Continuing Disclosure Policy Best Practices. Andrew C. Maher, Esq.

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1 Continuing Disclosure Policy Best Practices Andrew C. Maher, Esq.

2 Topics Covered in this Presentation: Primary Offering Disclosure Continuing Disclosure Agreements Continuing Disclosure Policies and Procedures

3 Primary Offering Disclosure

4 The principal purpose of primary disclosure is for the issuer or obligor to provide investors with all information which is material with respect its financial condition and the debt it is offering. What is material? There is a substantial likelihood that a reasonable investor would have considered the information important when making an investment decision. Continuing Disclosure in an Official Statement Five year look back. Pursuant to Rule 15c2-12, it is required to describe any instances in the previous five years in which each issuer or obligor failed to comply, in all material respects, with any previous continuing disclosure undertakings

5 Approaches to Disclosure: Disclose all instances of non-compliance, regardless of materiality, either specifically or in categories. Disclose only those instances where there was non-compliance in a material respect. Rule 15c2-12 does not require an affirmative statement in official statements regarding compliance or to describe in official statements every instance of non-compliance.

6 Factors to consider in determining appropriate disclosure: Disclosure regarding compliance in prior official statements. Whether or not obligations contained in prior continuing disclosure agreements are included in the new continuing disclosure agreement. Whether failures to comply fall into general categories. Representations with respect to prior continuing disclosure undertakings may also be included in the bond purchase agreement.

7 Continuing Disclosure Agreements

8 Rule 15c2-12 requires issuer or obligor to promise to provide certain financial information, including audited financial statements on an annual basis to the Municipal Securities Rulemaking Board s EMMA platform. Best practice specify dates whenever possible rather than X days after end of Fiscal Year. Pick a reporting date which you are sure will be time enough for completion of your audit. SEC Guidance says the CDA should require that if the audit is not completed by the reporting date, the issuer or obligor should file unaudited financial statements by the reporting date, and supplement with the audited statements when they are available. The other part of the annual report is an updating of financial information or operating data which was included in the original Official Statement with respect to each obligated person. Avoid promising to provide information which is not required by the Rule budgets!

9 Discuss fully with the underwriters which information to be included in an Official Statement needs to be disclosed on an ongoing basis. Examples include: Enrollment Tuition Occupancy Avoid being too specific with information where such specificity is not needed. If data is no longer collected, it can replaced or substituted with other more relevant data. CDA only needs to update financial and operating data that the issuer can obtain from its own records. Be careful about requiring information from outside sources. Watch for information which will become obsolete before final maturity of the bonds.

10 Second part of the reporting regime is to report certain events within 10 business days of their occurrence. Rule originally had 11 events, which had to be reported if material and in a timely manner. Amendments to the Rule in 2010 expanded the list of events but they were divided into two categories: events to be reported in every instance (e.g., deemed always material), and events to be reported if the issuer determined the event was material to investors.

11 Events reportable in all cases: Principal and interest payment delinquencies; 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 issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); Tender Offers; Defeasances; Rating changes; or Bankruptcy, insolvency, receivership or similar event of the obligated person.

12 Events to be reported only if deemed material: Unless described above, other notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other events affecting the tax status of the Bonds; Modifications to rights of Bond holders; Optional, unscheduled or contingent Bond calls; Release, substitution, or sale of property securing repayment of the Bonds; Non-payment related defaults; Merger, consolidation or acquisition transactions of the obligated person; or Appointment of a successor or additional trustee or the change of name of a trustee.

13 Continuing Disclosure Policies and Procedures

14 Once a transaction is complete, it is good practice to create a template for annual compliance as well as a list of events to be reported. Although not required by the SEC - Issuers and obligors should establish written policies and procedures for compliance with CDAs and have periodic (at least annual) training. As part of MCDC, SEC has required such policies and procedures to be implemented as part of settlements. Issuers and obligors should establish a staff position where at least one person should be made responsible for compliance. Establish internal deadlines and ticklers to ensure compliance. Use EMMA or third party vendors for automated reminders of approaching deadlines annual, quarterly, other

15 If a failure is discovered, best practice is for an issuer or obligor to make a filing on EMMA. If a filing is missed two filings need to be made. 1. File the information which needs to be filed 2. Notice of failure to file Issuers and obligors may want to prepare compliance reports to provide to the underwriter and other members of the working group. This can reduce costs for review and would be helpful in competitive transactions and for frequent issuers. Annual reports and material event notices are disclosures to the market subject to Rule 10b-5 standards, as would be any voluntary disclosures made on EMMA.

16 Questions