e.g., Port Portland Letter (stating ``the sheer number of
leases to which the Port is a party could create a volume of
postings that would overwhelm participants in the municipal
market''); ACI Letter.
    \134\ See, e.g., UHC Letter (``The broad definition of leases
implicates a variety of lease arrangements executed by UHC in the
ordinary course of business, including office leases, copier leases,
etc. . . . [i]dentifying and evaluating the materiality of every one
of these arrangements . . . would be burdensome and costly'').
    \135\ See White Plains Letter; SIFMA AMG Letter.
    \136\ See BDA Letter.
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    The Commission agrees with commenters that, as proposed, the term
``lease'' was too broad. Accordingly, the Commission believes that it
is appropriate to limit the Rule's coverage of leases to those that
operate as vehicles to borrow money.\137\ The Commission believes that
this is appropriate because a lease entered into as a vehicle to borrow
money could represent competing debt of the issuer or obligated person.
Such leases implicate the Commission's concerns regarding access to
timely disclosure regarding their incurrence or terms because they
could, for example, contain acceleration provisions or more restrictive
debt service covenants and, as a result, could affect existing security
holder's rights.\138\ Due to the Commission's decision to narrow the
scope of leases covered by the amendments to only include those entered
into as a vehicle to borrow money, the Commission believes it is
appropriate to remove the term ``lease'' from the definition of
``financial obligation.'' As discussed below, however, leases that
operate as vehicles to borrow money generally would be debt obligations
and thus would be defined as financial obligations under the Rule.
Accordingly, the Commission believes that it is appropriate to (i)
remove the term ``lease'' from the definition of the term ``financial
obligation;'' and (ii) provide guidance that the term ``debt
obligation'' generally should be considered to include lease
arrangements entered into by issuers and obligated persons that operate
as vehicles to borrow money.
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    \137\ See id.; White Plains Letter.
    \138\ See BDA Letter.
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    As discussed above, the proposed term ``debt obligation'' did not
include leases because the Commission included the term ``lease'' as a
separate item in the definition of ``financial obligation.'' \139\ The
Commission stated in the Proposing Release that the term ``debt
obligation'' is intended to capture debt obligations of an issuer or
obligated person under the terms of an indenture, loan agreement, or
similar contract that will be repaid over time. The Commission believes
that an obligation to repay borrowed money over time under the terms of
a lease is functionally equivalent to a similar obligation that is
incurred under the terms of an indenture, loan agreement, or similar
contract.\140\ Accordingly, the Commission believes that a lease
entered into as a vehicle to borrow money is more appropriately defined
as a variety of ``debt obligation'' rather than a separate type of
``financial obligation'' as was proposed. The Commission believes that
leases entered into as a vehicle to borrow money are commonly used by
municipal securities issuers and obligated persons and, when used,
commonly understood to be a tool for facilitating an issuer's or
obligated person's ability to borrow money.\141\ Therefore, under the
Rule, a lease that operates as a vehicle to borrow money generally
should be treated like an obligation incurred under the terms of an
indenture, loan agreement, or similar contract.
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    \139\ See Proposing Release, supra note 3, 82 FR at 13937.
    \140\ See generally Association for Governmental Lease and
Finance, An Introduction to Municipal Lease Financing: Answers to
Frequently Asked Questions (July 1, 2000) (``Municipal Lease
Financing''), available at https://aglf.memberclicks.net/assets/docs/municipal_lease_financing.pdf; see also BDA Letter (arguing
that ``the definition of financial obligation should be narrowed to
include only obligations for borrowed money, leases that operate as
vehicles to borrow money, and derivatives that are executed for the
purpose of hedging these types of transactions'').
    \141\ For example, the types of leases that could be debt
obligations include, but are not limited to, lease-revenue
transactions and certificates of participation transactions.
Typically, in a lease-revenue transaction, an issuer or obligated
person borrows money to finance an equipment or real property
acquisition or improvement and a lease secures the issuer's or
obligated person's obligation to make principal and interest
payments to the lender. See Municipal Lease Financing, supra note
140; see also CA Finance Letter (stating that the majority of its
municipal securities transactions are structured as lease-revenue
transactions). In a certificates of participation transaction, the
issuer or obligated person sells certificates of participation and
the proceeds of the certificates are used, typically, to finance an
equipment or real property acquisition or improvement by the issuer
or obligated person. The issuer or obligated person, typically,
will, as part of the transaction, execute a lease with a trustee,
which serves as the mechanism through which the trustee receives
payments from the issuer or obligated person. The trustee then
proportionately distributes the lease payments it receives from the
issuer or obligated person to certificate holders to pay principal
and interest when and as due. See Municipal Lease Financing, supra
note 140.
