Alice Ostdiek. Issuing Municipal Bonds: Understanding Continuing Disclosure Obligations and the 2019 Amendments

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1 Issuing Municipal Bonds: Understanding Continuing Disclosure Obligations and the 2019 Amendments WASHINGTON PUBLIC TREASURERS ASSOCIATION Spring 2019 Conference Chelan, Washingto n Alice Ostdiek Stradling Yocca Carlson & Rauth PC AOstdiek@sycr.com

2 ISSUING MUNICIPAL BONDS: OVERVIEW OF DISCLOSURE OBLIGATIONS 2 What are the Issuer s Disclosure Obligations? Securities Laws Key Topics: Issuer s Primary Disclosure Obligations Continuing Disclosure Obligations Post-Issuance Compliance New Rule15c2-12 Amendments What are the amendments? When do they apply? What do I need to do to get ready? Best Practices and Unanswered Questions

3 ISSUING MUNICIPAL BONDS: OVERVIEW OF DISCLOSURE OBLIGATIONS 3 Key Concepts: Each Issuer of municipal bonds and the Officials responsible for issuance are subject to SEC antifraud regulations: Anti-fraud provisions: Section 17(a) (1933 Act) Section 10(b) (1934 Act) Rule 10b-5: unlawful for any person, in connection with the purchase or sale of any security, (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Alice Ostdiek Aostdiek@sycr.com

4 4 ISSUING MUNICIPAL BONDS: PRIMARY DISCLOSURE What is an Official Statement? Preparation and Process Tips Key Takeaways Alice Ostdiek

5 ISSUING MUNICIPAL BONDS: PRIMARY DISCLOSURE 5 What is an Official Statement? The OS is the Issuer s Document Description of Bonds: Payment Timing, Interest Calculation, Redemption, Put/Call Provisions Description of Legal Documents Security / Source of Payment All Material Information About the Issuer & its Finances Legal Opinions, Pending Litigation, Tax Considerations

6 ISSUING MUNICIPAL BONDS: PRIMARY DISCLOSURE 6 OS Preparation and Process: Choosing who prepares the OS What is a Preliminary OS (POS) vs. Final OS? Deemed final Process Tips: Get the right people to review Make sure those with knowledge take review seriously and understand responsibility Don t omit high level / big picture review Be aware of timing Be aware of events that could impact the disclosure Insist on one or more diligence meetings and/or conference calls Insist on a signoff diligence call near posting date Rule 15c2-12: *** (b) Requirements. (1) Prior to the time the Participating Underwriter bids for, purchases, offers, or sells municipal securities the Participating Underwriter shall obtain and review an official statement that an issuer deems final as of its date, except for the omission of [certain information dependent on pricing] ***

7 ISSUING MUNICIPAL BONDS: PRIMARY DISCLOSURE 7 Wait Did you say the Issuer s Officials? Yes. You will be asked to sign something like this: I, Your Name Here, the duly chosen, qualified and acting [Finance Director] of the City, acting in my official capacity, DO HEREBY CERTIFY that the Official Statement for the Bonds does not contain any untrue statement of a material fact and does not omit any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. How do I get comfortable signing this? CYA! Adopt Internal procedures! Document review by department staff and others Use Disclosure Counsel and obtain a Negative Assurances letter

8 ISSUING MUNICIPAL BONDS: PRIMARY DISCLOSURE Takeaways: Review entire document for accuracy and completeness Ensure the right people read it and provide input (from program staff to high level) Document your internal signoff procedures Opportunity for review by Elected Officials Be certain you are personally comfortable attesting that the OS is: Accurate and complete No omissions of any information necessary to make the statements in the document not misleading Obtain Disclosure Counsel Negative Assurances letter 8 Alice Ostdiek Aostdiek@sycr.com

9 9 ISSUING MUNICIPAL BONDS: CONTINUING DISCLOSURE What is an Undertaking or CDA? EMMA Overview & CDA Basics Key Takeaways Alice Ostdiek

10 ISSUING MUNICIPAL BONDS: CONTINUING DISCLOSURE Continuing Disclosure Agreement (CDA or Undertaking): May be in Ordinance, Resolution, Indenture, or separate Certificate Requires electronic filings on EMMA, in accordance w/ EMMA procedures Rule 15c2-12: *** (b)(5)(i) A Participating Underwriter shall not purchase or sell municipal securities unless the Participating Underwriter has reasonably determined that an issuer or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of such securities, to provide [certain information] to the Municipal Securities Rulemaking Board in an electronic format as prescribed by the Municipal Securities Rulemaking Board ***

11 ISSUING MUNICIPAL BONDS: CONTINUING DISCLOSURE Annual Filings Within 10 Business Days of Event Occurring 2019 Amendments added new Event #15 and Event #16

12 ISSUING MUNICIPAL BONDS: CONTINUING DISCLOSURE Anti-fraud regulations do apply to filings posted on EMMA: Anti-fraud provisions: Section 17(a) (1933 Act) Section 10(b) (1934 Act) Rule 10b-5: Unlawful to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading

13 13 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Overview Financial Obligations Event #15 Incurrence or Agreement Materiality Standard Event #16 Events Reflecting Financial Difficulties Best Practice Recommendations Alice Ostdiek

14 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Overview: 2019 Amendments to Rule 15c2-12 What? Added two new Event filings (within 10 business days of occurrence) relating to Financial Obligations other than publicly offered bonds Who? Only applies to CDAs entered into after Feb 27, 2019 Does NOT alter existing CDAs (voluntary disclosure encouraged) Only required to link filings to CUSIPs for Post-2019 Bonds The 2019 Amendments will NOT affect you unless and until you issue municipal bonds AFTER February 27, 2019! Alice Ostdiek Aostdiek@sycr.com

