Governments or governmental entities (Issuers) issuing bonds generally have an obligation to meet specific continuing disclosure standards set forth in continuing disclosure agreements (CDAs, also called continuing disclosure certificates or undertakings). Issuers enter into CDAs at the time of bond issuance to enable their underwriters to comply with Securities and Exchange Commission (SEC) Rule 15c2-12.  This rule, which is under the Securities Exchange Act of 1934, sets forth certain obligations of (i) underwriters to receive, review and disseminate official statements prepared by issuers of most primary offerings of municipal securities, (ii) underwriters to obtain CDAs from issuers and other obligated persons to provide listed event disclosures and annual financial information on a continuing basis, and (iii) broker-dealers to have access to such continuing disclosure in order to make recommendations of municipal securities in the secondary market.
Subject to limited exceptions, when bonds are issued and publicly-offered, the Issuer enters into a CDA. Under these contractual agreements, the Issuer commits to provide to the marketplace certain financial information and notices of listed events. The Issuer will file, or cause to be filed, necessary items under the CDAs in a searchable electronic format at the Electronic Municipal Market Access (EMMA) portal (www.emma.msrb.org).
The SEC’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative in 2014, along with other recent federal regulatory actions, have highlighted the importance of maintaining a reliable system to adequately manage continuing disclosure. Failure to comply with CDAs may impair the issuer’s access to the public capital markets in a timely manner as underwriters must have a reasonable basis for believing that the issuer will meet their CDA obligations
In addition to continuing disclosure requirements, bonds issued by state and local governments are generally subject to ongoing monitoring and reporting with respect to compliance with federal tax requirements specifically related to tax-exempt bonds and a variety of other compliance obligations, such as bond indenture requirements, state and local law, and policy requirements. Please see the GFOA Best Practice entitled “Post-Issuance Policies and Procedures”.
GFOA recommends that finance officers responsible for their government’s debt management program develop a thorough continuing disclosure policy and adhere to the following best practices. Issuers should determine how to apply best practices in the manner that is relevant and most practical for their entity. Incorporating robust disclosure practices and demonstrating a solid disclosure track record will benefit an Issuer by encouraging regulatory compliance and by enhancing credibility among investors, credit rating agencies and the public, thereby resulting in optimal bond issuance results. In addition, prior to participating in an Issuer’s bond offering, underwriters must have a reasonable basis for believing that the offering statement accurately describes the past continuing disclosure compliance of the Issuer, and an understanding of the likelihood of future compliance.
Issuers should have a clear understanding of their specific reporting responsibilities as detailed in their CDAs, both with respect to financial information/operating data and the listed events. If the Issuer has determined that certain financial information and operating data is material and must be included in its official statement, its CDA should require that such information be updated annually. Issuers should work with their bond counsel, disclosure counsel, internal counsel, municipal advisor, if applicable, and underwriter (collectively the Financing Team) to determine the appropriate financial and operating information to be included in a CDA. Prior to execution, CDAs should be discussed with the issuer’s bond counsel, disclosure counsel, internal counsel, and municipal advisor to ensure a full understanding of the Issuer’s obligations, including the applicable filing deadlines contained within the CDA.
Issuers may choose to provide periodic voluntary financial information to investors in addition to fulfilling the specific SEC Rule 15c2-12 responsibilities undertaken in their CDA. It is important to note that Issuers should disseminate any financial information to the market as a whole and not give any one investor certain information that is not readily available to all investors. Issuers should also be aware that any information determined to be “communicating to the market” can be subject to regulatory scrutiny.
In addition to filing information via EMMA, an Issuer may choose to post its annual financial information and other financial reports on the investor section of its website.
