Each issuer of securities in the public debt markets is responsible for providing prospective investors with information that reasonable investors would consider to be important in making an investment decision. This information includes relevant financial and operating information as well as legal and tax considerations. In preparing offering documents for new securities, issuers are expected to describe the key terms of the securities and to provide information regarding the issuer’s ability to repay the securities on a timely basis. This Best Practice addresses disclosure documents prepared by municipal issuers for prospective investors when new securities are issued in the public debt markets. The issuance or sale of new securities is referred to as the primary market.
Municipal bonds are largely exempt from federal requirements for securities, but are required to comply with the antifraud provisions of the Securities Act of 1933 and Rule 10b-5 of the Securities Act of 1934. Primary market disclosure practices for municipal securities have developed as a result of these antifraud provisions, federal regulation of broker-dealers through the Securities and Exchange Commission (SEC) Rule 15(c)2-12, and other regulations of market participants by the Municipal Securities Rulemaking Board (MSRB). Disclosure guidelines published by various industry groups have also played a significant role in shaping market practice.
Federal antifraud laws prohibit making material misstatements, or omissions of material facts if those facts are necessary to avoid a misleading statement. In some cases, issuers may be held responsible only if they had knowledge of the fraud. In other cases, issuers may be held responsible for violations through negligence. In either case, issuers who fail to comply with disclosure requirements may be subject to regulatory actions and/or monetary fines. Regulatory expectations are increasing and issuers should be very mindful of the quality and accuracy of information included in primary market offering documents.
GFOA recommends issuers establish clear policies and procedures for compiling information before issuing debt. Issuers are to carefully consider information that may be material to investors when compiling primary market information. The preliminary official statement should contain specific information about the securities, including a detailed description of the purpose of the issue, and legal opinions regarding the issuer’s authority and the tax status of the securities. In addition, the offering document (“Preliminary Official Statement” or “POS”) should provide the most recent financial information that may be useful to prospective investors. GFOA recommends that issuers consult counsel to determine if this information should be updated following the sale for the final Official Statement. Specific GFOA recommendations for primary market disclosure are detailed below.
Identifying, Compiling and Verifying the Information that is Material for Investors
Good and consistent disclosure is the issuer’s responsibility. Issuers should develop a clear written statement of the systematic process in which primary market disclosure is drafted, reviewed and approved. The statement should specify who coordinates the disclosure process and name internal and external participants. Implementation will vary by the size of the issuer, the frequency with which the issuer accesses the market and by type of credit.
- Determine who has responsibility for drafting the disclosure and managing the preparation and review process. Issuers should have a clear understanding of the roles of various parties on the financing team, including bond counsel, disclosure counsel, municipal advisors or underwriter’s counsel. While each of these parties may provide input into the drafting process, the issuer has the ultimate responsibility for its accuracy and content. Discuss the different roles of bond counsel and disclosure counsel.
- Identify an internal working group involving subject matter experts on budget, pension, operations, legal etc. to actively review the disclosure and consider whether it is accurate and complete.
- Consult offering documents of peer issuers for an overview of topics covered.
- Include management (people in positions of authority) in the preparation and review process whenever possible to ensure a big-picture perspective. Identify issuer representatives to certify as to the material accuracy of data included in the offering documents and the completeness of the offering documents.
- Provide sufficient training to participants in the internal working group regarding market expectations and regulatory guidelines to understand ramifications of omissions.
- Consider whether the information provides the investor with a coherent and comprehensive understanding of the issuer and the credit. More is not necessarily better. Be clear and concise.
- Inform members of the governing body of the expected issuance and provide them with an opportunity to review primary market offering documents.
- Determine how external parties such as bond counsel, disclosure counsel, municipal advisors, underwriters or underwriters counsel participate in the diligence review. Understand the regulatory requirements of each party. For example, in a negotiated sale, underwriters will likely require a due diligence call or meeting.
Preparing the Preliminary Official Statement
The Preliminary Official Statement (POS) is the published offering document that contains information regarding the securities and the issuer that would be considered to be important for investors. It is electronically distributed prior to the sale and pricing of the securities for review and consideration by potential underwriters and investors. The specific information included in a POS as well as the order of that information within the document will vary widely based on issuer historical practices, regional norms and industry expectations.
- Cover – A brief summary noting the issuer, the purpose of the issue, security terms, the estimated par amount, principal and interest payment dates, sources of payment, ratings (if available), and the date of the document. In negotiated sales, the names of managing underwriters are shown. The cover is typically followed by contact information for the issuer, advisors and counsel, and a table of contents for the document.
