General obligation compared with revenue bonds, the official statement and who is responsible for it, the legal opinion a bond counsel gives, continuing disclosure undertakings and what a failure to file does, material event notices, arbitrage and private use limits on tax exemption, and the enforcement actions brought over disclosure.
A continuing disclosure undertaking obliges the obligated person to give notice of listed events to the municipal repository in a timely manner not in excess of ten business days after the occurrence. Some entries are absolute, such as payment delinquencies, defeasances and rating changes. Others apply only if the event is material, which requires a judgment recorded before the period expires rather than after it.
A general obligation bond is secured by a pledge of the issuer's taxing power, sometimes unlimited and sometimes capped by the same law that authorized the borrowing. A revenue bond is secured only by receipts of an identified enterprise, applied through a flow of funds set out in the indenture. The pledge determines the covenants, the remedies on a shortfall, and the financial information the issuer must keep publishing.
Interest on an obligation is not excluded from gross income if the obligation is an arbitrage bond. Proceeds may be invested above the bond yield only within temporary periods, a reserve allowance and a minor portion. Earnings that exceed what the bond yield would have produced must be rebated, with interim payments of at least ninety percent at computation dates no more than five years apart and a final payment of one hundred percent.
An official statement is the issuer's own disclosure document. The federal rule requires an underwriter to obtain and review a version the issuer deems final before bidding, permitting only a short list of omissions, and to obtain copies of the final document within seven business days of the purchase agreement. Liability runs under the general antifraud provisions rather than under a registration statute, because municipal securities are exempt from registration.
Bond counsel delivers an approving opinion covering due authorization, validity and enforceability of the obligations, and a separate conclusion on federal tax treatment. Each rests on stated assumptions about the accuracy of certificates and on the issuer's covenants to comply with continuing requirements. Enforceability is qualified by bankruptcy and equitable principles, and the opinion speaks only as of its date, with no undertaking to revisit later events.
Municipal disclosure matters proceed under the general antifraud provisions rather than a registration regime, because municipal securities are exempt from registration and direct regulation of issuers is limited by statute. One route reaches negligent conduct in the offer or sale of securities; another requires scienter. Officials are reached through primary liability for their own statements or through provisions addressing those who cause a violation.
An issue is a private activity bond if it meets both the private business use test and the private security or payment test, or if it meets the private loan financing test. The use threshold is ten percent, reduced to five percent for use unrelated or disproportionate to the governmental purpose. A management contract meeting the conditions of the published safe harbor does not create private business use.
Before bidding for or selling municipal securities, a dealer must obtain and review an official statement the issuer deems final, and must reasonably determine that a continuing disclosure undertaking is in place. Board rules impose a duty of fair dealing and prohibit deceptive practices, and require disclosure to the issuer of the arm's length nature of the relationship and of material conflicts. The two duties run to different parties and are satisfied differently.
The definition of a final official statement requires it to describe any instance in the previous five years in which a person specified in a continuing disclosure undertaking failed to comply, in all material respects, with a previous undertaking. That statement travels with the issuer through every subsequent offering in the period, and an inaccurate or incomplete version of it is itself a misstatement in the offering document.
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.
A refunding issue provides funds to pay principal or interest on a prior issue. A bond is treated as issued to advance refund another if it is issued more than ninety days before redemption of the refunded bond, and interest on an advance refunding bond is not excluded from gross income. Escrow deposits are themselves proceeds subject to the arbitrage rules, and the sufficiency of the escrow is verified before closing.