Issuers should consider the following elements in creating policies and practices related to required continuing disclosure responsibilities:
1. Issuers should develop and adopt continuing disclosure procedures that:
- identify the person who is designated as responsible for compliance with CDAs and the adopted continuing disclosure policy
- require development and maintenance of accurate lists of outstanding bond issues subject to CDAs
- outline the process by which the Issuer works with its Finance Team to review, discuss and understand CDA provisions, prior to the related bond closing
- specifically identify the financial and operating information to be submitted on EMMA, by bond issue and CDA, including the required deadlines for such filings
- list the sixteen listed events and provide an ongoing framework to ensure prompt Issuer monitoring and recognition of any listed events, and timely event filing on EMMA within 10 business days of the occurrence of a listed events
- detail a process to document and track the required EMMA filings prior to each filing deadline, including use of an external dissemination agent, if applicable
- describe the process by which any voluntary filings are made
- identification of records relating to continuing disclosure that should be retained and the record retention period
- procedures to address actions and notices related to noncompliance with continuing disclosure requirements
- require ongoing disclosure training for staff and officials responsible for producing, reviewing and approving disclosure
2. Issuer representatives responsible for filing continuing disclosure should carefully review and understand the specific requirements in the CDA for each individual bond issue. For some governments, filing the complete Comprehensive Annual Financial Report (CAFR) on EMMA may fulfill annual financial information obligations. Issuers should carefully compare information in their CAFR to information required by a CDA to ensure full compliance. If a government has agreed in the CDA to furnish operating data or other information that is not included in its CAFR, that information may be included as a supplement to the CAFR when filing with EMMA. Some Issuers – especially those with multiple types of bond issues – may choose to prepare a supplemental annual disclosure document that provides the specific information identified in its CDAs (in addition to filing the CAFR).
3. A government should complete its audited annual financial information within six months of the end of its fiscal year or sooner if available. Upon its completion, the CAFR should immediately be submitted to EMMA.
4. For bonds issued on or after February 27, 2019 there are two additional event notices under Rule 15c2-12 (Events 15 and 16), dealing with “financial obligations”:
- (15) Incurrence of a financial obligation, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation, any of which affect security holders, if material
- (16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation, any of which reflect financial difficulties
“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) a guarantee of (i) or (ii). Some examples of financial obligations include but are not limited to:
- Direct placements, loans, lines of credit or other credit arrangements with private lenders or commercial banks;
- Letters of credit issued in connection with variable rate debt issuance;
- Interest rate swaps entered into in connection with debt issuance.
Procedures to ensure prompt Issuer recognition of Events 15 and 16 may be different than procedures for the other listed events since they are more general in nature and not specific to a bond or obligation.
5. Event filings with respect to the incurrence of financial obligations should include a description of the material terms of such obligation, which can be done by filing the underlying documents (any sensitive information such as bank accounts and wire information should be redacted from documents prior to posting however, interest rate and spread are considered a material term and should not be redacted).
6. Under Rule 15c2-12, underwriters cannot participate in an offering unless the Issuer includes language in their Official Statements for new bond issues describing any material non-compliance with continuing disclosure requirements within the past five years. Issuers should consult with their counsel regarding appropriate language to include in this primary disclosure, as the official statement disclosure is subject to federal securities laws (and inaccurate statements by Issuers regarding their prior compliance with CDAs was the basis for the MCDC Initiative).
7. Issuers, in consultation with internal and external counsel, may wish to submit other information beyond the requirements in the CDA (such as annual budgets, financial plans, financial materials sent to governing bodies for council or board meetings, monthly financial summaries, investment information, and economic and revenue forecasts) to EMMA and post it on their websites . Legal and regulatory implications of voluntary postings remain uncertain. Issuers should consult with Financing Team to determine the best strategy to analyze the market benefits of additional communication and any associated legal risks.
Upon implementation of a formal set of continuing disclosure policies and procedures, Issuers should also take steps to ensure standards are being diligently followed. Continuing disclosure policies and practices should be periodically reviewed (annual basis is suggested) to ensure consistency with market and regulatory expectations.
- MSRB Glossary of Terms, www.msrb.org
- GFOA Best Practice: Using Technology for Disclosure, 2020.
- GFOA Best Practice: Maintaining an Investor Relations Program, 2019.
- GFOA Best Practice: Using the Comprehensive Annual Financial Report to Meet SEC Requirements for Periodic Disclosure, 2006.
- GFOA Best Practice: Post-Issuance Policies and Procedures, 2020.
- GFOA Best Practice: Primary Market Disclosure, 2020.
- Disclosure Roles of Counsel, John McNally, Project Coordinator, ABA/National Association of Bond Lawyers, 2009.
- SEC Rule 15c2-12
- Electronic Municipal Market Access (EMMA)