Earlier this year, the Securities and Exchange Commission published for comment proposed amendments to the Municipal Securities Disclosure Rule (Rule 15c2-12). The existing rule is complicated and I will not attempt to explain it here. For purposes of this discussion, suffice it to say that the SEC is proposing to add an event notice for the occurrence of a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer or obligated person, provided the occurrence reflects financial difficulties, to the list of events listed in the Rule. Neither the rule nor the proposed amendments include a definition of “financial difficulties”.
In reading the proposed amendment, I was struck by just how vague a standard “financial difficulties” is. All issuers face financial difficulties. Further, what does it mean to “reflect” financial difficulties. The SEC correctly points out that “the concept of ‘reflecting financial difficulties’ has been used since the adoption of Rule 15c2-12 in paragraph (b)(5)(i)(C)(3) and in paragraph (b)(5)(i)(C)(4)”. However, I’m skeptical of the SEC’s claim that “market participants should be familiar with the concept as it relates to the operation of Rule 15c2-12”. How does the SEC know? I am not aware of a single judicial decision interpreting the phrase. The SEC’s claim of familiarity is belied by comment letters, such as this, noting the lack of guidance concerning the meaning of the term.