Full Disclosure by Governmental Issuers: Protection Against Liability
| Publication year | 1987 |
| Pages | 64 |
1987, January, Pg. 64. Full Disclosure by Governmental Issuers: Protection Against Liability
The federal securities laws contain a variety of disclosure requirements for issuers of securities. These laws also contain provisions imposing liability against issuers for failure to provide full disclosure to investors. While these disclosure requirements generally are not imposed on states and political subdivisions that issue bonds and other obligations, certain provisions clearly threaten governmental issuers with serious sanctions for failure to provide investors with complete and accurate information.
The Government Financial Officers Association ("GFOA") has provided a voluntary, detailed set of guidelines ("GFOA Guidelines")(fn1) as a standard for full disclosure. However, as shown in a recent survey,(fn2) some of the significant guidelines are not consistently followed by state and local governmental issuers. In many cases, fewer than 25 percent of the disclosure documents surveyed included certain significant information that the GFOA Guidelines suggest is necessary for an investor to make an informed investment decision. Such incomplete disclosure increases the threat of liability, which is a potentially costly proposition that states and local governments can ill afford in these tough financial times. Governmental issuers, seeking to avoid liability for inadequate disclosure, would benefit from assisting disclosure counsel(fn3) in following the GFOA Guidelines more closely.
In light of this potential liability, this article reviews some of the more significant GFOA Guidelines and notes the compliance rates revealed by the recent survey. The article also analyzes the significance to investors of those Guidelines which are not consistently followed and which may be central to full disclosure.
The Securities Act of 1933 ('1933 Act")(fn4) requires that a registration statement be filed with the Securities and Exchange Commission ("SEC") in connection with the offer and sale of all securities unless a specific exemption from registration is available. The SEC closely regulates the disclosure related to securities registered under the 1933 Act and provides specific requirements as to the type and detail of information that must be provided to potential investors.
Offers and sales of bonds and other obligations of states and political subdivisions generally are exempt from registration under the 1933 Act,(fn5) although certain non-registration provisions of the 1933 Act and the Securities Exchange Act of 1934 ("1934 Act")(fn6) may apply to such "exempt" securities. These non-registration provisions include certain anti-fraud provisions of the 1933 and 1934 Acts which require the disclosure of all material information so that an investor can make a prudent investment decision.(fn7) However, no specific standards have been established by the SEC to guide disclosure for an offer and sale of exempt securities.
In 1976, the GFOA(fn8) attempted to fill this void by creating a set of guidelines(fn9) to "provide a complete, accurate and objective description of those factors that relate to the securities being offered that are necessary to make an informed investment decision."(fn10) The types of information suggested by the GFOA Guidelines include overall financial, revenue and debt information. Although compliance with the GFOA Guidelines is voluntary, they have helped establish an industry framework for providing full disclosure of material facts by governmental issuers and underwriters. However, some commentators have argued that mandatory guidelines must be enacted to replace the GFOA Guidelines.(fn11)
The recent survey examined the rate of compliance with certain of the GFOA Guidelines in disclosure for general obligation bond offerings. Based on its results, it is apparent that investors are receiving significantly less information than the GFOA Guidelines suggest is appropriate.
The GFOA Guidelines(fn12) recommend that an official statement(fn13) provide summary information regarding operations of the issuer or enterprise over the last five years. The Guidelines then suggest that, following this summary, a discussion of material trends and changes should be given which includes the reasons and conditions for these changes and trends. In addition, investors should be provided with a two-year record of audited financial statements, including balance sheets, statements of revenues and expenditures and statements of changes in financial position.
Clearly, the GFOA Guidelines recommend disclosure of the five-year operations information (together with a discussion), as well as two-year overall financial reporting in order to insure that a potential investor will have sufficient historical data to recognize any trends and understand the factors that may be contributing to such trends. The survey did not comment specifically on the inclusion of five-year operational information and discussion. However, it did determine that 54 percent of those official statements included in the survey incorporated some audited financial statements and 39 percent contained complete audited financial statements for only one year. However, fewer than 14 percent contained complete financial reports for a two-year period.(fn14)
This finding is significant in that the information currently being provided may not enable investors to analyze trends and understand contributing factors. Financial statements for only a one-year period cannot indicate trends. As noted, the survey did not comment on the inclusion of the five-year operational information and discussion. However, even assuming that the same percentage of issuers that includes the complete two-year financial information (14 percent) also includes the recommended historical operational information, it is unlikely that the same percentage takes the additional steps to include a discussion of trends and related factors to accompany such information.
Much of the impact and significance of such trend information is lost if investors are left to their own devices to analyze financial information that may appear entirely in a tabular format. Without the recommended historical financial disclosure, most investors are forced either to make decisions based on static numbers or, when operational and other financial information is provided without the recommended discussion, to make assumptions about trends revealed in such information that may be completely unfounded.
Disclosure counsel often will not be sufficiently informed to analyze and understand trend information and contributing factors. Government officials, including financial officers and counsel, are familiar with the operations and can offer insight into trends. Such officials will benefit by assisting in the preparation of the recommended discussion to insure its inclusion in the official statement in complete and accurate form.
Revenue information relates to the source of funds available to repay the municipal obligation. Hence, the exact nature of information to be provided will vary significantly depending on the nature of the obligation. For example, disclosure information for obligations payable in whole or in part from property tax revenues (e.g., general obligation bonds) should include detailed information regarding the levying and collection of taxes and property valuations and assessments.(fn15)
To continue reading
Request your trial