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Navigating the Disclosure Labyrinth in Municipal Finance: A Practical Approach

One of the primary purposes of the Securities and Exchange Commission (the “SEC”) is to ensure that the investing public obtains accurate, timely and comprehensive information with respect to publicly-traded securities. The SEC regulates the release of such information through the antifraud provisions of the federal securities laws, particularly Section 17(a) of the Securities Act of 1933 and SEC Rule 10b-5 (established under Section 10(b) of the Securities Exchange Act of 1934) (“Rule 10b-5”). Like public companies, governmental issuers of municipal bonds must comply with these antifraud provisions when making public statements that are reasonably expected to reach investors and the trading market. In recent years, the SEC has undertaken unprecedented enforcement activity relative to such disclosures, both in terms of the number of actions and the enforcement tools at its disposal. Significantly, recent SEC enforcement actions have involved not only governmental issuers, but also their individual officials.

As a result, issuers are taking a fresh look at their disclosure practices relative to their public finance transactions, paying particular attention to the individuals tasked with: (i) assuring that the issuer’s disclosure documents for a particular bond issue comply with federal securities law requirements and (ii) assisting the issuer with its post-issuance disclosure obligations. Often, the issuer’s bond counsel and financial advisor take the lead in overseeing these matters. Alternatively, in situations involving unique or complicated disclosure questions, separate disclosure counsel may be engaged to advise the issuer on its disclosure obligations.

The involvement of legal counsel notwithstanding, the issuer is ultimately responsible for complying with its disclosure obligations under the federal securities laws. This blog is intended to help issuers in navigating these considerations, focusing on: (i) the preparation of the issuer’s offering circular, commonly known as the official statement (the “Official Statement”), in connection with the public sale of its municipal bonds; (ii) the issuer’s ongoing disclosure requirements once the bonds are issued, including the effect of the issuer’s other financial obligations on these requirements; (iii) the impact of the issuer’s other public statements in relation to the antifraud provisions; (iv) guidelines for preparing effective disclosure policies and procedures to facilitate these requirements; and (v) a brief word on environmental, social and governance (“ESG”) matters as they relate to the issuer’s disclosure obligations.

The Official Statement

The Official Statement is used as a marketing tool to attract potential investors in connection with the public sale of municipal bonds. It describes the details of the bonds and discloses information about the issuer, its finances and operations. Investors, in turn, use this information to decide whether to purchase the bonds.

As noted above, the issuer’s statements included in the Official Statement are subject to the antifraud provisions of the federal securities laws.  These provisions are designed to ensure that investors in municipal bonds have access to accurate and complete information about the creditworthiness of the issuer, in order to make an informed investment decision. Specifically, under Rule 10b-5, the information provided to investors must not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements included therein not misleading. For purposes of Rule 10b-5, a fact is material if there is a substantial likelihood that a reasonable investor would have viewed it as significantly altering the total mix of available information, given the particular facts and circumstances of each instance.

With this standard in mind, working group members for a particular bond transaction (e.g., the issuer, its bond counsel and/or disclosure counsel, financial advisor, underwriter and underwriter’s counsel) typically approach the Official Statement by considering the following fundamental questions:

  • Does the Official Statement contain any misleading information?
  • Does the Official Statement omit any material information about the issuer?
  • Does the Official Statement otherwise fairly represent the credit of the issuer?

To ensure the accuracy of this information, the issuer and the other working group members review the Official Statement against the issuer’s most recent financial statements, proposed transaction documents and other available issuer information. The issuer and working group members also consider whether the information presented reflects any significant or otherwise noteworthy developments or changes to the issuer’s overall financial or operational outlook from year to year, which may require additional disclosure. As part of this review, the issuer may designate one or more of its employees with responsibility for updating certain sections of the Official Statement. These employees are available to answer questions and otherwise confirm information presented by the working group. In any event, the issuer should be contacted immediately if any of the information presented in the Official Statement cannot be independently verified, or any significant topics are uncovered but not addressed in the Official Statement. Based on this review, the issuer and working group members may propose additional disclosure or revisions for the Official Statement.