    Moreover, in the context of Rule 15c2-12, the Commission is not
limiting the term ``debt obligation'' to debt as it may be defined
for state law purposes, but instead is applying it more broadly to
circumstances under which an issuer or obligated person has borrowed
money. Debt, as defined for state law purposes, ``ordinarily means
general obligation debt. Typically, the limitation is interpreted to
exclude revenue bonds, special fund obligations, and other debt
which is not backed by the full faith and credit of the [issuer]
coupled by the unlimited power to levy an ad valorem tax to pay such
debt.'' See Nat'l Ass'n of Bond Lawyers, Fundamentals of Municipal
Bond Law 25 (2018). The Commission believes that, for the purposes
of Rule 15c2-12, a narrow interpretation of ``debt'' would be under-
inclusive because issuers and obligated persons can, and often do,
borrow money through a variety of transactions, many of which would
not qualify as ``debt'' under relevant state laws. See id.
(describing forms of debt that would not be ``debt'' as ordinarily
defined by state law). See also Steven Maguire and Jeffrey M.
Stupak, Cong. Research Serv., RL30638, Tax-Exempt Bonds: A
Description of State and Local Government Debt (2015), available at
https://www.hsdl.org/?view&did=761823 (stating that ``an advantage
of [lease rental revenue bonds and certificates] is that many
states' constitutional and statutory definitions do not consider
this type of financing to be debt[.]'').
    For a discussion of when a debt obligation is incurred for
purposes of the Rule, see supra Section III.A.1.ii.
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    In the Proposing Release, the Commission included the phrase ``that
will be repaid over time'' when discussing the term ``debt
obligation.'' As adopted, the Rule does not include the phrase ``that
will be repaid over time'' to avoid any suggestion that there is a
temporal consideration regarding the repayment period of a short-term
or long-term debt obligation that could be used to distinguish an
obligation that is

a ``debt obligation'' from one that is not. In the Commission's view,
any short-term or long-term debt obligation of an issuer or obligated
person under the terms of an indenture, loan agreement, lease, or
similar contract \142\ is covered by the term ``debt obligation''
regardless of the length of the debt obligation's repayment period.
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    \142\ A ``similar contract'' could, for example, include a line
of credit obtained from a bank or other lender.
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    As adopted, the term ``debt obligation'' includes short-term and
long-term debt obligations of an issuer or obligated person under the
terms of an indenture, loan agreement, lease, or similar contract.
    With respect to leases that do not operate as vehicles to borrow
money, the Commission agrees with commenters that the burden of
assessing their materiality and disclosing such leases within ten
business days would not justify the benefit of such disclosures. While
the Commission continues to believe that lease arrangements that are
not vehicles to borrow money might be relevant to the general financial
condition of an issuer or obligated person, the Commission also
believes that such lease arrangements do not warrant inclusion in the
Commission's definition of ``financial obligation'' because they
generally do not represent competing debt of the issuer or obligated
person.\143\ Accordingly, at this time, the Commission does not believe
that such leases raise the same concerns regarding timely disclosure of
their incurrence as leases entered into as a vehicle to borrow
money.\144\
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    \143\ See BDA Letter (stating that leases entered into in the
ordinary course of an issuer's operations do not represent competing
debt and should be excluded from the definition of financial
obligation); see also TASBO Letter (stating that operating
transactions ``have little or no impact on a school district's
ability to pay debt service on public securities secured by a
separate unlimited ad valorem debt service tax'').
    A determination of whether a lease is a ``debt obligation''
should be based on the substance of the arrangement, not its label.
Accordingly, any type of lease arrangement could, under the
appropriate facts and circumstances, be a ``debt obligation'' and be
subject to disclosure under the Rule, if it is entered into as a
vehicle to borrow money and is material.
    \144\ Several commenters stated that such disclosures would
likely be available in an issuer's or obligated person's audited
financial statements. See, e.g., Arlington SD Letter; Lebanon
Letter. Examples of such leases that are typically not vehicles to
borrow money that are common among issuers and obligated persons
include, but are not limited to: Commercial office building leases
(see San Jose Letter), airline and concessionaire leases at airport
facilities (see ACI Letter and DFW Letter), and copy machine leases
(see PFM Letter). Unless they are a debt obligation under the Rule,
disclosure of these types of lease arrangements pursuant to the Rule
will not be required. However, issuers and obligated persons may
choose to voluntarily disclose such leases to EMMA.
