The Continuing Disclosure Undertaking
The obligation to keep reporting after a municipal offering is not imposed on the issuer by federal law. It is created by a contract the issuer signs for the benefit of holders, because an underwriter cannot complete the sale without one.
The rule in short
An underwriter may not purchase or sell municipal securities unless it has reasonably determined that the issuer or obligated person has agreed in writing to provide annual financial information, audited statements when available, and prompt notices of listed events to the municipal repository. The agreement itself sets the categories of information, the accounting basis and the date each year, and a failure to file by that date triggers a separate notice obligation.
Federal securities law does not order a municipal issuer to publish an annual report. It reaches the same result by conditioning the underwriter's participation: a dealer may not purchase or sell the securities in an offering unless it has reasonably determined that the issuer or an obligated person has undertaken in writing, for the benefit of holders, to keep providing specified information. The obligation therefore lives in a contract signed at closing.
What the agreement must contain
The rule prescribes the skeleton and the parties fill it in. The undertaking must identify each person for whom annual information and event notices will be provided, either by name or by the objective criteria used to select them. For each such person it must specify, in reasonable detail, the type of financial information and operating data to be provided, the accounting principles under which financial statements will be prepared, whether those statements will be audited, and the date each year on which the information will be provided.
Those four specifications do the real work. The categories of information are drawn from what appeared in the offering document, so a table of system customers or of assessed valuation that was published at pricing becomes a recurring obligation. The accounting basis matters because a change in basis without explanation makes successive filings incomparable. The date is a promise, and it is measured from the end of the fiscal year rather than from any external calendar.
The three deliverables
An undertaking produces three streams. The first is annual financial information for each obligated person, of the type included in the offering document. The second is audited financial statements, delivered when and if available if they were not already part of the annual submission, which accommodates audits that finish after the promised date. The third is notice of listed events, each due promptly after the event occurs rather than at year end.
Annual financial information is a defined term rather than a synonym for the audit. It means financial information or operating data of the type included in the offering document with respect to an obligated person, provided at least annually. On a utility issue that ordinarily means the statement of net position and the operating tables showing customers, consumption, rates and coverage. On a general obligation issue it usually means fund balances together with the assessed valuation, levy and collection tables. The audit alone rarely discharges the promise.
A fourth obligation sits behind the first: if the annual information is not provided by the specified date, a notice of that failure must be filed in a timely manner. The failure notice is not a courtesy. It is a term of the agreement and a filing the market can see, and its absence compounds the original lapse. The event stream is treated separately in the listed events and the ten business day deadline.
Financial information and operating data may be set out in the submission or included by specific reference to documents already available from the repository or filed with the Commission. Specific reference means identifying the document; a general statement that information appears elsewhere does not satisfy it. Undertakings are also breached by filing a document that is available but not yet posted, because availability to the public is what the provision assumes.
Who administers the promise
The signature belongs to the issuer or the obligated person, but the work is usually distributed. Finance staff assemble the operating tables; the auditor produces the statements; a dissemination agent, often the trustee or a specialist firm, makes the submissions and keeps the record. Delegating the mechanics does not move the obligation, and an agent's failure to file is the obligated person's failure.
Conduit financings concentrate the difficulty. The issuer lends proceeds to a borrower and has no independent knowledge of the borrower's finances, yet the market receives the borrower's information through the issuer's transaction. The loan agreement therefore obliges the borrower to prepare and deliver the material, and the undertaking names the borrower as the obligated person. When the borrower fails, the issuer's practical remedy is contractual enforcement rather than substitution of its own reporting, and the gap shows in the repository.