Many issuers access the municipal bond market frequently (sometimes several times per year) as a cost-effective means of borrowing money. As a result, some Official Statements include updated information about an issuer that is simply layered on top of historical or older background information.  The historical and background information, although interesting, may not add to the issuer’s current financial or operational picture. By paring down this extraneous historical background, yet retaining the current, and more significant, financial information, an issuer may find that the Official Statement becomes less dense and more reader-friendly.

Additionally, the SEC encourages the use of “plain English” to convey information in corporate disclosure documents, and this format has been adopted with increasing regularity in Official Statements as well. Furthermore, where the bond issue involves complex structures or repayment sources, issuers have incorporated tables and charts in order to convey this more nuanced information.  Overall, the aim is to present information to investors in a comprehensive, but also clear and succinct, manner (using common words, descriptive headers, visual cues, active voice, etc.) without sacrificing accuracy.

Continuing Disclosure Compliance

One of the ways in which the SEC protects investors is by regulating underwriters through SEC Rule 15c2-12 (“Rule 15c2-12”).  Pursuant to Rule 15c2-12, prior to participating in a primary offering of municipal bonds, an underwriter must reasonably determine that the issuer has committed, through the execution of a continuing disclosure agreement, to provide investors with annual financial information and operating data of the type presented in the Official Statement for the bonds (the “Annual Report”), as well as notices of the occurrence of certain events listed in Rule 15c2-12 with respect to the bonds (the “Event Notices”).[1] Issuers are required to file the Annual Reports and the Event Notices with the Municipal Securities Rulemaking Board (the “MSRB”) through its Electronic Municipal Market Access (“EMMA”) website for as long as the municipal bonds remain outstanding.  Particularly, the Event Notices must be filed in a timely manner not in excess of ten business days of each occurrence.

The Official Statement must also disclose any instances within the past five years where the issuer failed to comply, in all material respects, with any previous continuing disclosure undertakings. To confirm such compliance, the issuer, in coordination with the other working group members, typically reviews its Annual Report filings for the past five years, determining whether they were filed by the deadline set forth in its prior continuing disclosure agreements and otherwise included the required financial information and operating data. The issuer also must verify: (i) the occurrence (if any) of the enumerated events described in Rule 15c2-12 during such period and (ii) the filing of the required Event Notices. Simultaneously, the underwriter and its counsel conduct an independent review of the issuer’s continuing disclosure compliance history.

Ideally, the components of an issuer’s Annual Report will remain consistent across all of its outstanding bond issues. However, many issuers have multiple series of bonds outstanding with varied security/repayment structures.  As a result, an issuer’s continuing disclosure undertaking with respect to its Annual Reports may vary from deal to deal. Additionally, an issuer may decide to update the contents of an Annual Report for a new bond issue, even though the older filing requirements will remain in effect as long as the issuer’s prior bonds remain outstanding. In these situations, it may be helpful to prepare a spreadsheet of the issuer’s continuing disclosure compliance obligations for each outstanding bond issue (i.e., the Annual Reports, Event Notices and filing deadlines) in order to track the different requirements.

If a compliance issue is identified, the situation is addressed by making a corrective EMMA filing and including an accompanying statement in the Official Statement for the current bond issue. To avoid any repeated compliance issues, some issuers engage its bond counsel, disclosure counsel and/or financial advisor to assist with the timely filing of Annual Reports and Event Notices.

The Impact of the Issuer’s Financial Obligation

In 2019, the SEC amended Rule 15c2-12 to add two additional events for which issuers are required to provide Event Notices: (1)(i) the incurrence of any new financial obligation, if material, or (ii) any agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation (e.g., an amendment to the terms of an existing financial obligation), any of which affect security holders, if material, and (2) the occurrence of certain events (e.g., default, acceleration, termination, modification of terms, or other similar events) with respect to a financial obligation which reflect an issuer’s financial difficulties. These changes apply to continuing disclosure agreements executed on or after February 27, 2019. As with the other Event Notices, the issuer must file notice of these events within ten (10) business days of their occurrence.

