MSRB Market Transparency Advisory – Suggested Practices in Submitting of Financial Disclosures to EMMA

Since July 1, 2009, the Municipal Securities Rulemaking Board (the “MSRB”) has been designated by the Securities and Exchange Commission (the “SEC”) as the recipient of continuing disclosures submitted by issuers of and other obligated persons with respect to municipal securities under continuing disclosure agreements entered into pursuant to the SEC’s Rule 15c2-12. The MSRB established the continuing disclosure service of its Electronic Municipal Market Access (“EMMA”^®) system for the purpose of accepting the submission, in electronic form, of continuing disclosures submitted under Rule 15c2-12 and making these disclosures available to the public for free on the EMMA website at http://emma.msrb.org.[1] The continuing disclosures provided under continuing disclosure agreements (“required continuing disclosures”)[2] are broadly divided between disclosures of financial information or operating data relating to the issuer of, or obligated person with respect to, the municipal securities (“financial disclosures”) and disclosures of specific events relevant to the municipal securities (“event disclosures”). In addition to required continuing disclosures, EMMA accepts submission of various categories of continuing disclosures submitted on a voluntary basis.

While the MSRB has no regulatory authority with regard to the content, timing or other matters relating to continuing disclosures and the compliance by issuers and obligated persons with their commitments to provide such disclosure, the MSRB’s operation of EMMA has provided it with considerable experience and insight into the patterns of disclosures emerging from the submission practices of issuers and obligated persons. In addition, the recent SEC enforcement and investigation activities relating to disclosure practices in the municipal securities market have highlighted the key role that good disclosure practices are expected to play in promoting a fair and efficient market and in avoiding incomplete or misleading disclosure to the marketplace resulting in harm to investors and potential federal securities law violations.[3] As described below, accurate, timely and complete public disclosures made through the EMMA continuing disclosure service represent the most direct and effective manner for issuers and obligated persons to address these recent findings of the SEC.

This market transparency advisory focuses specifically on providing guidance to submitters of financial disclosures pursuant to requirements of continuing disclosure agreements to assist them in achieving more efficient, accurate and timely posting on EMMA, and to assist EMMA users in accessing such documents more effectively. In particular, this market transparency advisory first outlines the types of financial disclosures called for under Rule 15c2-12 and the manner in which the Rule contemplates such financial disclosures to be provided, and then sets forth “suggested practice” guidance on how to make submissions of financial disclosures through EMMA most effectively.[4] The market transparency advisory then maps the continuing disclosure obligations of Rule 15c2-12 to the various types of municipal securities offerings, including how to trace which obligations may apply to a particular offering.[5] The MSRB expects to publish additional market transparency advisories and to produce related educational materials in the future on submissions of event disclosures and other voluntary continuing disclosures to EMMA, as well as with respect to other aspects of the MSRB’s market transparency systems.

BACKGROUND

The continuing disclosure provisions of Rule 15c2-12 first became effective in July 1995 and apply to most new issues of municipal securities since then.[6] For offerings of municipal securities subject to the Rule, underwriters have been required to determine that the issuer or other obligated person has undertaken in a continuing disclosure agreement to provide the required continuing disclosures applicable to such offering.[7] Among other things, the continuing disclosure agreement is required to specify the date by which one type of financial disclosure, referred to as “annual financial information” (as described below), is to be provided.[8] Until June 30, 2009, required continuing disclosures for most such offerings were expected to be provided to multiple private sector information vendors known as nationally recognized municipal securities information repositories (“NRMSIRs”).

Under amendments to Rule 15c2-12 that became effective on July 1, 2009, the MSRB was designated as the sole NRMSIR to which all required continuing disclosures are to be made, and the SEC’s designations of the private sector NRMSIRs were withdrawn.[9] Continuing disclosure agreements executed on or after July 1, 2009 should provide for required continuing disclosures to be submitted electronically to the MSRB. Required continuing disclosures made under continuing disclosure agreements executed prior to that date also are to be submitted electronically to the MSRB as the sole NRMSIR and successor to the prior NRMSIRs for purposes of such continuing disclosure agreements, even if such continuing disclosure agreements list the former NRMSIRs by name as the expected recipients of such disclosures.

