Continuing disclosure

What Is Continuing Disclosure?

Continuing disclosure refers to the ongoing obligation of issuers of certain securities, primarily state and local governments issuing municipal bonds, to provide current information to the public after the initial sale of the securities. This practice falls under the umbrella of Regulatory Compliance within the broader financial markets. Unlike corporate securities, municipal bonds were historically exempt from federal registration and ongoing disclosure requirements. However, through regulations targeting underwriters, mechanisms for continuing disclosure were established to ensure investors have access to timely and material information. Continuing disclosure helps maintain transparency and facilitates informed investment decisions in the secondary market.

History and Origin

The framework for continuing disclosure in the municipal bond market emerged gradually, distinct from the comprehensive disclosure requirements for corporate securities established by the Securities Acts of 1933 and 1934. Initially, municipal bonds enjoyed broad exemptions from federal registration and reporting, largely due to political considerations and the perceived low risk of governmental debt.³⁷ For decades, disclosure in this market remained largely voluntary, driven by market demand rather than direct federal mandates on issuers.³⁶

A significant shift occurred following financial crises in the municipal market, notably New York City's fiscal crisis in the mid-1970s and the Washington Public Power Supply System (WPPSS) default in the 1980s.³⁵ These events highlighted the need for greater transparency. Congress responded by establishing the Municipal Securities Rulemaking Board (MSRB) in 1975, which gained authority to regulate brokers, dealers, and municipal advisors, though municipal issuers themselves remained exempt from direct federal disclosure requirements.³³, ³⁴

The most impactful development for continuing disclosure was the adoption of SEC Rule 15c2-12 by the Securities and Exchange Commission (SEC) in 1989. This rule, though not directly regulating issuers, indirectly mandates continuing disclosure by prohibiting underwriters from purchasing or selling municipal securities unless the issuer commits in writing to provide ongoing information.³¹, ³² This written commitment is typically documented in a Continuing Disclosure Agreement.³⁰ The rule was later amended to centralize these disclosures through the MSRB's Electronic Municipal Market Access (EMMA) system, making the information readily available to the public.²⁹ This historical evolution reflects a continuous effort to balance the unique nature of governmental issuers with the need for investor protection and market integrity.²⁸

Key Takeaways

• Continuing disclosure refers to the ongoing provision of financial and operating information by municipal bond issuers after the initial sale.
• It is a regulatory requirement, primarily driven by SEC Rule 15c2-12, that applies to underwriters but results in a contractual obligation for issuers.
• Information includes annual financial statements, operating data, and notices of material events.
• Disclosures are typically filed with the MSRB's EMMA system, providing centralized access for investors.
• Compliance with continuing disclosure obligations is crucial for maintaining market access and avoiding potential enforcement actions.

Interpreting the Continuing Disclosure

Interpreting continuing disclosure involves reviewing the information provided by the issuer to assess its financial health and any events that may affect the securities.²⁷ For investors, this data offers critical insights into the issuer's evolving capacity to repay its debt obligations and the ongoing value of the bonds.²⁶

Key aspects to analyze in continuing disclosure filings include annual financial statements and operating data. These documents allow for a year-over-year comparison of revenues, expenditures, outstanding debt, and other relevant metrics. Understanding the context of an issuer's public finance and economic environment is essential for a thorough interpretation.

Additionally, investors should pay close attention to notices of material events, which must be filed promptly. These events can include, but are not limited to, changes in credit rating, payment delinquencies, non-payment related defaults, unscheduled draws on debt service reserves, and adverse tax opinions.²⁴, ²⁵ The timely disclosure of such events is crucial for risk management and allows investors to react to developments that could impact their investment.

Hypothetical Example

Consider the City of Greenway, which issued $50 million in municipal bonds to fund a new wastewater treatment plant. As part of the bond issuance, the City entered into a Continuing Disclosure Agreement, as required by its underwriters under SEC Rule 15c2-12.

One year after issuance, Greenway experiences a significant, unforeseen decline in its primary tax revenue source due to a major industry relocation. This event materially affects its financial condition and ability to meet future debt service payments. Under its continuing disclosure obligations, the City of Greenway must promptly file a notice of this material event on the MSRB's EMMA portal. This filing would inform bondholders and potential buyers in the secondary market about the adverse development.

Furthermore, on an annual basis, Greenway is required to submit its audited financial statements and updated operating data to EMMA. These annual submissions would reflect the impact of the revenue decline on its overall financial health, allowing investors to see the quantitative effects of the material event and assess the City's ongoing capacity to honor its bond covenants.