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ii. Derivative Instrument Entered Into in Connection With, or Pledged
as Security or a Source of Payment for, an Existing or Planned Debt
Obligation
    As proposed, the term ``derivative instrument'' was intended to
capture any swap, security-based swap, futures contract, forward
contract, option, any combination of the foregoing, or any similar
instrument to which an issuer or obligated person is a
counterparty.\145\ The Commission stated that though issuers and
obligated persons may not use each type of derivative instrument
listed, the proposed list was sufficiently broad to cover the use of
derivative instruments that may develop in the future.\146\ As
discussed below, many commenters raised questions about the proposed
scope of the term ``derivative instrument.'' A common theme was that
the Commission should limit the scope of derivative instruments covered
by the Rule to those instruments related to debt, such as interest-rate
swaps, because only such instruments could compete with the rights of
existing securities holders.\147\ Commenters also stated that an overly
broad interpretation of the term would elicit disclosures that would be
of minimal value to investors because such instruments would not
represent competing debt of an issuer or obligated person.\148\
Commenters cited instruments entered into to manage fuel prices or
power price volatility or to reduce other similar risks related to
commodity or future inventory purchases by issuers and obligated
persons as the types of instruments that should not be covered by the
Rule.\149\
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    \145\ See Proposing Release, supra note 3, 82 FR at 13938.
    \146\ Id.
    \147\ See, e.g., LPPC Letter.
    \148\ See id., Kissimmee Letter; BDA Letter; and WPPI Letter
(stating ``in the normal course of operations, power utilities enter
physical commodities derivatives and we would strongly oppose the
inclusion of these lengthy contracts as a material event'').
    \149\ See LPPC Letter.
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    The Commission continues to believe derivative instruments should
be included in the adopted definition of the term ``financial
obligation'' because such instruments could adversely impact an
issuer's or obligated person's liquidity and overall creditworthiness,
or adversely affect security holders.\150\ However, the Commission
agrees with commenters that the term, as proposed, was too broad, and
is adopting a more tailored approach to derivative instruments by
limiting the definition to those that are ``entered into in connection
with, or pledged as security or a source of payment for, an existing or
planned debt obligation.'' In the Commission's view, derivative
instruments entered into in connection with an existing or planned debt
obligation such as an interest rate swap could, for example, expose an
issuer or obligated person to contingent liquidity risk, such as a
requirement to post collateral or pay a termination fee upon the
occurrence of certain events,\151\ any of which could adversely impact
the issuer's or obligated person's liquidity and overall
creditworthiness, and affect the interests of security holders.
Therefore, such instruments raise the Commission's fundamental concern
that security holders lack access or lack timely access to information
about an issuer's or obligated person's material financial obligations.
Accordingly, as adopted, the definition of ``financial obligation''
includes a ``derivative

instrument entered into in connection with, or pledged as security or a
source of payment for, an existing or planned debt obligation.''
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    \150\ In its comment letter, NABL argued that the Commission
offered little evidence of the need for disclosure of derivative
instruments. See NABL Letter. But see NFMA, Recommended Best
Practices in Disclosure for Direct Purchase Bonds, Bank Loans, and
Other Bank-Borrower Agreements (June 2015), available at http://www.nfma.org/assets/documents/RBP/rbp_bankloans_615.pdf (stating,
``In any credit analysis, liquidity is a key component. Bank loans--
like a host of other financial products, including LOCs, liquidity
facilities, and swaps--often include obligor payment provisions that
change upon the occurrence of certain events. These `triggers' can
result in the acceleration of debt payments or in the requirement
for the payment or posting of collateral for termination payments,
either of which can potentially impair obligor liquidity''). See
also Elizabeth Campbell, Chicago Settling $390 Million Tab When City
Can Least Afford It, Bloomberg (Mar. 17, 2016), available at https://www.bloomberg.com/news/articles/2016-03-17/chicago-settling-390-million-tab-when-city-can-least-afford-it (stating that the City of
Chicago had already paid about $290 million to exit various swaps
and was planning to spend $100 million more). See also Government
Finance Officers Association, Potential Impacts of Tax Reform on
Outstanding and Future Municipal Debt Issuance (Feb. 2018),
available at http://www.gfoa.org/potential-impacts-tax-reform-outstanding-and-future-municipal-debt-issuance (highlighting
derivatives as a tool to simulate tax-exempt advance refundings,
which were abolished under recent changes to the federal tax laws,
and reminding issuers to ``fully understand'' the ``specific
benefits, risks, and costs'' of such a financial tool), and Brian
Tumulty, What GFOA is Warning on Alternatives to Advance Refundings,
The Bond Buyer (Feb. 15, 2018), available at https://www.bondbuyer.com/news/what-gfoa-is-warning-on-alternatives-to-advance-refundings?brief=00000159-f607-d46a-ab79-fe27f2be0000.
