Bradley Partner Rod Kanter Quoted in The Bond Buyer on Confusion Surrounding Materiality Debate

Bradley attorney Rod Kanter was quoted in The Bond Buyer on why issuers are avoiding the Securities and Exchange Commission’s (SEC) recently implemented amendments to Rule 15c2-12. Under this revision, issuers are required to disclose when they incur financial obligations, if material, as well as agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer that could affect security holders. These amendments have issuers questioning whether information is material to investors or not, and what information needs to be disclosed.  

The municipal bond market is still in its education phase after the recently implemented events, said Kanter.

“Up til now it’s mostly been let’s get ready so we can comply,” he explained. “It’s been the difficult discussion with the issuer of why it is that they need to go and pull all their old loans and other arrangements that could be considered financial obligations and look at them.”

In Event 16, issuers need to disclose for any of their financial obligations, defaults, accelerations, modifications and similar events which reflect financial difficulties. This could be, for example, a current covenant breach on a bank loan, even if that loan was closed several years earlier, Kanter said.

“In some respects, the new rules operate as if there’s a bond lawyer sitting with the issuer in their day to day life,” he explained.

“It’s getting issuers to get their arms around the fact that they’re going to have to scrub, understand and report things about all their financial obligations, not just debt sold in the public bond market,” Kanter said.

He added that he suspects this err on the side of caution approach may come about as disclosure decisions are made under two new material events, partly because of the absence of guidance from the SEC and the Municipal Securities Rulemaking Board regarding what is material.

“I can see some kicking the materiality discussion to the side,” Kanter said. “They’re going to say it’s hard to determine what’s material so yes, disclose it.”

It’s going to take time for issuers to know when there would be a potential disclosure issue, Kanter said.

The complete article, “Issuers Avoiding 15c2-12 Materiality Debate,” first appeared in The Bond Buyer on June 21, 2019.