RECENT SEC ENFORCEMENT ACTIONS

In its investigation of the City of Harrisburg, the SEC found that certain public documents and statements, including a speech by a public official, misrepresented and omitted to state material information regarding Harrisburg’s deteriorating financial condition and credit ratings downgrades at the same time that Harrisburg failed to provide annual financial information or notices in accordance with its continuing disclosure agreements under Rule 15c2-12. As a result, the SEC instituted cease-and-desist proceedings against Harrisburg, and Harrisburg consented to the issuance of the Harrisburg Order without admitting or denying the findings therein. In the Harrisburg Order, the SEC stated:

Municipal issuers have an obligation to make sure that information that is released to the public that is reasonably expected to reach investors and the trading markets, even if not specifically published for that purpose, does not violate the antifraud provisions.[10] In its 1994 Interpretive Guidance, the Commission reminds issuers that without a “mechanism for disseminating information about the municipal issuer to the market as a whole . . . investors purchasing municipal securities in the secondary market risk doing so on the basis of incomplete and outdated information. Since access by market participants to current and reliable information is uneven and inefficient, municipal issuers presently face a risk of misleading investors through public statements that may not be intended to be the basis of investment decisions, but nevertheless may be reasonably expected to reach the securities markets.”[11]

The SEC addressed the obligations of public officials in connection with disclosures made in the secondary market for their securities in the Harrisburg Report. In particular, the SEC discussed the “total mix” of public information available to investors in municipal securities in analyzing Harrisburg’s disclosure practices. The SEC observed:

Harrisburg failed to submit annual financial information, audited financial statements, notices of failure to provide required annual financial information and material event notices. Investors may be more likely to rely upon statements from public officials where written undertakings made pursuant to Rule 15c2-12 have not been fulfilled and required continuing disclosures are not available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) system. [footnote omitted]

The statements by the Harrisburg public officials were part of, and could have altered, the total mix of information available to the market. There is a substantial likelihood that a reasonable investor would consider the financial condition of the City important in making an investment decision, and there were no other disclosures made by the City as part of the total mix of information available to enable investors to consider other information. These public officials’ statements were the principal source of significant, current information about the issuer of the security and thus could reasonably be expected to influence investors and the secondary market. Because statements are evaluated for antifraud purposes in light of the circumstances in which they are made, the lack of other disclosures by the municipal entity may increase the risk that municipal officials’ public statements may be misleading or may omit material information.[12]

In addition, the SEC instituted cease-and-desist proceedings against West Clark Community Schools, and West Clark consented to the issuance of the West Clark Order without admitting or denying the findings therein, relating to its failure to provide financial disclosures required under a continuing disclosure agreement and its statement in the official statement for a subsequent issue of municipal securities that it had not failed to comply with the agreement. The SEC observed, “There is a substantial likelihood that a reasonable investor determining whether to purchase the municipal securities would attach importance to the School District’s failure to comply with its continuing disclosure undertaking.”[13]

Significantly, the SEC’s recent enforcement activities illustrate with clarity the importance of issuers and obligated persons providing all expected disclosures to EMMA on an accurate, timely and complete basis. Under Rule 15c2-12 and the continuing disclosure agreements executed by issuers and obligated persons for the benefit of investors, all investors in municipal securities subject to that Rule have the expectation of being able to access, through the EMMA website, the types of continuing disclosures enumerated in the Rule and such continuing disclosure agreements. These continuing disclosure documents are indexed to each security to which they relate and are displayed on the EMMA website accompanied by the original official statement, trade data and other available disclosures and data relating to each such security to create a venue for investors to access this range of disclosures and data for that security on a uniform basis.[14]