Administration fails most often for structural reasons rather than negligence: the person who knew which tables were promised has left, several issues carry different undertakings with different dates, or a conduit borrower stopped responding to requests. Those risks are managed by written procedures that name the responsible officer and list, issue by issue, what is due and when.
| Deliverable | Timing set by | Content standard |
|---|---|---|
| Annual financial information | The date specified in the undertaking | Of the type included in the offering document |
| Audited financial statements | When and if available | Prepared on the accounting basis the undertaking states |
| Listed event notice | Within ten business days of the occurrence | The event as described in the rule, some tested for materiality |
| Failure-to-file notice | Timely after the annual date passes | Notice that the promised information was not provided |
| Voluntary filing | At the obligated person's election | Subject to the same antifraud standard as required filings |
The liability behind the filing
Two distinct exposures attach. The first is contractual: a failure to file breaches an agreement made for the benefit of holders, though the practical remedy is usually specific performance rather than damages, and undertakings commonly state that a breach is not a default under the indenture. The second is the antifraud exposure, which attaches to what is filed rather than to whether anything was filed at all.
The second is the more consequential. A filed annual report that repeats a prior year's operating table without updating a figure that has moved is a statement in connection with the trading market for the securities, and it is measured against the ordinary untrue-statement-or-omission standard. Enforcement theories built on that reasoning are examined in enforcement actions over municipal disclosure.
What a lapse does to the next offering
A missed filing does not stay in the year it occurred. The definition of a final official statement requires the document to describe any instance in the previous five years in which a person specified in the undertaking failed to comply in all material respects with a previous undertaking. The next offering document therefore carries the history, and an underwriter must weigh that history in forming its reasonable basis.
That is why remediation is a market activity as well as a compliance one: issuers file the missing material, describe the lapse plainly, and adopt written procedures. The drafting of that disclosure is examined in what must be said about a missed filing, and the review the underwriter performs is described in the underwriter's own duties.
Points to carry away
- The duty arises from a written agreement for the benefit of holders, not from a direct federal command to issuers.
- The agreement must specify the financial information and operating data, the accounting principles, and the annual date.
- Audited financial statements are delivered when and if available if they are not part of the annual submission.
- Filings are made to the municipal repository in the electronic format the board prescribes.
- A failure to provide the annual information by the promised date requires a timely notice of that failure.
Questions readers ask
Who is an obligated person for these purposes?
It is the entity generally committed to support payment of the securities, which may or may not be the issuer. On a conduit financing the borrower is usually the obligated person, because its finances rather than the issuer's determine repayment. The undertaking must identify each such person by name or by the objective criteria used to select them, and the annual information must cover each of them. Where an entity ceases to be an obligated person, the agreement may permit its reporting duty to end.
Are small offerings covered by the same obligation?
Not all of them. The rule applies to primary offerings of one million dollars or more, and it carves out offerings in authorized denominations of at least one hundred thousand dollars sold to no more than thirty-five sophisticated purchasers or maturing within nine months. A limited undertaking is available where no obligated person will be obligated on more than ten million dollars of outstanding municipal securities, and securities maturing within eighteen months escape most of the annual obligation.
Does the agreement survive if the securities are refunded?
It survives so long as the securities to which it relates remain outstanding. A refunding that legally defeases the prior issue generally ends the undertaking for that issue, and the new issue carries its own agreement with its own terms. Where only part of an issue is refunded, the original agreement continues for the portion left outstanding, which is how an issuer can end up administering several undertakings with different content and different annual dates at the same time.
Sources
- 17 CFR § 240.15c2-12 — Municipal securities disclosureCreates the undertaking requirement and specifies what the written agreement must contain.
- 15 U.S. Code § 78o-4 — Municipal securitiesLimits direct federal regulation of issuers and frames the indirect approach the rule takes.
- MSRB Rule G-32 — Disclosures in connection with primary offeringsRequires dealer submission of offering documents to the repository.
- EMMA — Overview of the disclosure systemDescribes the repository that receives annual filings and event notices.
- EMMA — Getting started with the repositoryExplains how submissions are indexed and retrieved by the public.
- 17 CFR § 240.10b-5 — Manipulative and deceptive devicesSupplies the antifraud standard applied to the content of what is filed.
Pinnacle Law Review is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
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