Once an issuer deliver a bond to investors, the future value and repayment risk of the security is based on, but not limited to:
- Project progress
- Changes in management
- Changes in issuer financials
- Changes in issuer demographics, such as large swings in the region’s employment
The U.S. Securities and Exchange Commission (SEC) created the Rule 15c2-12 to ensure municipal securities issuers enter an agreement, through their dealer/underwriter, that requires them to provide documentation to investors when these changes occur since the value of their securities can change. Continuing disclosure updates investors on significant events and ongoing trends in the issuing organization.
Example:
Significant events affecting securities can require continuing disclosure, such as:
- Principal and interest delinquencies
- Unscheduled draws from reserves for debt service
- Substitution of credit or liquidity providers
- Defaults
- Adverse tax opinions affecting security tax-exempt status
- Material bond calls and tender offers
- Defeasances
- Rating changes
- Bankruptcy or insolvency
- Material modifications to investors’ rights
- Other related occurrences
- Changes in or the sale of property securing repayment
- Appointment of a successor trustee
- New issuer financial obligations, including new debt and contractual agreements that could impact bondholder rights
- Financial difficulties related to the issuer’s financial obligations, such as defaulting on another bond or loan
What’s important here?
During a security issuance, the issuer must sign a continuing disclosure agreement. The municipality or state agrees to provide continuing disclosure of information relevant to the bond’s market value throughout its life. The issuer and other entities contractually committed to supporting repayment sign this agreement.
The continuing disclosure agreement must address:
- What specific financial information and operating data the municipality will provide
- Which financial statements the entity will file
- The accounting principles to be applied, since these are not federally regulated
- The date by which the entity will provide annual financial information
The issuer must provide disclosures via Electronic Municipal Market Access (EMMA), on stated deadlines or within ten business days of the Material Event.