15 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Must file notice on EMMA within 10 business days: Event #15 The incurrence of a financial obligation, of the obligated person, if material, or Agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and Event #16 The occurrence of a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, provided the occurrence reflects financial difficulties. Alice Ostdiek Aostdiek@sycr.com

16 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Financial Obligation means: A DEBT OBLIGATION; A DERIVATIVE INSTRUMENT entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or A GUARANTEE of either a debt obligation or a derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation. The term financial obligation does not include municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12. Alice Ostdiek Aostdiek@sycr.com

17 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS DEBT OBLIGATIONS: Not limited to State law definition of debt Includes both short-term & long-term obligations Leases and other agreements that operate as vehicles to borrow money May be influenced by upcoming GASB 87/88 changes to debt and leases Most Common Types (Local Gov t): Bank Loans (or Direct Placement Bonds) State & Federal Loans & Financing Contracts Public Works Trust Fund State Revolving Fund State LOCAL Program Financing Contracts USDA Rural Dev t Other Federal Loans Interlocal Agreements Payment obligations to finance joint capital improvements Guarantees of 3 rd party payment obligations Capital Leases & Financing Contracts Equipment or Real Property Acquisitions Police cars? Fire trucks? Financings vs. COP (Lease) Financings Alice Ostdiek aostdiek@sycr.com

18 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS GUARANTEES: Not limited to State law definition of debt Includes contingent obligations Contain two financial obligations: Guarantor Obligation to make payment for debt service Beneficiary Obligation to repay funds advanced by guarantor Most Common Types (Local Gov t): Guarantee Agreements / Contingent Loan Agreements relating to Bonds issued by: Public Development Authorities Public Facilities Districts Other local gov t agencies Interlocal Agreements May include implicit guarantees, such as step up provisions or joint and several payment obligations Alice Ostdiek aostdiek@sycr.com

19 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Event #15 (Part 1) INCURRENCE of a financial obligation, of the obligated person, IF MATERIAL, or Analysis: Is a new financial obligation being incurred? Is it a financial obligation? Is it material? If YES, make a filing within 10 business days of the effective date (closing date) Alice Ostdiek Aostdiek@sycr.com

20 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Event #15 (Part Two) AGREEMENT to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which AFFECT SECURITY HOLDERS, IF MATERIAL; and Analysis: Is there an agreement to modify terms of a financial obligation: Covenants, events of default, remedies, priority rights, etc. Careful of waivers, extensions, subordination agreements, etc. Does it affect bondholders? Need not reflect financial difficulties! Is it material? If YES, make filing within 10 business days of the effective date Alice Ostdiek Aostdiek@sycr.com

21 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Event #15 includes a materiality standard. No bright-line guidance in Rule; depends on facts and circumstances Is there a substantial likelihood that a reasonable investor would have considered the information to be important in making an investment decision? Would a reasonable investor would view the information as significantly altering the total mix of information available? Dollar thresholds $$ amount should not be the ONLY factor, but may be used to filter Other factors likelihood of default unusual remedies or acceleration clauses, cross-defaults to other obligations, or other collateral consequences of a default Alice Ostdiek Aostdiek@sycr.com

22 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Event #16 The occurrence of a default, event of acceleration, termination event, modification of terms, or other similar EVENTS under the terms of a financial obligation of the obligated person, provided the occurrence REFLECTS FINANCIAL DIFFICULTIES. Analysis: Has one of the following events occurred under the terms of a financial obligation? Default Acceleration Termination Modification Other Similar Event Does the event reflect financial difficulties? If YES, make filing within 10 business days of the event occurring Alice Ostdiek Aostdiek@sycr.com

23 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Event #16 No Materiality qualifier! If it reflects financial difficulties it must be reported, even if minor. Covenant defaults? Failure to meet coverage test? Failure to replenish a reserve? Delay/extension in repayment accommodated by lender? Other restructuring? Waiver of default or remedy? Default may be broader than Event of Default as defined in contract SEC specifically declined to limit to those items that trigger an Event of Default Be wary if legal document specifies that certain defaults only become Events of Default under certain conditions. Alice Ostdiek Aostdiek@sycr.com

24 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Making a Filing Cover sheet? May prepare a summary and/or submit copies of documents Must contain all material terms Limit redactions to personal information Determine form of filing prior to closing/effective date, if possible Alice Ostdiek Aostdiek@sycr.com

25 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Takeaways: Inventory your financial obligations Can be in any form Objective: Get handle on what kinds of financial obligations are outstanding and what types you might incur in the future Tip Make categories of types of obligations, develop approach for each category Educate the gatekeepers Who is likely to review these types of contracts? Who is going to make sure you know to file in a timely manner? Update your disclosure procedures or policy Use your policy/procedure to identify a materiality threshold that is right for you Be prepared to explain your approach to Underwriter on your next bond issuance For new financial obligations, finalize form of filing prior to closing Alice Ostdiek Aostdiek@sycr.com

26 MUNICIPAL BOND CONTINUING DISCLOSURE: RULE 15c2-12 AMENDMENTS Resources: Center/Issuers/Disclosing.aspx AE6aDI8O9RG29BB2vR6mI pdfs/emmacdmanual.pdf

27 SUMMARY Adopt written disclosure procedures Initial Disclosure Ensure the right people review the POS Training - Ensure reviewers understand purpose of their review (not just an update ) Document internal review by staff/departments Utilize disclosure counsel Continuing Disclosure Training ensure staff filing understand what they are doing Monitor and create reminder/tickler systems Update procedures to reflect Amendments Ask questions!!

28 QUESTIONS? ALICE OSTDIEK Stradling Yocca Carlson & Rauth PC Seattle, Washington aostdiek@sycr.com