Thus, investors have a clear expectation of being able to access the key disclosures and related information regarding their investments in municipal securities through the EMMA website or its data feeds. Lacking expected disclosures from issuers or obligated persons through such venue, some investors likely will seek relevant information from other available public sources not designed as formal disclosures to the municipal securities market, including the types of sources described by the SEC in the Harrisburg Order and Report. While the availability of accurate, timely and complete disclosures through EMMA cannot foreclose the potential for investors to also seek additional information through other sources, comprehensive disclosure through EMMA has a substantial impact on the total mix of public information available to investors described by the SEC in the Harrisburg Report and should improve the ability of investors to differentiate information designed to provide disclosures relevant to their investments from information of a political or other nature on which they would have less basis to rely in making investment decisions.[15]

In addition to providing the types of continuing disclosures explicitly enumerated in the applicable continuing disclosure agreement, issuers and obligated persons should remain cognizant of their ability to provide additional voluntary continuing disclosures to the marketplace through EMMA. In particular, issuers and obligated persons should review the various sources through which information and other data of a financial or operational nature may be made available to the public – for example, an issuer’s public website may include operating data for its various enterprise activities, or the minutes of meetings of the issuer’s governing body posted on the issuer’s public website may include interim financial data. This type of information, already made public and therefore part of the mix of information available to investors, can be submitted by issuers and obligated persons to EMMA as voluntary continuing disclosures, thereby providing a fuller set of information to investors through the venue where they expect to receive relevant investment-related disclosures.[16]

The remainder of this market transparency advisory focuses primarily on providing guidance to submitters of financial disclosures pursuant to requirements of continuing disclosure agreements to assist them in achieving more efficient, accurate and timely posting on EMMA. The MSRB expects to provide further guidance on submissions of voluntary financial disclosures and other types of disclosures in future market transparency advisories.

FINANCIAL DISCLOSURES UNDER RULE 15c2-12

Rule 15c2-12 provides for four categories of financial disclosures, depending on the type of primary offering: annual financial information, audited financial statements, customary financial information and failure to file notice. Each of these categories is described below.

Annual Financial Information

Rule 15c2-12 Definition – “Annual financial information” consists of financial information or operating data, provided at least annually, of the type included in the official statement with respect to an issuer or obligated person for whom financial information or operating data is presented in the official statement.[17]

Typical Form of Annual Financial Information – For most offerings subject to Rule 15c2-12, the annual financial information will reflect the core financial and operating data included in the official statement for the offering and will normally consist of two basic parts:

(i) audited financial statements, if audited financial statements were included in the official statement; and

(ii) additional information that updates any financial information and/or operating data that was included within text, tables, charts or other materials describing financial and/or operational matters relating to the issuer or obligated person (“quantitative information”) in the official statement.[18]

Variant Forms of Annual Financial Information – In some offerings where the official statement for the offering contained limited financial or operating data, only one of the two basic parts of annual financial information may be required under the following circumstances:

(i) only audited financial statements, if audited financial statements but no additional quantitative information was included in the official statement; or

(ii) only updated quantitative information, if no audited financial statements were included in the official statement.[19]

Submission by Contractual Deadline – By the date specified in the continuing disclosure agreement for providing annual financial information, the following items are to be submitted to EMMA:

(i) audited financial statements, if audited financial statements were included in the official statement; if, however, audited financial statements have not been prepared in time to meet the deadline, unaudited financial statements are to be submitted by the deadline as a provisional measure, with the audited financial statements submitted when they become available, as described below.[20]

(ii) updated quantitative information, if additional quantitative information was included in the official statement.

Audited Financial Statements (Including CAFRs)

Rule 15c2-12 Treatment of Audited Financial Statements – For purposes of Rule 15c2-12, “audited financial statements” refer to the audited financial statements for the issuer and any obligated person for whom financial information or operating data is presented in the official statement.[27] While Rule 15c2-12 implicitly recognizes that not all issuers or obligated persons may prepare audited financial statements, such audited financial statements typically will be included in the official statement and therefore will be an important component of annual financial information, as described above. Rule 15c2-12 contemplates that audited financial statements might be submitted to EMMA as a distinct submission separate from the annual financial information submission under two circumstances:

(i) if audited financial statements were included in the official statement but have not been prepared in time to meet the deadline for submission of annual financial information, the audited financial statements would be submitted to EMMA when they become available;[28]

