The term “continuing disclosure” refers to proper handling and dissemination of important information on municipal bonds that arises after the issuance of the bond. The information typically consists of financial and operating conditions of the issuer, as it may change over time. Events which would have a major impact on the issuer’s ability to continue payments in the future, the value of the bonds as they are sold in the secondary market, timing of repayment of principal and future bonding for the municipality may also be required disclosures. Continuing disclosure is unique to each individual bonding. What is required for reporting is different for every issue.

Who needs to do “continuing disclosure”/when does Rule 15c2-12 apply?

• No disclosure required if:
  1. Issue size is $1 million or less
  2. If bonds are sold to investors in units no less than $100,000
  3. If bonds are sold to no more than 35 “sophisticated” investors
  4. If bonds are sold in $100,000 minimum denomination and mature in nine months or less
  5. If bonds were sold prior to Dec. 1, 2010 in $100,000 minimum denomination and the bond owners can require the issuer to purchase back the bonds at face value every nine months or more frequently (demand securities)

The MSRB’s Electronic Municipal Market Access (EMMA) is the municipal issuer’s repository for the “continuing disclosures”. Rule 15c2-12 of the Securities Exchange Act of 1934 (Exchange Act) outlines the required information for most new offerings of municipal securities, however, each individual bonding will have “continuing disclosure” obligations specified and the responsible party should review these requirements for their individual disclosure requirements. Following is an outline of the required information to be filed with EMMA.

• Financial or Operational Information
  1. Annual financial information (information found in a Comprehensive Annual Financial Report (CAFR) or within the Official Statement (OS))
  2. Operating data provided by the issuers or other obligated persons
  3. Audited financial statements for issuers or other obligated persons
• Event Notices
  1. Failure to file an annual report
  2. Principal and interest payment delinquencies
  3. Non-payment related defaults, if material
  4. Unscheduled draws on debt service reserves reflecting financial difficulties
  5. Unscheduled draws on credit enhancements reflecting financial difficulties
  6. Substitution of credit or liquidity providers, or other failure to perform
  7. Adverse tax opinions, IRS notices of events affecting the tax status of the security
  8. Modifications to rights of security holders, if material
  9. Bond calls, if material
  10. Tender offers
  11. Defeasances
  12. Release, substitution, or sale of property securing repayment of the securities, if material
  13. Rating changes
  14. Bankruptcy, insolvency, receivership, or similar event
  15. Merger, consolidation, or acquisition, if material; and appointment of a successor or additional trustee, or the change of name of a trustee, if material
  16. Notices of failures to provide annual financial information on or before the date specified in the written agreement

There may be additional information required as part of contractual obligation. EMMA will display the additional information if submitted by an issuer or obligated person. This information may include the following.

• Additional Financial or Operation Information:
  1. Quarterly/monthly/interim financial/budgetary/operational information
  2. Timing of annual disclosure (120/150 days)
  3. Change in fiscal year/timing of annual disclosure
  4. Accounting standards (GAAP-GASB/FASB) and any changes therein
  5. Investment/debt/financial policies and any changes
  6. Material provided to rating agency or credit/liquidity provider
  7. Consultant reports and any other financial/operating data
• Additional Event-Based Disclosures
  1. Amendment to continuing disclosure undertaking
  2. Change in obligated person
  3. Notice to investors pursuant to bond documents
  4. IRS communications other than those included under Rule 15c2-12
  5. Bid for auction rate or other securities
  6. Capital or other financing plan
  7. Litigation/enforcement action
  8. Change of tender agent, remarketing agent or other on-going party
  9. Derivative or other similar transaction or any other event-based disclosures

What do municipal issuers need to be aware of?

• Failure on the part of an issuer to comply with continuing disclosure for the previous 5 years must be disclosed in the final offering document of any new issuances
  • Failing to comply with disclosure may affect debt pricing and timing
  • Repeated failure may preclude the underwriter from underwriting the issue
  • Under MSRB Rule G-17, a municipal security cannot be offered for sale in the secondary market without disclosing an issuer’s past continuing disclosure compliance record
• Issuers lack policies or procedures adequate to ensure accurate/full disclosure
• Legislative body often approves disclosure with little or no review
• Issuer not required to certify the accuracy of disclosure
• Professionals are often hired on a transaction-by-transaction basis and lack factual knowledge derived from ongoing relationship with issuer
• If an issuer or “obligated person” does no undertake to provide “continuing disclosure”, then an underwriter may not purchase/sell primary offering of securities
• An “Obligated Person” is a person, including issuer, generally or through an enterprise, fund or account committed by contract or other arrangement to support payment of all or a part of the obligations on the municipal securities

Conclusion

The SEC has increased focus regarding due diligence and disclosure. This increased focus prompts underwriters and issuers to review the current procedures to ensure compliance with continuing disclosure. Adherence to the continuing disclosure will help your debt to remain attractive in an increasingly competitive market and provide for a more smooth financing experience.