    \151\ See e.g., Ianthe Jeanne Dugan, School District, Bank in
Swap Clash, Wall St. J. (May 24, 2011), available at https://www.wsj.com/articles/SB10001424052702303654804576341772921133838
(discussing potential swap termination fee liability of a school
district to its swap counterparty); see also Statement of State
College Area School District Board of School Directors (Jan. 14,
2013) (``State College Area Swap Statement''), available at http://www.statecollege.com/news/local-news/state-college-area-school-district-agrees-to-9-million-payment-in-interest-rate-swap-agreement-with-royal-bank-of-canada,1222044/.
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    The term ``derivative instrument entered into in connection with,
or pledged as security or a source of payment for, an existing or
planned debt obligation'' is not limited to derivative instruments
incurred by issuers or obligated persons solely to hedge the interest
rate of a debt obligation or to hedge the value of a debt obligation to
be incurred in the future.\152\ Instead, the term covers any type of
derivative instrument that could be entered into in connection with, or
pledged as security or a source of payment for, an existing or planned
debt obligation. Accordingly, the Commission reiterates that the
definition captures any swap, security-based swap, futures contract,
forward contract, option, any combination of the foregoing, or any
similar instrument to which an issuer or obligated person is a
counterparty in the adopted definition of ``financial obligation''
provided that such instruments are related to an existing or planned
debt obligation.\153\ This includes, under certain circumstances,
instruments that are related to an existing or planned debt obligation
of a third party. To determine whether a derivative instrument that
relates to an existing or planned debt obligation of a third party is
covered by paragraph (b)(5)(i)(C)(15), the Commission believes that it
would be reasonable to distinguish derivative instruments designed to
hedge against the risks of a related debt obligation (i.e., debt-
related derivatives) from derivative instruments designed to mitigate
investment risk. In the Commission's view, the former generally would
be covered by paragraph (b)(5)(i)(C)(15), while the latter would not.
This definition is sufficiently comprehensive to cover the use of
derivative instruments that may develop in the future, while, at the
same time, limiting the scope of its current and future application to
the types of instruments that are related to an existing or planned
debt obligation.
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    \152\ For a discussion of when an issuer or obligated person
should assess the materiality of a derivative instrument entered
into in connection with, or pledged as security or a source of
payment for, an existing or planned debt obligation, see supra
Section III.A.1.ii.
    \153\ See Proposing Release, supra note 3, 82 FR at 13938.
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    The Commission believes that a debt obligation is ``planned'' at
the time the issuer or obligated person incurs the related derivative
instrument if, based on the facts and circumstances, a reasonable
person would view it likely or probable that the issuer or obligated
person will incur the related yet-to-be-incurred debt obligation at a
future date. In the Commission's view, it would be likely or probable
that an issuer or obligated person will incur a future debt obligation
if, for example, the relevant derivative instrument would serve no
economic purpose without the future debt obligation (regardless of
whether the future debt obligation is ultimately incurred).\154\ For
example, in a forward starting interest rate swap transaction, an
issuer or obligated person typically incurs the forward starting
interest rate swap in advance of the incurrence of a debt obligation.
As part of such agreement, the issuer or obligated person agrees to pay
its counterparty interest at a fixed rate, and, in exchange, the
counterparty agrees to provide payments to the issuer or obligated
person at a variable rate.\155\ These payment obligations will commence
and the initial rate for the counterparty's variable rate payments will
be set only once the related debt obligation is incurred. In addition,
upon incurrence of the forward starting interest rate swap, the issuer
or obligated person would typically pay a premium to its swap
counterparty to establish the fixed rate payment based on the then
prevailing interest rates. Accordingly, without the future incurrence
of a debt obligation, the forward starting interest rate swap would
have no economic value (for the issuer or obligated person). Therefore,
the Commission believes that such an instrument would generally serve
no economic purpose (for the issuer or obligated person) except if and
when it is paired with a planned incurrence of a debt obligation.
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    \154\ See State College Area Swap Statement, supra note 151.