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August 21, 2013

New Guidance on Continuing Disclosure Obligations for Bond Issuers

By Eric M. Berman, Charles B. Congdon and Robert W. McCann

The Municipal Securities Rulemaking Board (MSRB) recently published guidance to assist borrowers of tax-exempt bond proceeds—including tax-exempt health care entities—who are required to comply with the Securities and Exchange Commission’s (SEC) continuing financial disclosure requirements.

The Guidance, called the “MSRB Market Transparency Advisory – Suggested Practices in Submitting of Financial Disclosures to EMMA (MSRB Notice 2013-18)” (the Guidance), was published August 12, 2013, and provides clear explanations and helpful best practices for maintaining compliance with the SEC’s continuing financial disclosure requirements.


The SEC’s Rule 15c2-12 requires that issuers of municipal securities and other “obligated persons,” i.e., the borrowers of municipal bond proceeds, enter into a “continuing disclosure agreement” to ensure that the issuer or borrower, as the case may be, provides ongoing public disclosures of financial information about its organization to enable investors to have current, transparent and accurate financial information relating to the issuer’s or borrower’s ability to repay the obligation.  Tax-exempt hospitals and other health care facilities, as well as colleges and universities, schools and other nonprofit institutions, typically are “conduit borrowers” of the proceeds of bonds issued by governmental issuers.  All such required ongoing disclosures are submitted to and maintained by the MSRB through its Electronic Municipal Market Access (EMMA) system.  These disclosure obligations apply to borrowers of bond proceeds, such as tax-exempt health care entities that have obtained financing through bond financing.  

Required Disclosures

There are four categories of ongoing financial disclosures that may be required by the borrower under SEC Rule 15c2-12, depending on the type of financing involved: (a) annual financial information, (b) audited financial statements, (c) customary financial information, and (d) failure­ to file notices. Each of these categories is described in more detail in the Guidance.  The Guidance provides detailed instructions on how to complete each of these disclosures in a timely, complete and compliant manner. 

Tracking Deadlines

In addition to the Guidance, the MSRB also has provided borrowers of bond proceeds an e-mail reminder tool to assist in tracking their continuing financial disclosure obligations to the EMMA. 

Recent SEC Enforcement Actions

The Guidance was issued by the MSRB in response to recent SEC enforcement actions against the City of Harrisburg, Pennsylvania (Harrisburg) and West Clark Community Schools in Clark County, Indiana (West Clark) pursued, in part, due to Harrisburg’s and West Clark’s failure to comply with their continuing disclosure obligations under Rule 15c2-12. 

In the enforcement action against Harrisburg, the SEC found that certain public statements made during a two-year period misrepresented and omitted state material information regarding Harrisburg’s deteriorating financial condition and credit rating downgrades, thereby violating the antifraud provisions of the Securities Exchange Act.  During the same period, Harrisburg did not provide to the public current and accurate information regarding its financial condition, including annual financial information or notices required by SEC Rule 15c2-12.  During the investigation process, Harrisburg improved its disclosure process through the implementation of new policies and procedures.  As a result of the investigation, the SEC and Harrisburg agreed to a settlement order, under which Harrisburg was required to cease and desist from committing or causing violations of the Securities Exchange Act.

In the enforcement action against West Clark, the SEC charged West Clark with falsely stating to bond investors that it had been properly providing annual financial information and notices required under SEC Rule 15c2-12.  An SEC investigation revealed that in an official statement prepared in 2007 for a bond offering written by an underwriter on behalf of West Clark, West Clark stated that it was in compliance with its disclosure obligations.  However, West Clark had not submitted any of the required annual reports or notices for a 2005 bond offering, and the underwriter did not conduct adequate due diligence to detect the false statement in the course of the 2007 offering.  As a result of the investigation against West Clark, the SEC and West Clark agreed to a settlement order, under which West Clark was required to cease and desist from committing or causing violations of the Securities Exchange Act, and to institute new policies and procedures and training programs with respect to its disclosure obligations.


The SEC’s recent enforcement actions provide a tangible reminder that the continuing disclosure agreements executed by borrowers of tax-exempt bond proceeds are in fact rooted in federal law.  This Guidance provides helpful assistance for borrowers of tax-exempt bond proceeds on how to comply with their continuing disclosure obligations, which is becoming an increasingly important legal requirement.  The MSRB is expected to provide additional transparency advisories and educational materials that will also assist borrowers of tax-exempt proceeds meet their disclosure obligations.  Health systems and other tax-exempt borrowers may wish to review their disclosure policies and procedures in light the MSRB’s Guidance and e-mail tracking system.   

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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