Municipal disclosure is typically provided through (i) preliminary and final official statements when municipal securities are being sold and (ii) secondary market disclosure that occurs away from an initial offering of municipal securities. Secondary market disclosures (e.g., annual disclosures, listed event filings) are typically made pursuant to the Continuing Disclosure Agreements and completed to permit underwriter compliance with Securities Exchange Commission Rule 15c(2)-12. See GFOA best practice “Understanding Your Continuing Disclosure Responsibilities.”
The Securities and Exchange Commission (SEC), through published comments and at events organized by the Office of Municipal Securities, has expressed concern with the “timeliness” of municipal disclosures and has encouraged municipal issuers to provide more robust and timely financial information to investors and municipal market participants. The comments continue to raise awareness about the importance of investor access to current financial information of municipal issuers. However, the SEC has not taken any action to impose additional regulatory mandates regarding municipal market disclosure.
The SEC’s comments on municipal disclosure regarding COVID-19 suggest that the typical practice of providing audited financial statements and/or annual filings made to comply with Continuing Disclosure Agreements may not be sufficient to enable investors to make informed investment decisions and encourage municipal issuers to provide more current financial and operating information. While the SEC’s comments may have been focused on disclosures for COVID-19, they are applicable to more routine matters and the timeliness of information provided to the municipal market.
Municipal analysts in the investor and rating agency communities have raised similar concerns. The National Federation of Municipal Analysts (NFMA) has prepared numerous white papers and related documents addressing the content of municipal disclosure while also expressing the need for more and quicker municipal disclosure. While “timeliness” may have initially been directed to the time it takes municipal issuers to prepare and release audited annual financial statements, the COVID-19 pandemic highlights that “timeliness” also may include the additional availability of information from municipal issuers in response to an event or situation that has a financial or operational impact.
Issuers should consider policies and practices to govern the process of providing voluntary disclosures to municipal market participants. Voluntary disclosure is financial or operating information related to an issuer’s obligations, credit, or operating conditions that an issuer chooses to provide in addition to information required by the issuer’s Continuing Disclosure Agreements. In evaluating the merits of providing voluntary disclosures, issuers may want to consult with their bond/disclosure counsel or municipal advisor for a thorough assessment of a nexus to credit for the voluntary disclosure.
In this best practice, reference is made to two documents released in 2020. First, the SEC through its Office of Municipal Securities, released a public statement in May entitled, “The Importance of Disclosure for Our Municipal Markets.” Second, the Government Finance Officers Association (GFOA) has led a diverse group of municipal market participants in collaborative discussions on municipal disclosure. This Disclosure Industry Workgroup released a paper in August entitled, “General Continuing Disclosure Considerations for Municipal Securities Issuers.” While both papers were released during the time of the COVID-19 pandemic and the resulting impacts on credit conditions, they provide an excellent backdrop for voluntary disclosure practices and considerations.
ESTABLISHING VOLUNTARY DISCLOSURE PRACTICES — WHAT INFORMATION SHOULD BE INCLUDED
Due to the diversity of the municipal market and the many types of credits (e.g., general obligation, utility revenue, other revenue, lease, appropriation, etc.), this best practice cannot prescribe a universal checklist of voluntary disclosures applicable for all issues.
Voluntary disclosure by an issuer should address any information, event, action, or other situation affecting an issuer’s obligations, credit, or operating information that the issuer believes is important to municipal market participants. This may include negative or positive information. For instance, events that expand a local economy or revenues that exceed estimates are just as important disclosures as the closing of large industries or revenues falling short of estimates. Note that “materiality” is a term often used in disclosure discussions and unfortunately does not come with clear definition or examples. What is deemed to be “material” is a discussion that issuers are encouraged to have with their bond/disclosure counsel.
Voluntary disclosure may be routinely available interim financial and operating information that is already prepared and made available by the issuer for internal management reporting or governing body updates; this may be information that is posted on its public website or provided as part of public meeting materials. Voluntary disclosure is the conveyance to the municipal market, in an organized manner, what a municipal issuer currently knows.
Once a voluntary disclosure practice is established, issuers will have an easier time recognizing when information, events, actions, or situations affecting an issuer’s obligations, credit, or operating information should be voluntarily disclosed to the market. Some examples of potential voluntary disclosure topics include:
- Status of actual to budgeted revenues and expenditures, including any forecasts with accompanying assumptions. This may include unaudited periodic or interim financial information, and the information may be provided in the format shared with staff or governing body.
- Actions of governing body or any other actions having impact on underlying source of funds being used to repay bonds and notes of a municipality; for example, a change in the rates, fees, or taxes that are pledged to the repayment.
- Events (either pending or occurring) that may have an impact on the underlying economy of the issuer.
- Information shared with any rating agency or responses to frequently asked questions from municipal market participants (including investors and bank loan providers).
- Voluntary disclosures that have been recommended in other GFOA best practices, such as but not limited to environmental risk factors.
Issuers should also examine their own unique circumstances to determine what may constitute information that may be important to municipal market participants.
ESTABLISHING VOLUNTARY DISCLOSURE PRACTICES — CONSIDERATIONS
Location/Accessibility of Information
As noted above, what could be considered important financial and operating information could be available through a variety of mediums/channels of the issuer’s ordinary course of business. A voluntary disclosure practice may help ensure that voluntary disclosures are available via a consistent means and in a consistent location. This consistency will assist municipal market participants locate financial and operating information.
