Overview of Continuing Disclosure under the Rule

The U.S. Securities and Exchange Commission’s (the “SEC”) Rule 15c2-12 (the “Rule”) requires an underwriter in a primary offering of certain municipal securities to reasonably determine that an issuer or obligated person (as such terms are defined in the Rule) has entered into a continuing disclosure agreement or undertaking.  This continuing disclosure agreement commits an issuer, obligated person and/or conduit borrower (for purposes of this article, an “obligated person”) to provide certain information to the Municipal Securities Rulemaking Board (the “MSRB”), through a posting on the MSRB’s “EMMA” website, on an ongoing basis concerning the occurrence of specified events pertaining to the obligated person or the securities.  The Rule sets forth the types of disclosures an obligated person must undertake in a continuing disclosure agreement to provide for the benefit of its bondholders (or investors).  It should be noted that although the Rule (in certain circumstances) requires a continuing disclosure agreement and sets forth the types of disclosures to be made under such agreement, the agreement itself is a contractual obligation by the obligated person for the benefit of the underwriter and investors.

COVID-19 Raises Questions About Compliance with Continuing Disclosure Obligations

Since the outbreak of the coronavirus, obligated persons have been dealing with operational challenges as well as the direct and indirect effects of the outbreak on their obligations under the Rule and their continuing disclosure agreements.  

SEC Not Relieving Obligated Persons of Filing Requirements Due to COVID-19

In a March 19, 2020 webinar by the MSRB, Ahmed Abonamah, Deputy Director of OMS, explained that the SEC lacks the authority to provide relief to obligated persons due to any violation of their continuing disclosure agreement (including the failure to timely file annual financial information) because of COVID-19.  Deputy Director Abonamah emphasized that the obligations to file under the continuing disclosure agreement are contractual ones with the parties to the agreement.  If an obligated person is unable to timely file an annual financial or operating filing due to COVID-19 circumstances, it should file a notice of failure to file (ideally prior to the required filing date), and as soon as the information is available, file the annual information, together with any additional information required to be filed in its continuing disclosure agreement.  If the obligated person failed to file an event notice filing within the ten (10) business day requirement, it should file the event notice as soon as it can and in the event notice, the obligated person may provide an explanation of the circumstances as to why the information was not filed within the ten (10) day period (see “Are Changes To Financial Obligations Due To COVID-19 Reportable Events Under the Rule?” below).  

In addition to the requirements of the Rule, an obligated person may be subject to consequences of failing to comply with its contractual obligations under the continuing disclosure agreement.  Obligated persons should look to the terms of the continuing disclosure agreement for what to file and when to do so.  Also, these agreements already contain provisions on what should be done should the obligated person or obligated person miss a filing deadline.

Filing a Voluntary COVID-19 Notice

Does every obligated person need to submit a COVID-19 event filing?  In the MSRB webinar, Deputy Director Abonamah explained that there is no such requirement under the enumerated events in the Rule based on the mere fact of the COVID-19 pandemic occurring.  However, a Public Statement¹ of SEC Chairman Jay Clayton and Rebecca Olsen, Director of OMS, released by the SEC on May 4, 2020 (the “Public Statement”), stated “in light of the potentially significant effects of COVID-19 on the finances and operations of many municipal obligated persons, we . . . request that municipal obligated persons provide investors with as much information about their current financial and operating condition as is reasonably practicable.”

Some obligated persons have elected to voluntarily post information on the impact of COVID-19 on their operations and access to liquidity.  Many obligated persons that have availed themselves of various federal stimulus programs (the PPP or Medicare Advance Payment (MAP)) have also elected to provide notice of such participation. Some obligated persons have included in such notices information about projected operating losses.  Many of these filings include forward-looking statements and projections which raise questions about compliance with other SEC rules and the need for cautionary language, both matters are discussed here.

The Impact of COVID-19 on Annual Disclosures and in Financial Statements

As we approach quarter and some fiscal year ends, many obligated persons are evaluating the impact of COVID-19 on their financial reporting.  Under certain accounting guidelines, the impact of COVID-19 is a reportable event that should be disclosed in financial information required to be posted on EMMA under the Rule.  

Are Changes To Financial Obligations Due To COVID-19 Reportable Events Under the Rule?

According to the Rule, obligated persons must file (post to EMMA), in a timely manner not in excess of ten (10) business days after the occurrence of the event, notice of certain enumerated events.  Amendments to the Rule in early 2019 added two additional events for continuing disclosure agreements entered into on or after February 27, 2019, expanding the list from 14 to 16 events.  The full list of events and additional information about the amendments to the Rule can be found here.

