Continuing disclosure is a reporting requirement for information about a municipal bond that occurs after the initial issuance of the bond. This information generally reflects the financial or operating condition of the city and its management as change occurs over time. In addition, it includes specific events either financial or occurrence-driven after issuance which may have an adverse impact on the city’s ability to pay amounts owing on the bond, the bond’s value, call prior to its maturity, the timing of repayment, or any number of other key features of the bond. Each bond has its own unique set of continuing disclosures which are listed in the disclosure documents prepared by your bond counsel.
Municipal Securities Rulemaking Board
The Municipal Securities Rulemaking Board (MSRB) was created by Congress in 1975 to provide oversight of firms engaged in the municipal securities business. Since that time, the MSRB’s role has changed to maintain rules and operate market transparency systems to protect investors, issuers of municipal securities and entities whose credit stands behind municipal securities, and public pension plans. In 2010, individuals and companies that provide advice to municipal entities became regulated by the MSRB. Then, in 2011 the MSRB added a new disclosure option for municipal security issuers to consolidate the portals used for Official Statement information before a bond is sold. Securities and Exchange regulations Rule 15C2-12 stipulates the following reporting requirements:
- Annual financial information concerning issuers or other obligated persons, or other financial information and operating data provided by issuers or other obligated persons
- Audited financial statements for issuers or other obligated persons if available and if not included in the annual financial information
- Notices of the following events:
- principal and interest payment delinquencies
- non-payment related defaults
- 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 security
- modifications to rights of security holders
- bond calls; defeasances, release, substitution, or sale of property securing repayment of the securities
- credit rating changes
- Notices of failures to provide annual financial information on or before the date specified in the written undertaking
Electronic Municipal Market Access
The MSRB created the Electronic Municipal Market Access (EMMA) portal to provide electronic access for those reporting as well as those interested in the municipal securities market. Three major areas of interest are available on the EMMA portal:
- Required disclosures provided by municipal issuers and other parties known as “obligated persons” or “obligors” under contractual agreements entered into under the Securities and Exchange Commission (SEC) Rule (see below)
- Voluntary disclosures provided by issuers and obligated persons without any legal obligation to do so
- Advance refunding documents provided by underwriters when an old issue of bonds are being refinanced with a new bond
Continuing disclosure information is generally required on any new bond issuance over $1 million in total principal with certain unit thresholds. This requirement includes submitting annual audited financial statements, annual financial data reports on EMMA and any material event notices as previously described in the Rule. If there are any questions regarding these requirements, you should seek assistance from your financial advisor or your bond counsel.
Failure To Make Required Disclosures in a Timely Manner
The MSRB rules have the force of federal law. There are several other consequences for compliance failure:
- The continuing disclosure certificate is an enforceable obligation, and the city may be required, either by the underwriter, by a bond holder, and sometimes by other persons, to submit the required disclosure reports.
- Failure to comply with the continuing disclosure covenants is required to be disclosed in future official statements for at least the next five years.
- Failure to comply with continuing disclosure (bond) covenants may reduce good market access (rates) for the city’s bonds, or jeopardize the tax status of the bond.
Working with bond counsel will insure that these Internal Revenue Service, Security and Exchange Commission and Municipal Securities Rulemaking Board filings are completed upon initial issuance of new bonds. It is the city’s responsibility to make sure that future reports are compliant.