8.4.4 Incentives for Compliance
As an incentive to issuers, SEC Rule 15c2-12 requires any instances of material non compliance with undertakings during the previous 5 years to be disclosed in each of the issuer’s OSs, even if the non compliance has been “remedied.” Underwriters (both in negotiated and competitive offerings) are required under SEC Rule 15c2-12 to make diligent inquiry to ensure that the issuer has properly disclosed any material non compliance within the prior 5 years in the preliminary official statement. The SEC has said, however, that it is not enough for underwriters to rely on issuers’ own representations regarding past compliance. Rather, underwriters must perform their own review (which may include engaging counsel or other consultants) to obtain evidence reasonably sufficient to determine whether the issuer has complied with its obligations under each of its prior undertakings. This has led underwriters to conduct 5 year look back reviews regarding issuers’ compliance when they are involved in a new bond financing.
The SEC has brought a series of enforcement actions against both issuers and underwriters based on findings that issuers had either falsely stated in an OS that they were in material compliance with all continuing disclosure undertakings for the prior 5 years or had omitted to disclose non compliance. See Section 6.1.4, SEC Enforcement Actions. These cases have generally involved late or non existent filings, but the SEC has declined to (a) define how late of a filing would constitute “material” non compliance with a CDA or (b) to otherwise define “material compliance.” As a result, issuers generally list in their OS any non compliance with an undertaking within the prior 5 years, no matter how technical or minor.
In addition to legal activity, there has generally been increased attention to continuing disclosure compliance by investors and a call by investors and the SEC to increase the frequency, timeliness, and scope of municipal continuing disclosures. From a positive perspective, providing updated and accurate information on a timely basis confirms that the issuer is managing its affairs well and careful and diligent attention to each undertaking can improve an issuer’s relations with investors for future financings. In light of market expectations and the SEC enforcement agenda it is important for issuers to establish internal policies and procedures regarding disclosure responsibilities.
The GFOA Best Practice Understanding Your Continuing Disclosure Responsibilities recommends that issuers consider adopting policies and procedures to apply best practices in the manner that is relevant and most practical for their agency. These best practices include designating a person, or the holder of a specific office, to be responsible for filing the annual reports accurately and timely, and for tracking and reporting on the events that must be reported within 10 business days. Issuers should also be aware of required filing dates in a continuing disclosure certificate or CDA and plan ahead to avoid late filings.
While issuers may rely on outside consultants (such as dissemination agents) to assist in the filing process, it is the issuers that ultimately suffer the consequences of a late filing. Accordingly, issuers should allow for sufficient time to review contents of filings by internal staff and outside consultants, including bond or disclosure counsel, before the due dates of filings. The issuer’s policies and procedures should clearly articulate the information that it must submit in its annual filings and should include a list of required reporting events, as mandated by the SEC and/or stated in a continuing disclosure certificate or CDA.