The changes to the SEC rule governing continuing disclosure for tax-exempt hospitals and other municipal borrowers are now in effect. Here’s a quick overview on how you may be affected and what to do about it.


What’s changed?

Starting with primary bond offerings completed on or after December 1, 2010, SEC Rule 15c2-12 now requires borrowers to report certain events within 10 business days of occurrence. The previous requirement was to report to EMMA on a “timely manner”, which some hospitals interpreted very casually as EMMA filings indicate. In addition, the amendment removed the materiality requirement from certain events, making their reporting mandatory. The current list includes:

Mandatory Events:

  • Rating changes.
  • Principal and interest payment delinquencies.
  • Unscheduled draws on debt service reserves reflecting financial difficulties.
  • Unscheduled draws on credit enhancements reflecting financial difficulties.
  • Substitution of credit or liquidity providers, or their failure to perform.
  • Adverse tax opinions or events affecting the tax-exempt status of the bonds.
  • Defeasances.
  • Tender offers (excludes regularly scheduled mandatory sinking fund redemptions).
  • Bankruptcy, insolvency, receivership or similar event.

Events Subject to Materiality:

  • Modifications to rights of bondholders.
  • Non-payment related defaults.
  • Consummation of a merger, consolidation or acquisition.

What does this mean for hospitals?

On one hand, Rule 15c2-12 continues to apply to bond underwriters and broker/dealers and most continuing disclosure agreements only require specific performance from the hospital as a remedy for failure to disclose (for more information, see Is Your Hospital Bond Disclosure Up To Snuff?).

On the other hand however, bondholders and rating agencies are paying more and more attention these days to the quality and frequency of disclosure, so ignoring a rule designed to improve market transparency could have a detrimental effect on your future access to funding and your cost of debt. Most bondholders equate poor disclosure with a higher risk premium.

Note that the old requirements apply until a new bond issue is sold, and that the requirements may vary for LOC-backed VRDBs (variable rate demand bonds), so best to check with your legal counsel or financial advisor.

What can be done to avoid disclosure problems?

Hospitals should designate a point person within the Finance function to monitor events and flag anything that looks reportable for management to address. For most hospitals, this will not require a lot of time and will help keep the organization in compliance.