Practical Applications

Continuing disclosure is fundamentally important for transparency and efficiency in the municipal securities market. Its primary practical application is to provide investors with current information that enables informed investment decisions beyond the primary market offering.²³

1. Investor Due Diligence: Individual and institutional investors rely on continuing disclosure filings to perform ongoing due diligence on their holdings. This allows them to monitor the financial health of the bond issuer and assess potential changes in credit quality.
2. Market Efficiency and Pricing: The availability of current financial and operational data facilitates more accurate pricing of municipal bonds in the secondary market. Without this ongoing information, assessing fair value would be significantly more challenging, potentially leading to increased illiquidity and wider bid-ask spreads.
3. Regulatory Oversight and Enforcement: Continuing disclosure agreements provide a basis for regulatory bodies, particularly the SEC, to ensure compliance and address potential fraud or misleading statements. For instance, the SEC launched the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encouraged issuers and underwriters to self-report past violations related to continuing disclosure, highlighting the importance of accurate and timely filings.²¹, ²²
4. Issuer Accountability: For municipal issuers, compliance with continuing disclosure obligations is crucial for maintaining their reputation and access to capital markets. Failure to comply can negatively impact an issuer's ability to issue new debt or result in enforcement actions.¹⁹, ²⁰

Limitations and Criticisms

Despite its importance, continuing disclosure in the municipal market faces certain limitations and criticisms.

One primary critique is that the direct regulatory burden for continuing disclosure falls on underwriters rather than directly on municipal issuers.¹⁸ While SEC Rule 15c2-12 requires underwriters to ensure an issuer commits to disclosure, the SEC generally cannot directly compel municipal issuers to make specific disclosures or file documents before a sale.¹⁶, ¹⁷ This indirect approach has led to a "patchwork" of disclosure practices rather than uniform standards, which can result in inconsistencies in timeliness, content, and style across different issuers.¹⁵

Another limitation is that while the MSRB's EMMA platform centralizes disclosures, the quality and comprehensiveness of the data can vary. Some critics argue that the required disclosure categories, particularly for material events, may not always capture every significant development relevant to an issuer's financial condition or the bonds' value. While amendments have expanded the types of events requiring disclosure, the system still relies heavily on the issuer's interpretation and commitment to comply.¹⁴

Furthermore, enforcement of continuing disclosure obligations has been a challenge. Although the SEC has undertaken initiatives like the MCDC Initiative to address widespread violations, the lack of monetary penalties for issuers in certain settlement agreements and the decentralized nature of the municipal market can make consistent compliance difficult to achieve across all issuers.¹², ¹³ Consequently, non-compliance with continuing disclosure agreements, though contractually binding and potentially impacting future bond issuances, can sometimes persist without immediate or severe penalties.¹¹ These factors can potentially affect an investor's ability to fully assess the evolving risks associated with their municipal bond investments.

Continuing Disclosure vs. Official Statement

Continuing disclosure and an Official Statement are both critical documents in the municipal bond market, but they serve different purposes and apply at different stages of a bond's lifecycle.

The Official Statement is the primary disclosure document prepared at the time a new municipal bond issue is brought to the market. It is analogous to a prospectus in the corporate bond market. Its purpose is to provide potential investors with comprehensive information necessary to make an informed investment decision before purchasing the bonds in the primary market. This includes detailed information about the issuer (e.g., its financial condition, operations, debt structure, economic demographics), the terms of the bonds, the security for the bonds, and any legal or tax matters. Under SEC Rule 15c2-12, underwriters must obtain and review a "deemed final" Official Statement before bidding for or selling municipal securities.⁹, ¹⁰

Continuing disclosure, on the other hand, refers to the ongoing provision of information after the bonds have been issued and are trading in the secondary market. Its purpose is to keep investors updated on any material changes to the issuer's financial condition or specific events that could impact the value or security of the outstanding bonds. This typically includes annual financial information, operating data, and notices of material events. The obligation for continuing disclosure arises from a written agreement or undertaking, usually the Continuing Disclosure Agreement, entered into by the issuer at the time of the initial offering.

In essence, the Official Statement provides a snapshot of information at the point of sale, while continuing disclosure provides a stream of updates to that initial picture, ensuring transparency throughout the life of the bond.

FAQs

What kind of information is included in continuing disclosure?

Continuing disclosure typically includes annual financial information, such as audited financial statements and operating data (e.g., tax collections, utility usage, demographic trends). It also includes notices of material events, such as changes in credit rating, payment delinquencies, defaults, or significant legal actions affecting the issuer or the bonds.⁷, ⁸

Who is responsible for providing continuing disclosure?

While SEC Rule 15c2-12 imposes requirements on underwriters of municipal securities, it is the municipal issuer (the state or local government entity) or an "obligated person" who enters into a written agreement, often called a Continuing Disclosure Agreement, to provide the ongoing information.⁵, ⁶

Where can I find continuing disclosure documents?

Continuing disclosure documents for municipal bonds are primarily filed with the MSRB's Electronic Municipal Market Access (EMMA) website. EMMA is the official centralized source for municipal securities data and documents, providing free public access to these filings.³, ⁴

What happens if an issuer fails to comply with continuing disclosure?

Failure to comply with continuing disclosure obligations can have several consequences. It can result in enforcement actions by the SEC against the issuer or underwriter, negatively impact the issuer's reputation, reduce its access to capital markets for future bond sales (potentially leading to higher borrowing costs), and may require the issuer to disclose its past non-compliance in subsequent Official Statement documents for up to five years.¹, ²