- Description of securities being offered – This section more fully describes the authority of the issuer, the purpose for which the securities are being offered, the security pledge, the principal amount, interest payment terms as well as all other structural features of the securities such as redemption features. It also identifies the fiscal agent or trustee. In the case of a refunding, this section identifies which securities may be refunded.
Authority – Describe pertinent provisions of the state constitution, statute, indentures or resolutions that authorize and/or limit the issuance of the securities.
Purpose – Describe the purposes for which the bond proceeds are to be used. Include a table showing the estimated sources and uses. If additional funds are needed to accomplish the stated purposes, indicate the projected sources of these funds. If the bonds are being issued to refund outstanding bonds, a listing of the proposed bonds for refunding, including CUSIP numbers, redemption dates and prices should be included, along with a description of the types of securities that will fund the escrow account.
Security Pledge – Provide a clear description of the security pledge and detailed information regarding the sources of payment. This section also notes if the obligations are secured by physical assets. Describe the provisions permitting or restricting the issuance of additional securities or the incurrence of additional parity debt.
For revenue bonds– Include additional information such as the flow of funds, rate covenants, the additional bonds test, and reserves (if applicable) and other provisions of the authorizing document. Briefly describe the findings of any engineering or financial feasibility reports or studies on the construction or operation of a funded facility (full reports may be included as an appendix, if desired).
For lease and installment financing contracts –Describe whether payments are subject to appropriation, and the legal provisions and covenants regarding budgeting, abatement and appropriations.
For variable rate debt – Include information regarding the terms of any liquidity facility or line of credit as well as terms related to termination events or credit remedies, if applicable.
For conduit financings, asset-backed, or assessment-backed securities– List significant risks faced by bondholders such as construction risks, legal issues, damage to property or risks related to foreclosure procedures. It is important that this section be comprehensive.
The body of the disclosure document should include or address the following matters.
- Future Issuance Plans – Current information regarding the issuer‘s plans for future sales of securities secured by the same credit.
- Credit Ratings – A statement regarding any rating(s) that have been requested and assigned.
- Credit Enhancements – Describes the terms of any guarantee, insurance, surety or credit facility pertaining to the payment of principal or interest.
- Continuing Disclosure Agreement – The issuer’s commitment to periodically update the financial information in the official statement to investors over the life of the bonds, the timeline for the distribution of these filings and commitments to make filings on specified material events. Identify any material failure to comply with prior undertakings during the past five years. It is important to stress that under SEC Rule 15c2-12, underwriters cannot participate in an offering unless the issuer includes language in their disclosure documents describing any material non-compliance with continuing disclosure requirements within the past five years (see GFOA Best Practice: Understanding Your Continuing Disclosure Responsibility).
- Legal and Tax Matters – A statement as to whether any pending litigation or regulatory proceedings challenge the validity or security for the bonds, the authority with which they are issued, or, if resolved adversely, could affect the issuer’s ability to pay debt service on the bonds. It also addresses the legal opinion and the tax status of the bonds under federal and state law.
- Municipal Advisors - The identification of municipal advisors for the issuer and certain information regarding their compensation.
Issuer’s Financial Information[i]
- Incorporation by reference – Some larger or frequent issuers may be able to “incorporate by reference” some financial information that is provided in the issuer’s continuing disclosure annual report. In doing so, issuers must still complete due diligence to ensure that such materials are accurate and provide updates as needed. Incorporation by reference may be accomplished by including a web link[ii]. The desirability of incorporating financial information by reference, and the manner of doing so, should be discussed with counsel as well as other parties involved in the financing, especially underwriters and municipal advisors.
- Overview of government financial framework – Provide background material regarding the issuer indicating the issuer’s ability to impose and collect taxes. A brief description of the issuer’s location and size, the form of government, the budget and appropriation process, fiscal monitoring and controls, and current accounting practices. This section often identifies the principal officials of the issuer and the number of government employees (including information about their employment benefits and collective bargaining groups).
- Revenues, Expenditures and Reserves – Present financial statements of revenues and expenditures for the most recent five-year period, generally in accordance with generally accepted accounting principles as established by GASB. Provide similar historical data on unrestricted balances, reserves or other sources of liquidity. Some issuers provide cash flow forecasts. Include information on budgets. Describe how tax revenues are levied and collected and identify factors likely to affect the issuer’s tax base.
- If the securities being offered are payable from particular revenues of the issuer, such as a particular tax or assessment or revenues of a particular enterprise, provide more detailed information including historical information on trends. Note what information is audited and what is unaudited. Prioritize audited data over unaudited data. If much time has elapsed since the prior year, include a narrative of the current year to date.
- If the securities being offered are payable from property taxes, provide historical information on the assessed valuation of taxable real property, including rates of collection and delinquencies, and segregating data for industrial, commercial, utility and residential properties.