(ii) if audited financial statements were not included in the official statement, any audited financial statements would nonetheless be submitted to EMMA when and if they become available for the issuer or any other obligated person if any financial information or operating data for the issuer or such obligated person was presented in the official statement.[29]

Customary Financial Information

Rule 15c2-12 Allows for Customary Financial Information for Small Issuer Offerings – Rule 15c2-12 provides that, for certain “small issuer offerings” in which no obligated person has more than $10,000,000 of bonds outstanding that are subject to the Rule, as more fully described below, the continuing disclosure agreement may provide for more limited financial disclosures than for most other offerings. This more limited disclosure may consist of financial information and operating data which is customarily prepared by, and is publicly available for, the issuer and any obligated person for whom financial information or operating data is presented in the final official statement (“customary financial information”), rather than the standard annual financial information based on the disclosures included in the official statement and audited financial statements normally required for other types of offerings subject to Rule 15c2-12.[31] However, an issuer or obligated person with respect to a small issuer offering is not required under the Rule to limit its financial disclosures to customary financial information but may instead elect in the continuing disclosure agreement to provide continuing disclosures for such offering as if it were fully subject to the provisions of Rule 15c2-12, including providing annual financial information and audited financial statements as described above.[32]

Failure to File Notice

Rule 15c2-12 Requires Failure to File Notice if Annual Financial Information Deadline Not Met – Rule 15c2-12 provides that, for offerings subject to the Rule’s provision relating to annual financial information, the continuing disclosure agreement is to require timely submission to EMMA of notice of failure to provide annual financial information on or before the date specified in the continuing disclosure agreement (“failure to file notice”).[33]

The obligation to provide a failure to file notice is triggered if an issuer or obligated person does not submit the complete annual financial information, as described above, by the specified date. Thus, for most offerings, both the audited financial statements and updated quantitative information, as described above, would need to be submitted on a timely basis. However, if audited financial statements are to be included as part of the annual financial information but are not available by the deadline for submission of the annual financial information, the timely submission of provisionally complete annual financial information, as described above, consisting of unaudited financial statements for the applicable year (including a disclosure that the audited financial statements will be submitted when they become available) and any required updated quantitative information would not normally be viewed as triggering the obligation to submit a separate failure to file notice since such notice would be embedded within the provisionally complete annual financial information submitted to EMMA.[34] The submitter, of course, would be expected to in fact submit the audited financial statements to EMMA upon becoming available, with failure to promptly do so meriting a separate failure to file notice requirement.

TYPES OF OFFERINGS AND THE APPLICABILITY OF RULE 15c2-12

Most primary offerings of municipal securities (including both debt obligations and municipal fund securities) since July 3, 1995 that have not fully matured or otherwise been redeemed are subject to the full complement of required continuing disclosures under Rule 15c2-12, including the financial disclosures described above as well as the event disclosures set out in the Rule. However, certain categories of primary offerings are subject to a more abbreviated set of continuing disclosure provisions under the Rule while other primary offerings are fully exempt from the Rule’s continuing disclosure provisions.

To assist issuers and obligated persons to better understand the applicability of Rule 15c2-12 to their new issue offerings, and to assist investors to better understand what types of continuing disclosures they should expect in connection with securities they are considering, the various categories of primary offerings and their status with respect to the continuing disclosure provisions of Rule 15c2-12 are outlined briefly below.

Fully Exempt Offerings

The following types of offerings are fully exempt from all continuing disclosure provisions under Rule 15c2-12:

• offerings prior to July 3, 1995 (“old offerings”)[35]
• offerings with an aggregate original principal amount of less than $1 million (“small offerings”)[36]
• offerings sold in $100,000 minimum authorized denominations[37] to 35 or fewer sophisticated investors (“limited offerings”)[38]
• offerings sold in $100,000 minimum authorized denominations that mature in nine months or less (“short-term institutional note offerings”)[39]
• offerings prior to December 1, 2010 in $100,000 minimum authorized denominations that are subject to optional tender by the bondholder for purchase at par every nine months or more frequently, so long as the securities continuously qualify as such after any remarketings occurring since December 1, 2010 (“old VRDO offerings”)[40]
• offerings that have previously been subject to some or all of the continuing disclosure provisions but for which no obligated person with respect to the offering continues to exist, such as an offering that has been advance refunded, or legally “defeased,” to the extent so provided in the applicable continuing disclosure agreement (“defeased offerings”)[41]
• offerings sold by an issuer directly to investors without using a broker, dealer or municipal securities dealer as an underwriter or placement agent (“direct offerings”)[42]

