Issuing municipal bonds isn’t just a simple matter of asking for money in exchange for a promised interest payment and return of principal. For example, if a school district issues bonds to the people, it needs to keep them apprised of its financial happenings – and those news updates are called disclosures.
The term “disclosures” encompasses a wide range of information related to the financial activities of a bond’s issuer. On top of the information that must be released when bonds are issued, the issuing entity must also commit to a series of continuing disclosures so that it may provide updated information on its financial dealings that could impact bondholder payments, for better or worse.
It’s Called Compliance, or Trust
Although the business of complying with rules is usually referred to as ‘compliance’, we prefer to think of it as Trust, because the regulations exist to protect investors. Even though municipal bonds are typically regarded as a relatively safe investment, there’s risk involved in any investment, so it’s especially important for the issuer to keep its investor up to date with any changes in financial or economic circumstances that could affect the issuer’s ability to pay back its loans.
Of course, disclosures aren’t a one-size-fits-all sort of thing. Different bonds have varying sets of disclosures, and some issuers even go so far as to offer up voluntary disclosures. Generally speaking though, most municipal bond issuers are concerned with five distinct categories of information, some of which overlap in theory but need to be officially submitted separately in practice:
- Annual financial information
- Audited financial statements
- Customary financial information
- Event-based disclosures
- Failure to file notices
Undertake and Submit
At the time of issuance, the issuer will agree to a Continuing Disclosure Undertaking, which sets out a deadline for filing disclosures. For instance, a school district might agree to file its annual financial information within 60 days of the end of the financial year.
All of the above information must be submitted to EMMA, the Electronic Municipal Market Access arm of the Municipal Securities Rulemaking Board. Let’s explore these disclosure categories a bit further.
Annual Financial Information
As the term implies, annual financial information generally includes things like comprehensive financial reports and additional information or operating data describing the issuer’s inner workings. This is an annual health check on the issuer’s operations. If it’s being filed soon after a bond issuance, much of this information will expand on the material provided in the Official Statement.
Audited Financial Statements
Most of the time, issuers also need to submit audited financial statements, including Comprehensive Annual Financial Reports (CAFRs) separately from annual financial information. If the issuer has its audited financial statements ready in time to submit along with annual financial information, they need to be careful to to categorize their submission properly on EMMA to avoid getting dinged for failing to submit the right materials.
Customary Financial Information
Some smaller bond issuers might submit customary financial information instead of annual financial information and/or audited financial statements. This courtesy applies to issuers who have $10 million or less of municipal securities outstanding, including any bonds currently being offered.
So the state just passed a measure cutting support for an issuer, or an issuer is suffering from an unexpected economic event, like a bankruptcy or a natural disaster – that’s when an event-based disclosure should be triggered. An issuer is obliged to report any event that could materially affect their ability to meet their debt obligations – positively or negatively. That means event-based disclosures also apply to ‘good’ news, like an upgrade to the issuer’s credit rating. In these cases the deadline agreed to in the Undertaking (see ‘Undertake and Submit’ above) will apply.
Failure to File Notice
So what if an issuer or their financing team dropped the ball on preparing or submitting financial information or an event-based disclosure? It happens. Now the issuer needs to own up to that mistake via a failure to file notice. A Failure to File notice is basically an admission that documents weren’t filed as required. It could mean the issuer had trouble meeting a filing deadline, or that it is dealing with discrepancies that need to be worked out before the data is ready to submit. In a failure to file notice, the issuer will need to explain why it failed to meet your contractual deadline for submitting the information it was required to provide, as well as the estimated timeframe in which investors can expect to receive that missing data.
Whose responsibility is it?
Issuers are responsible for filing disclosures but they may choose to appoint a Dissemination Agent, who could be a member of their financing team (such an employee of their Municipal Advisory firm, or their bond counsel) to do the filing. However, whoever has the task of making the filing, the issuer will ultimately be held responsible if something isn’t filed.
Meanwhile, each time an issuer wants to make a new issuance, the whole financing team is responsible for checking on its disclosure history and making sure that any disclosure violations are disclosed in the issuance documents. If the issuer filed a Failure to File notice in the past, that needs to be noted. Even more importantly, if an issuer failed to file a required disclosure and did not file a Failure to File notice either, that oversight needs to be called out so investors are aware. In September 2015, the SEC fined 22 underwriting firms for selling issuances whose documents did not include accurate information about the issuer’s disclosure history.
Transparency = Trust
Filing all this financial information may seem cumbersome, but disclosures are a critical part of maintaining trust between issuers and investors.
But there’s an upside for issuers too. Those who present their financial data in a clear, comprehensive fashion and develop reputations for upholding disclosure requirements can benefit by commanding higher prices for their bonds – because investors prefer to invest in organizations they trust.
Finally, for issuers, it’s not just the trust of investors that matters. They also have taxpayers to answer to, and even if they’re not investing in your bonds, they still have a right to know where their money is going. If the issuer does a good job of adhering to their disclosure requirements, they’ll make a lot of people happy at the end of the day. It’s really a win-win.
How can I find disclosures on Neighborly?
You can find disclosures in the Documents tab of any issuance page. Click on the document title links to open disclosure documents posted to EMMA.