The new events described in subsection (ii) of subpart (1) and in subpart (2) above are significant, since once an issuer executes a continuing disclosure agreement incorporating these new notice requirements, all of the issuer’s existing financial obligations are subject to potential disclosure, regardless of when the financial obligation was incurred. In other words, issuers may be responsible for filing Event Notices not only with respect to a new financial obligation, but also for amendments to its existing financial obligations.  Additionally, in contrast to subpart (1) above, the events described in subpart (2) above do not include a materiality qualifier; rather, such events must be disclosed if they reflect an issuer’s financial difficulties.

Financial obligations are related to debt and debt-type products (derivatives and guarantees of debt, for example) and not normal business operations. The types of financial obligations that are captured under the amendments include direct placement bond issues (where a commercial bank purchases the entire bond issue for investment), bank loans and lines of credit, capital leases, interest rate swaps, guarantees, or other funding mechanisms that operate as vehicles for the issuer to borrow money.

An issuer may look to its bond counsel, disclosure counsel and/or financial advisor as a resource in determining whether to file an Event Notice relative to its financial obligations. In any event, issuers may find the following guidelines helpful in considering these additional events, any or all of which can be built into the issuer’s general disclosure policies and procedures:

  • Review existing debt management and disclosure policies to determine how they address the incurrence of, and amendments to, financial obligations.
  • Create a master list of all current financial obligations and designate an issuer official charged with monitoring it.
  • Have a process in place to add new financial obligations to the master list.
  • Developing a system to track amendments to the financial obligations and any financial difficulties affecting these obligations.
  • Create an Event Notice template for financial obligations for filing on EMMA, including material terms to be disclosed such as:
    • The date the financial obligation is incurred or amended/modified,
    • The principal amount,
    • The maturity dates and amortization schedule,
    • The interest rate, if fixed, or method of computing interest, if variable, and default rates (if any),
    • The collateral securing the financial obligation,
    • Key covenants,
    • Events of default, acceleration and termination, and
    • Such other terms as are appropriate under the circumstances.
  • Develop a process for reporting the required matters relative to financial obligations to EMMA within ten (10) business days after the occurrence.
  • Work with bond counsel, disclosure counsel and/or the financial advisor to determine the materiality of the issuer’s financial obligations and when financial difficulties may arise.

As to the last point, one of the most difficult tasks in analyzing financial obligations is determining materiality. To determine whether a financial obligation, or the terms of a financial obligation, are material, the SEC has cited the same test used in the preparation of disclosure documents, i.e., whether the financial obligation or the terms of the financial obligation, if they affect security holders, would be important to a reasonable investor in making an investment decision. With this consideration as a backdrop, issuers have developed a number of tests for determining the materiality of financial obligations.

One approach is for the issuer to take on the role of a hypothetical reasonable investor and ask the question “what facts would I want brought to my attention in order to make an informed investment decision regarding the purchase of these bonds?” In other words, the issuer is evaluating the likelihood that a reasonable investor would include the issuer’s financial obligation among such facts and its level of importance. But this is by no means the only method for evaluating materiality. In contrast, some issuers assign a dollar value to the question of materiality, defining it as a percentage of the issuer’s overall annual budget, for example. This dollar value is then compared to the principal amount of the financial obligation to determine its materiality. In applying this method, an issuer may also weigh the concentration of its existing financial obligations with any single creditor at that time.  Alternatively, a financial obligation may be considered material if it provides the creditor with additional and significant covenants or rights that extend beyond those provided to the issuer’s bondholders.  As is evident from these examples, there is no universal standard for determining materiality. Issuers should work with their counsel to develop a materiality test that works best for them, given their particular facts and circumstances, so that they remain in compliance with these requirements.