Issuers should discuss any voluntary disclosure practice with their bond/disclosure counsel. The SEC public statement made in May 2020 addresses many frameworks for voluntary disclosure. The SEC public statement accepts that voluntary disclosures will not have the benefit of a formal audit process; in many cases certain financial disclosures made voluntarily will be based on estimates and assumptions as well as projections regarding future circumstances. Nevertheless, the SEC public statement encourages providing as much current issuer- and security-specific information as is practicable. Finally, the SEC public statement addresses liability of a municipal issuer if information that was released voluntarily was later found to be in error. The SEC stated that issuers may reduce legal and other risks by accompanying disclosures with meaningful cautionary language. The SEC public statement further states, “We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.”
Voluntary disclosure does not come with set expectations on content and frequency; in other words, there is no requirement that voluntary disclosure occur monthly or quarterly. It is recommended that any voluntary disclosure practice have consistency in what is disclosed. For example, if an issuer took efforts to voluntarily disclose when actual-to-budgeted revenues or expenditures had a certain variance, unless other events impact the importance of that variance, the issuer should voluntarily disclose when that variance level occurs again.
BENEFITS OF VOLUNTARY DISCLOSURE
This best practice acknowledges that, under existing regulations, investors purchase municipal securities with the understanding that municipal issuers are required only to provide annual continuing disclosure information and notice of specific listed events (as outlined in a Continuing Disclosure Agreement). However, the availability of interim and ongoing information can address “timeliness” concerns previously raised by the SEC.
Enhanced market communication achieved through voluntary disclosure allows the issuer to improve its investor relations. This enhanced communication and improved relations with investors can become an important factor for access to the capital for markets, but more importantly should result in additional demand for its bond offerings that may lead to a lower cost of capital with more favorable terms.
Finally, a widespread adoption of proactive voluntary disclosure, which is a market solution, will always be more beneficial to municipal issuers compared to the alternative of more governmental regulation mandating additional municipal disclosure. Additional regulation will impose additional compliance burdens on issuers, which may lead to a reduction in issuance of municipal securities and consequently higher cost of capital for municipal issuers.
ONE SIZE DOES NOT FIT ALL
GFOA strongly believes that any frequent issuer of municipal securities (for example, an issuer that is in the primary market on a regular basis) should consider having a voluntary disclosure practice. GFOA further understands that voluntary disclosure practices may not work for all municipal issuers–for example, infrequent issuers that are only periodically in the primary market.
A voluntary disclosure practice may sound intimidating, but at its core, is simply better organization of existing information. However, issuers will ask themselves if they have the resources to sufficiently achieve the objective of voluntary disclosures. Nonetheless, issuers and finance officers of an issuer have an important role related to disclosure at any time they enter the primary market with a borrowing (See GFOA best practice “Primary Market Disclosure”). When reviewing a possible voluntary disclosure practice, issuers should consider the resources already committed to disclosure responsibilities.
ESTABLISHING VOLUNTARY DISCLOSURE PRACTICES – IMPLEMENTATION SUGGESTIONS
Once a municipal issuer commences a voluntary disclosure practice, they will likely soon realize that it will not take many extra steps or workload to make this effort successful. The following are some suggestions to help frame your voluntary disclosure efforts for municipal issuers.
- Discuss voluntary disclosure practice with your bond/disclosure counsel to include the appropriate cautionary language that should accompany a voluntary disclosure. Such cautionary language will address assumptions made related to the information being disclosed, the process and methodology used to produce the voluntary disclosure, as well as any limitations associated with the information.
- Make sure that any municipal advisor, trustee, or dissemination agent that serves the municipal issuer is aware of your voluntary disclosure practice. Many mid-size to smaller issuers may engage with their municipal advisor, trustee, or dissemination agent to complete its annual required filings and these same parties could be engaged to assist with implementing a voluntary disclosure practice.
- To assist with consistency for investors and municipal market participants to find voluntary disclosure information, issuers should consider using the MSRB’s EMMA system to communicate voluntary filings with a wide array of investors and municipal market participants, similar to the means that annual continuing disclosure and listed events are communicated. EMMA includes a voluntary disclosure field to assist with voluntary disclosure filings, and the MSRB has signaled upcoming upgrades to EMMA will make voluntary disclosure filings easier for issuers.
- An additional consideration is the utilization of an investor relations website to organize disclosure filings (primary market, secondary market, and voluntary) or information for frequent issuers. If an issuer provides any disclosure, annual continuing disclosure, or listed events on an investor relations or municipal website, any voluntary disclosure should also be made available on these website(s).
- Many issuers are already making voluntary disclosures via financial and operating information available on their municipal websites. A step towards a voluntary disclosure practice is (i) recognizing that municipal market participants are looking for certain information, (ii) organizing the municipal website so that such information is more visible and accessible, and (iii) providing the URL of the municipal website via a reference in your primary market offering document and/or annual filing, and also as a link on your customized EMMA issuer page.
Resources and Other Related GFOA best practices
- SEC through its Office of Municipal Securities, May 2020, “The Importance of Disclosure for Our Municipal Markets”
- Disclosure Industry Workgroup, August 2020, “General Continuing Disclosure Considerations for Municipal Securities Issuers”
- GFOA best practice, Primary Market Disclosure
- GFOA best practice, Understanding Your Continuing Disclosure Responsibilities
- Board approval date: Friday, October 1, 2021