Issuers have room for improvement in continuing disclosure
In the aftermath of the SEC’s Municipal Continuing Disclosure Cooperation initiative, the municipal market has taken notice of the requirements of 15c2-12 disclosure rules and the anti-fraud provisions of the Securities Exchange Act. The MCDC initiative yielded 71 Issuer Cease and Desist Orders which required, among other things, those Issuers to update past delinquent disclosure filings and improve their processes to ensure timely and complete disclosure going forward.
In many instances, underwriters are spending more time and resources conducting their “reasonable diligence” and issuers are taking a closer look at their filing history to ensure not only that disclosure in the preliminary official statement or official statement is accurate but also to provide underwriters the comfort they need that the issuer will meet their obligations prospectively. While data suggests some improvement around the submission of required filings, issuers need to take steps to ensure their new issue disclosures are correct and that their filings are timely, accurate and comprehensive.
With an increased focus on 15c2-12 by the underwriting community, issuers need to ensure they address the legitimate concerns and requests of underwriters in order to maintain ready access to the capital markets and maximize demand for their bonds. Underwriters, after conducting their “reasonable diligence,” need to be able to support the conclusion that the Issuer will comply with its 15c2-12 filing obligations prospectively. To do this, they look at past disclosure compliance and check for comprehensive disclosure of “material” misses or late filings in the new issue POS/OS. Where an Issuer was less than fully compliant in the past, underwriters will look for steps taken by Issuers to mitigate the risk of non-compliance in the future.
The Cease and Desist Orders issued by the SEC should serve as a baseline for the tens of thousands of Issuers that were not subject to the orders. In part, these orders require Issuers to comply with existing continuing disclosure undertakings, including updating past delinquent filings and establish policies and procedures and periodic training regarding continuing disclosure obligations within 180 days.
The Government Finance Officers Association’s August 24, 2016 Alert to Members provided “essential practices” that, combined with the SEC Orders, can serve as best practices for Issuers. It provides, in part: understanding and discussing the Issuer’s policies and procedures on disclosure; knowing who within the Issuer is filing what, when and where; knowing what the Issuer has promised to do in its continuing disclosure agreement; being aware of what the Issuer has posted on EMMA; and recognizing that each official statement must include a statement about whether the Issuer failed to materially comply with previous commitments within the past five years.
Despite the practicality of the GFOA’s alert and requirements from the SEC Orders, some are still struggling with how to best ensure a comprehensive understanding of their 15c2-12 obligations and to ensure their filings and, ultimately, their disclosures, are accurate. Some others may be overly reliant on the fact that they have a Dissemination Agent and need not concern themselves “because the filing agent is responsible.”
As many have learned through the MCDC process, the obligation for accurate disclosure in the preliminary official statement and official statement resides with the issuer (and underwriter) – not bond counsel or the dissemination agent. While policies and procedures and the resulting “reasonable diligence” can and does include third parties, it remains incumbent on the issuer (and underwriter) to ensure representations are accurate and the policies, procedures and resulting processes are sound.
As a result, issuers coming to market need to ensure that their past filings conform to what they promised to disclose to the market and need to provide Underwriters comfort that the Issuer has a sound process in place to make timely and complete disclosures.
To this end, the GFOA Alert provides an excellent starting point: knowing who within the issuer (or on behalf of the issuer) is filing what, when and where. While this seems simple and obvious, this basic tenant, defined in your policies and procedures, can go a long way in ensuring you are meeting your obligations.
Next, it is critical that the issuer know what it has promised to disclose in any issue outstanding at any time in the preceding five years. This requires a review of the continuing disclosure agreements of any such issues and a complete understanding of what was promised to be disclosed.
Finally, being aware of what was posted on EMMA is critical in terms of actual filings, required content, accuracy of submission with EMMA and ensuring that the filing is tagged to all of your outstanding debt. Over-reliance on a dissemination agent, or internally developed processes subject to human error, without a level of independent verification can prove costly in terms of misrepresentations in your new issue POS/OS, access to the capital markets or, in a worst-case scenario, SEC action.
While it's best to take these steps now, at a minimum it is important to begin this analysis when a deal is in its formative stages as Underwriters will want to know whether the representations in the POS/OS accurate. And do I, the underwriter, have confidence the Issuer will comply with their disclosure requirements going forward?
Below we offer a suggested approach to help Issuers meet these “best practices” and support their access to the capital markets.
Address the Past and Ensure Accuracy in the POS and OS Disclosure:
Conduct a detailed 15c2-12 five-year look-back analysis to understand filing obligations and identify missed filings, right down to the individual bond level. Use data provided from this analysis to update missed filings on EMMA. Once done, consider re-running the look-back analysis to confirm compliance at the Issue and CUSIP level.
Ensure proper and comprehensive disclosure in the new issue POS/OS .
Prospective Compliance: Notification/Monitoring and Periodic Look-Back Analyses
Utilize a notification service to alert you in advance of upcoming filing obligations such as the Audit and Financial and Operating data. The notification service should clearly identify: the timing and due date of the filing; operating and financial data information required; and Identification of all outstanding debt to which filings need to be tagged
Use a monitoring and notification service to identify rating changes to support timely filing.
Once the filing date has passed, perform a 15c2-12 look-back “refresh” to confirm proper filing.
Official Statement Notice: Provide the Underwriter Confidence
Consider a statement in the new issue POS/OS regarding steps taken and the use of a notification/monitoring service for prospective filing obligations and post-filing 15c2-12 “refresh” to ensure filings are done properly.
The approach outlined above is recommended for all issuers to ensure their filings are timely and representations on new issues are accurate. The focus on disclosure and fraud requires market participants to address the heightened scrutiny in an efficient and cost-effective manner.