Other Available Information

Sometimes, an issuer will make public statements, or use investor websites, to communicate general information to investors. Doing so, when approached cautiously, not only promotes transparency, but also access to significant and current information regarding the issuer. Nevertheless, such public statements could expose an issuer to liability under the antifraud provisions of the federal securities laws, even if the statements are made outside of a particular bond issue. This is especially the case when the official making the statement is viewed as having knowledge of the issuer’s financial condition or operations. At a minimum, issuer’s should consider including a statement or disclaimer on their investor websites to the effect that:

  • The information posted to the website is included for general informational purposes only.
  • Past results do not necessarily forecast future results.
  • Such information is limited in scope and does not contain all material information necessary for an investor to make an informed investment decision.
  • Nothing contained on the website should be construed as an offer to sell securities or the solicitation of an offer to buy securities.
  • Such information speaks only as of its date and has not been updated since such date.
  • The issuer is under no obligation to update such information except as set forth in its continuing disclosure agreements.
  • Certain financial information and operating data, as well as information regarding certain material developments with respect to the issuer and its bonds may be found on EMMA.

Although it may seem obvious, the accuracy and timeliness of any public statements, whether included in Official Statements, posted to investor websites, made to the media, or otherwise, should be carefully reviewed in advance, in order to reduce the risk of inadvertently misleading investors. 

Disclosure Policies and Procedures

Written disclosure policies and procedures can be a useful tool for identifying and disclosing material information in a timely manner. The most effective disclosure policies follow a practical and organic approach specifically tailored to each issuer’s needs, combining existing practices with additional steps to strengthen them. An example of such an approach involves the following five-step process:

  • Consider whether any new and relevant disclosure guidelines or reports have been issued by the MSRB, the National Federation of Municipal Analysts, the Government Finance Officers Association, the Bond Buyer, the National Association of Bond Lawyers, or other industry resources.
  • Identify the issuer’s current policies for preparing, reviewing and approving its disclosure.
  • Use the following criteria to evaluate the issuer’s current policies:
  • Do the policies involve all subject matter experts within the issuer’s organization?
  • Do the policies identify who within the issuer’s organization is responsible for reviewing and approving the various components of the issuer’s Official Statement, the Annual Reports and Event Notices?
  • Do the policies include the approval of the proper level of authority within the issuer’s organization?
  • Do the policies incorporate internal disclosure discussions designed to ensure that the relevant personnel are meeting together to communicate concerns and questions with each other?
  • Do the policies include an appropriate process of documenting the steps the issuer has taken in preparing the disclosure?
  • Do the specific policies governing the issuer’s ongoing continuing disclosure undertakings:
  • Identify the required information to be included in the issuer’s Annual Report filings?
  • Disclose the deadlines by which the filings must be made?
  • List the Event Notices required by Rule 15c2-12 and included in the issuer’s continuing disclosure agreements?
  • Include a template to be used in connection with the filing of Event Notices?
  • Ensure the accuracy and timeliness of the reported information?
  • Include a procedure for confirming the issuer’s continuing disclosure compliance history?
  • Identify the person(s) who is/are responsible for the filings?
  • Do the policies provide for periodic training and education of staff members involved in the preparation of the Official Statements, Annual Reports and Event Notices, to ensure that they understand the issuer’s responsibilities under the federal securities laws?

These guidelines should serve as a starting point in developing a set of workable disclosure policies, with adaptations to suit each issuer’s unique circumstances and particular needs. In the end, the important takeaway is to develop a process that produces accurate and complete information and avoids unforced errors.

A Word on ESG Disclosure

In order to make an informed investment decision when purchasing municipal bonds, the latest trend is for investors to consider ESG factors in evaluating an issuer’s overall financial condition, operations and future prospects. The “environmental” factor considers the issuer’s plans for mitigating and managing severe weather and climate-related events, promoting energy efficiency, renewable energy projects, reducing pollution and carbon emissions, and maintaining and improving public transportation and drinking water and wastewater systems. The “social” factor evaluates the issuer’s approach to providing public educational services, quality healthcare and mental health services and affordable housing to underserved populations, combating income disparities and unemployment, and promoting crime prevention. Finally, the “governance” factor focuses on the issuer’s overall decision-making processes, including internal controls, financial and budgeting practices, policymaking, transparency, cybersecurity, pension and OPEB liabilities and long-range planning.