Recently Added Events May Require Filing for Incurrence of a Financial Obligation, a Default, or Modification of Terms.  The two additional events (Events 15 and 16) have been viewed (and criticized) by some as being broad and potentially covering a variety of events.  Disclosures arising from COVID-19 highlight these criticisms. 

Event 15 requires filing of an event notice upon the “Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material.” 

Event 16 requires filing of an event notice upon “Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties” (emphasis added).² 

Many obligated persons are now faced with the struggle of seeking certain waivers from investors because of negative impacts due to COVID-19.  Even if such waivers avoid a default, the obligated person needs to consider whether such waiver reflects financial difficulty and thus triggers the event notice filing requirement under the circumstances.  The explanation for the Rule amendments in the Release of the Final Rule published by the SEC (the “Release”) provides some context to what constitutes ‘financial difficulty’ and states: 

The occurrence of a default, event of acceleration, termination event, modification of terms, or other similar event under terms of a financial obligation of the obligated person or obligated person, any of which reflects financial difficulties, could provide relevant information regarding whether the financial condition of the obligated person or the obligated person has changed or worsened, and whether the obligated person or obligated person has agreed to new terms that would provide the counterparty with superior rights to assets or revenues that were previously pledged to existing security holders.³

Additionally, a default under Event 16, includes a monetary default and other failures to comply with specific covenants, but is not limited to only an “event of default” as defined in the financing documents.  That more narrow view of default was rejected by the SEC as it believes there are defaults that may reflect financial difficulties “even if they do not qualify as ‘events of defaults’ under transaction documents.”  

Comments in the Release addressing the items other than ‘default’ in Event 16, such as “modification of terms,” which is of particular relevance due to COVID-19, also seem broad and sweeping in their scope.  In the applicable sections of the Release, some potentially helpful insight can be gleaned from a discussion of proposed revisions to the Rule, both of which were rejected by the SEC.  The first was to revise the rule to read “modification of material terms” (emphasis added), and the second was to add “including written or verbal waivers.”  The SEC rejected both revisions explaining it believed they were unnecessary since the requirement to report a modification of terms already had the qualifier that the modification was one which reflected financial difficulties.  Specifically on the topic of waivers, the Release states, “Additionally, ‘modification of terms’ is broad, and as such, a written or verbal waiver of a deal provision would be a modification of the terms of an agreement because such waivers are a departure from what was agreed to under the terms of the agreement” (emphasis added).  Thus, even if the likelihood of a default is unclear (or will be avoided) but there is a future modification as a result of receiving a waiver, the obligated person will likely need to timely file an event notice upon the entering of the prospective waiver.

Practical Considerations 

An obligated person should: 

• continue to observe the filing deadlines in its continuing disclosure agreements;
• ensure any filing that contains information regarding its current financial status and operations is truthful and does not include any material omissions or misleading statements; 
• evaluate the impact of COVID -19 on the finances and operations of the obligated person and determine the appropriateness of additional voluntary disclosures relating to such impact; 
• evaluate the effect of entering into new credit agreements, modifications of existing credit agreements that affect existing bond holders, and other Event 15 occurrences, for materiality. If it determines that any such event is material, it should file an Event 15 notice;
• evaluate the effects of a default, waiver, a covenant holiday, or other Event 16 occurrence on its financial position. If it determines that they reflect ‘financial difficulty’, then it should file an Event 16 notice; and
• if any of its filings include forward-looking statements, estimates, or management discussions, include appropriate cautionary language and disclaimers after consulting with legal counsel (please refer to our discussion of the Public Statement on forward-looking statements in municipal issuances found here).

Even in the absence of a contractual or regulatory obligation to disclose the effects of COVID-19 or related events, obligated persons should weigh their decision not to disclose against the potential for improved transparency and investor relations in today’s market.

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¹ The Public Statement represents the views of the SEC Chairman and the Director of the Office of Municipal Securities of the SEC.  It is not a rule, regulation, or statement of the SEC.  The SEC Commission has neither approved nor disapproved its content.  The Public Statement does not alter or amend applicable law and has no legal force or effect.  The Public Statement creates no new or additional obligations for any person.

² Notice of such events are required to be filed by any obligated person which has entered into a continuing disclosure agreement after the February 27, 2019 effective date of the Rule amendments, regardless of when the obligated person entered into the financial obligation (as defined in the Rule).  

³ SEC’s Release of Final Rule, effective October 30, 2018 (17 CFR Part 240).

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