- Indebtedness and other obligations – Present the debt structure of the issuer and explain the authority to incur debt, limitations on debt and debt trends. Provide details on the current debt portfolio to show principal and interest payments due. Include other obligations such as bank loans, direct purchases or private placements, capital leases, and other obligations such as financial guarantees, note variable rate debt, bond anticipation notes and deep discount debt. Also describe key terms of any outstanding derivative contracts or other financial obligations subject to acceleration or rating triggers.
- Investments – Describe the investment portfolio, trends in investment balances and a summary of the investment policy.
- Risk Management – Describe resources available to the issuer such as insurance policies or reserve funds to cover general liability claims or property damage.
- Retirement/Pensions/Other Post-Employment Benefits (OPEB) – Describe the issuer’s retirement plans and funding policies, as well as the issuer’s required pension contributions. Note the number of eligible employees. Summarize the most recent actuarial valuation or study of the plan. Describe the plan’s funded status and summarize the investment policy for plan assets. Include any key legislation or litigation that might affect the issuer’s pension obligations. Information on any OPEB should also be included. If pension or OPEB information is particularly complex and lengthy, the POS can include a summary, with full information included as an appendix.
- Demographic and Economic Information – A brief summary of key economic indicators for the issuer as available from regional, state or national sources. This may include data such as population trends, employment by sector or number of employees at key local employers, unemployment rates retail sales and building permits.
- Financial Projections – For some issuers or types of bonds, financial projections may be included. This could be especially important for credits that are payable solely from a specific, dedicated revenue stream. If projections are included, list all assumptions and factors that could cause actual results to differ from the projections.
- Utility or enterprise issuers – Include a description of the facilities, service area, customers, rates, capital plans, permits, major risk factors, and the capacity of the system.
- Attach the issuer’s most recent audited financial statements.
Proposed Form of Legal Opinions
Attach the proposed form of the opinions prepared by counsel regarding the authority, validity and tax status of the securities.
Distributing Disclosure Documents
Wide distribution of an issuer’s POS is important for a successful bond sale. Several electronic distribution systems are available. Larger and more frequent issuers may consider establishing an email distribution list for sharing disclosure documents or to provide an alert on the availability of such documents. For issuers who maintain an official website, GFOA recommends posting disclosure documents when available and should consult legal counsel regarding appropriate disclaimer language for prospective investors.
For some sales, information in offering documents is summarized or displayed on an issuer’s website or in “roadshow” materials that can be made available to prospective investors, with appropriate disclaimers. Consult with counsel for guidance on these alternative formats.
Converting the POS to OS
The final disclosure document or the Official Statement (OS) updates the POS to include the final terms of the bonds after the sale, i.e. the final principal amounts, coupon rates, yields, prices and CUSIPs for each maturity. If securities have been sold competitively, it also identifies the underwriter(s) who purchased the securities.
Certain financial or legal developments following the distribution of the POS but prior to pricing or prior to posting the final OS may require the distribution of a revised or “stickered” document to prospective investors. In this event, consult with counsel to determine if the development or the new information would be considered to be material to an investor’s consideration of the security. Issuers are also responsible for communicating material developments to the market for a 25-day period following the closing date.
As illustrated in this best practice, primary market disclosure is expected to satisfy regulatory requirements by identifying information that is material for investors. Good disclosure communicates this information effectively and lowers borrowing costs by promoting good investor relations. In addition, issuers with deficient disclosure may be subject to regulatory actions and/or monetary fines. The information included in this best practice is intended to provide comprehensive suggestions for primary market disclosure.
[i] Issuer’s Financial Information may be included in front portion or in an appendix
[ii] The uniform resource locator (or “URL”) where the investor may locate the information should be posted on the issuer’s website. Alternatively, that URL may be an active hyperlink. Use of an active hyperlink may have the legal effect of including the information in the issuer’s offering document. Care should also be taken to maintain the functionality of the hyperlink.
- GFOA Best Practice, Using Technology for Disclosure, 2020
- GFOA Best Practice, Understanding Your Continuing Disclosure Responsibilities, 2020
- National Federation of Municipal Analysts, Recommended Best Practices in Disclosure for State Government General Obligation and Appropriation Debt, September 2015
- National Federation of Municipal Analysts, Recommended Best Practices in Disclosure for Charter School Debt Offerings, March 2017
- National Federation of Municipal Analysts, Recommended Best Practices in Disclosure for Variable Rate and Short-Term Securities, August 2012
- National Association of Bond Lawyers, Consideration in Preparing Disclosure in Official Statements Regarding an Issuer’s Pension Funding Obligations, 2012
- SEC Report on the Municipal Securities Market, 2012