Given this growing investor interest, issuer-related ESG disclosure is beginning to appear in Official Statements in varying degrees of emphasis, depending on the relation of the ESG factors to the particular issuer and its investor mix. Additionally, specific bond issues labeled as “green,” “climate,” “social” or “sustainability” are increasing in popularity, where the issuer dedicates the proceeds to specific ESG-related projects. Although the concepts have certain similarities, providing general ESG disclosure regarding an issuer in an Official Statement does not necessarily transform a bond issue into green, climate, social or sustainability bonds. Likewise, providing specific project-related details in connection with an issuance of green, climate, social or sustainability bonds may capture some, but not all, of the ESG disclosure matters relative to issuers generally. Stated differently, where general ESG disclosure focuses on the issuer’s overall outlook, a “green,” “climate,” “social” or “sustainability” bond issue focuses on the use of the bond proceeds to finance a particular ESG-related project or set of projects. In any event, given the antifraud provisions of the federal securities laws, issuers should proceed with caution when including any new ESG disclosure in Official Statements. Additionally, issuers and underwriters should carefully consider whether any new ESG disclosure would be picked up by the filing requirements for Annual Reports under the issuer’s continuing disclosure agreements.

Whether focused on an issuer generally or a bond issue specifically, some industry participants have advocated for the use of uniform ESG criteria, as a means of promoting clear and consistent disclosure within the public finance industry. However, questions remain as to whether a standardized approach would be feasible for issuers and meaningful to investors, given the diversity of issuers and credits in the municipal space. In contrast, others have advocated for a principles-based approach, with general guidelines that can be applied or adapted to particular facts and circumstances. In any case, it is likely that specific ESG disclosure frameworks, in various iterations, will find their way into issuer disclosure policies sooner rather than later.

Concluding Thoughts

An issuer’s approach to disclosure has emerged as a major focus of the SEC and its staff. In that respect, by following effective disclosure practices, issuers reduce the risk of an SEC investigation, before, during and after a particular bond issue. Nevertheless, some issuers consider the process of developing disclosure policies and procedures to be unwieldly, expensive and inefficient.  This is particularly true where issuers are presented with a “one size fits all” approach that fails to consider the issuer’s particular facts and circumstances. This approach has the tendency of creating two extremes – the issuers who adopt a set of procedures that are incoherently followed, or the issuers who refrain from doing so out of concern that the procedures are too foreign or burdensome to their operations. As outlined above, however, it is possible to develop policies with respect to the information presented in Official Statements, as well as ongoing disclosure matters, that are not only consistent with federal antifraud standards, but also organic, adaptable and user-friendly for the issuer. Such policies have a greater likelihood of producing accurate, timely and complete disclosures regarding the creditworthiness of the issuer and are more likely to be consistently followed in the future.

The foregoing discussion is intended to provide an overview of certain key issues affecting disclosure in municipal finance. For specific guidance in comprehending this nuanced area of the law, readers are encouraged to contact Neal Pandozzi at with any questions.

[1] The listed events requiring Event Notices include: (i) principal and interest payment delinquencies; (ii) non-payment related defaults, if material; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) unscheduled draws on credit enhancements reflecting financial difficulties; (v) substitution of credit or liquidity providers, or their failure to perform; (vi) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations affecting the tax status of the bonds, or other material events affecting the tax status of the bonds; (vii) modifications to rights of bond holders, if material; (viii) bond calls, if material, and tender offers; (ix) defeasances; (x) release, substitution, or sale of property securing repayment of the bonds, if material; (xi) rating changes; (xii) bankruptcy, insolvency, receivership or similar event of the issuer; (xiii) the consummation of a merger, consolidation or acquisition involving the issuer or the sale of all or substantially all of the assets of the issuer, other than in the ordinary course of business, and the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; (xiv) appointment of a successor or an additional trustee or change of name of a trustee, if material; (xv) incurrence of a financial obligation of the issuer, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the Institution, any of which affect bond holders, if material; and (xvi) default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer, any of which reflect financial difficulties. The events described in subparts (xv) and (xvi) are further discussed below.

About The Author

Neal R. Pandozzi

Neal Pandozzi is Co-Chair of the firm’s Public Finance group.  Neal has over two decades of experience in New England public… Read More

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