Partially Exempt Offerings

The following types of offerings are partially exempt from the continuing disclosure provisions under Rule 15c2-12, as described below:

• offerings that mature in 18 months or less, which are subject to the event disclosure provisions but exempt from financial disclosure provisions (“medium-term note offerings”)[43]
• offerings prior to July 1, 2009 for which no obligated person has more than $10,000,000 of outstanding bonds (excluding limited, short-term institutional note and old VRDO offerings), for which event disclosures would be submitted but only customary financial information would need to be provided to any person upon request (that is, not required to be filed with EMMA or the NRMSIRs), rather than the standard annual financial information and audited financial statement requirements described above (“old small issuer offerings”)[44]
• offerings on or after July 1, 2009 for which no obligated person has more than $10,000,000 of outstanding bonds (excluding limited and short-term institutional note offerings), for which event disclosures would be submitted but only customary financial information would need to be submitted to EMMA, rather than the standard annual financial information and audited financial statement requirements described above (“new small issuer offerings” which, together with old small issuer offerings, are collectively referred to herein as “small issuer offerings”)[45]

Fully Subject Offerings

The following types of offerings are fully subject to the continuing disclosure provisions under Rule 15c2-12:

• offerings on or after December 1, 2010 in $100,000 minimum authorized denominations that are subject to optional tender by the bondholder for purchase at par every nine months or more frequently (“new VRDO offerings”)[46]
• offerings prior to December 1, 2010 which, at such time, were in $100,000 minimum authorized denominations and subject to optional tender by the bondholder for purchase at par every nine months or more frequently which, after a remarketing or conversion to a different mode on or after December 1, 2010, are no longer sold in $100,000 minimum authorized denominations and/or no longer are subject to put by the bondholder at par in nine months or less (“converted old VRDO offerings”)[47]
• all offerings not otherwise described above, constituting the bulk of new issues offerings in the municipal securities market

For a printable version of the chart above please click here.

 

ADDITIONAL RESOURCES FOR ISSUERS AND OBLIGATED PERSONS

The EMMA Dataport, at http://emma.msrb.org/aboutdataport.aspx, includes or links to instructional materials and technical specifications for the submission of continuing disclosures. In addition, the webpage of the SEC’s Office of Municipal Securities, at https://www.sec.gov/municipal, provides access to materials produced by the SEC to assist all municipal market participants in understanding and meeting their obligations under the federal securities laws, including assisting issuers and obligated persons in understanding the continuing disclosure provisions of Rule 15c2-12. The MSRB has also posted on the MSRB website links to documents produced by certain organizations active in the municipal securities market that provide their views of “best practices” or provide other non-mandatory guidance on what various market participants believe are appropriate practices in regard to certain aspects of the content of continuing disclosure. BY INCLUDING LINKS TO SUCH MATERIALS ON THE MSRB WEBSITE, THE MSRB IS NOT ENDORSING, TAKING RESPONSIBILITY FOR OR CONFIRMING THE ACCURACY OR APPROPRIATENESS OF THE CONTENTS OF SUCH MATERIALS, BUT IS PROVIDING ACCESS TO THEM SOLELY AS A MATTER OF CONVENIENCE FOR ISSUERS, OBLIGATED PERSONS, MARKET PROFESSIONALS AND OTHER EMMA USERS.

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Questions about the process for submitting continuing disclosures to the EMMA continuing disclosure service may be directed to MSRB Support at 703-797-6668. Other questions about this market transparency advisory may be directed to Ernesto A. Lanza, Deputy Executive Director, at 703-797-6720.