Complying with secondary market disclosure rules: an update.

• Author: Tigue, Patricia
• Position: Securities and Exchange Commission disclosure rates

It has been two years since the Securities and Exchange Commission's (SEC) continuing disclosure rules have been in effect. The rules, which generally affect bonds issued on or after July 3, 1995, prohibit broker-dealers from underwriting bonds unless the issuer has entered into an agreement to disclose annual financial and operating information and to provide notices of material events on an ongoing basis. The rules have compelled governmental issuers to make decisions related to what information to disclose and the means by which the information is disseminated. The municipal market also has struggled with the impact of the rules, including looking at ways to improve the flow of information to different parts of the market.

In general, the disclosure rules now prohibit dealers from underwriting municipal securities of $1 million or more unless the governmental issuer or an obligated person has contractually committed to providing annual financial information and notices of material events. The SEC has defined financial information to include both financial information and operating data, and it is the same type of information provided by the issuer in the official statement. Audited financial statements, if available, must be provided for each obligated person if they are not included as part of the annual financial information. Financial information must be provided to nationally recognized municipal securities information repositories (NRMSIRs) and a state information depository (SID), if one exists in the issuer's state. Material event notices must be submitted to all NRMSIRs or to the Municipal Securities Rulemaking Board's (MSRB) Continuing Disclosure Information (CDI) system and to a SID.

Issuer Compliance

The manner in which governmental issuers are complying with their ongoing disclosure requirements varies, depending on the size of the government and its bond program. Many issuers have chosen to use their comprehensive annual financial reports (CAFRs) as a primary means to communicate with bondholders. Some larger or more frequent issuers are experimenting with separate documents that incorporate information on various outstanding bonds.

For many governmental issuers, the CAFR can be an effective means to transmit information needed by bondholders to evaluate whether to purchase or hold their bonds. The GFOA adopted a recommended practice in 1996, entitled "Using the Comprehensive Annual Financial Report to Meet SEC Requirements for Periodic Disclosure," that provides guidance to issuers who elect to use the CAFR for disclosure purposes. Exhibit 1 presents a list of specific recommendations contained in the recommended practice.

When an issuer submits a CAFR to the market, securities law considerations make it imperative that all information in the CAFR be complete and not misleading. Issuers may want to take extra care in preparing all tables, even those not specifically included for disclosure purposes. Issuers also might consider reviewing information with disclosure counsel before finalizing the CAFR.

Many governments are using the approach suggested in the recommended practice to present annual financial and operating information. For example, the City of Carrollton, Texas, has augmented the statistical section of its CAFR with a section entitled "Continuing Financial Disclosure Tables." This section includes tables found in the official statement, such as appraised value of taxable property in relation to outstanding debt; property tax rates, levies, and collections; top 10 taxpayers; municipal sales tax collections; outstanding debt service requirements for general obligation debt; comparisons of general fund revenues and expenditures; general fund current operations, including prior-year actual, budget, and current-year estimated expenditures; and value of investments.

The South Florida Water Management District, which also uses its CAFR for disclosure purposes, has developed a separate section in the CAFR, entitled "Disclosure Section," that specifically addresses the debt program and disclosure requirements. It provides a description of the bonds covered by the disclosure...