Continuing Disclosure Agreements

Presentation forBonneville Legal Briefing

October 29, 2015

Topics Covered in this Presentation

• Disclosures in Official Statements

• Continuing Disclosure Agreements

• Policies and Procedures for Issuers, Obligors and Underwriters

Continuing Disclosure Agreements

Disclosures inOfficial Statements

· Overarching principle: underwriters and investors must be able to reasonably expect that the issuer or obligor will comply with its continuing disclosure obligations relating to the bonds being issued. Prior failure to comply in all material respects is relevant to that analysis.

· Five year period: the five year period preceding the date of the relevant official statement will be a different period than that applicable for the MCDC review. For example, for official statements prepared in 2015, the period commences in 2010 (during which period all filings were made on EMMA).

· Rule 15c2-12: The Rule defines a “final official statement” as a document or set of documents that describes any instances in the previous five years in which each issuer or obligor failed to comply, in all material respects, with any previous continuing disclosure undertakings.

· No requirement to disclose self-reporting under MCDC or knowledge of the underwriter’s self-reporting with respect to bonds of that issuer or obligor.

Disclosure Relating toContinuing Disclosure Obligations

· Approaches to Disclosure:

» Disclose all instances of non-compliance, regardless of materiality, either specifically or in categories.

» Disclose only those instances where there was non-compliance in a material respect.

» If no non-compliance, include affirmative statement of compliance.

» If no non-compliance, be silent.

· The Rule does not require an affirmative statement in official statements regarding compliance (requirement is to describe non-compliance) or to describe in official statements every instance of non-compliance (requirement is to describe failures to comply in all material respects).

· SEC has not provided guidance regarding materiality in this area.

· In the end this is a decision based on Rule 10b-5 standards

Disclosure Relating to Continuing Disclosure Obligations (continued)

· Factors to consider in determining appropriate disclosure:

» Analysis undertaken to determine whether or not to self-report under MCDC.

» Disclosure regarding compliance in prior official statements.

» Whether or not obligations contained in prior continuing disclosure agreements are included in the new continuing disclosure agreement.

» Whether failures to comply fall into general categories.

· Representations regarding prior compliance or non-compliance may also be included in the bond purchase agreement.

Disclosure Relating to Continuing Disclosure Obligations (continued)

Continuing Disclosure Agreements

· Rule 15c2-12 requires issuer or obligor to promise to provide certain financial information and audited financial statements by a date certain every year.

· Specify the date for annual filings. Don’t use “X” number of days after end of thefiscal year.

· Pick a reporting date which you are sure will be time enough for completion of your audit. Be conservative and add 30 days beyond what has been typical in the past.

· SEC Guidance says the CDA should require that if the audit is not completed by the reporting date, the issuer or obligor should file unaudited financial statements by the reporting date, and supplement with the audited statements when they are available.

· The other part of the annual report is an updating of “financial information or operating data” which was included in the original Official Statement with respect to each “obligated person.”

Continuing Disclosure Agreements

· Discuss fully with the underwriters which information is important for future investors to know in order to accurately trade the bonds.

· Frequent issuers or obligors can incorporate their updated financial information by reference to a recent OS. For less frequent issuers or obligors, it is important to keep the information to be updated in a manageable fashion.

· Try to be flexible in describing the information, so that if certain data is no longer collected, some other similar data can be substituted, but also be mindful of need to provide adequate guidance on what to report.

· One option is to attach a template of the annual report to the CDA.

· CDA only needs to update financial and operating data that the issuer can obtain from its own records. Be careful about requiring information from outside sources.

· Watch for information which will become obsolete before final maturity of the bonds.

Continuing Disclosure Agreements (continued)

· Make sure the correct party or parties sign the CDA. The CDA obligations only fall on “obligated persons” who support part or all of the debt service. Threshold is generally set at 10 percent of debt service.

· Second part of the reporting regime is to report certain events within 10 business days of their occurrence. Rule originally had 11 events, which had to be reported “if material” and “in a timely manner.”

· Amendments to the Rule in 2010 expanded the list of events but they were divided into two categories:

a. events to be reported in every instance (e.g., deemed always material), and

b. events to be reported if the issuer determined the event was “material” to investors.

Continuing Disclosure Agreements (continued)

· Events reportable in all cases:

1. Principal and interest payment delinquencies;

2. Unscheduled draws on debt service reserves reflecting financial difficulties;

3. Unscheduled draws on credit enhancements reflecting financial difficulties;

4. Substitution of credit or liquidity providers, or their failure to perform;

5. Adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB);

6. Tender Offers;

7. Defeasances;

8. Rating changes; or

9. Bankruptcy, insolvency, receivership or similar event of the obligated person.

Continuing Disclosure Agreements (continued)

· Events to be reported only if deemed “material:”

1. Unless described in paragraph (1) above, other notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other events affecting the tax status of the Bonds;

2. Modifications to rights of Bond holders;

3. Optional, unscheduled or contingent Bond calls;

4. Release, substitution, or sale of property securing repayment of the Bonds;

5. Non-payment related defaults;

6. Merger, consolidation or acquisition transactions of the obligated person; or

7. Appointment of a successor or additional trustee or the change of name of a trustee.

Continuing Disclosure Agreements (continued)

· Unless there is a compelling reason, no additional events should be included in the CDA beyond what is called for by the Rule.

· CDA must also contain an obligation to make a filing with EMMA if the issuer or obligor fails to file the required annual financial report on time. This is separate from disclosing such a failure in a future OS.

· CDA will contain various housekeeping provisions:

» Termination of CDA if the bonds are redeemed or defeased. Make this apply to fewer than all of the bonds, if there is only partial redemption or defeasance.

» Amendment after bond issuance. The SEC severely limits permissible amendments without bondholder consent.

· The CDA should always make clear that any default in compliance is not a default under the bonds, and that remedies are limited to action for specific performance.

Continuing Disclosure Agreements (continued)

Policies and Proceduresfor Issuers, Obligorsand Underwriters

· Once a transaction is complete, it is good practice to create a template for annual compliance as well as a list of events to be reported.

· Issuers and obligors should establish written policies and procedures for compliance with CDAs and have periodic (at least annual) training.

· Issuers and obligors should establish a staff position where at least one person should be made responsible for compliance.

· Establish internal deadlines and ticklers to ensure compliance.

· Use EMMA for free automated reminders of approaching deadlines – annual, quarterly, other.

· Remember event notices require ongoing monitoring. Remember EMMA is submitter determined – you must describe the deal and the filings accurately and should link them to all related CUSIPs.

Practices and Procedures for Issuers and Obligors

· If a failure is discovered, best practice is for an issuer or obligor to make a corrective or supplemental filing on EMMA.

· Issuers and obligors may want to prepare compliance reports to provide to the underwriter and other members of the working group. This can reduce costs for review and would be helpful in competitive transactions and for frequent issuers.

· Annual reports and material event notices are disclosures to the market subject to Rule 10b-5 standards, as would be any voluntary disclosures made on EMMA. Some circumstances or events which are not part of the CDA listed events may still have to be disclosed for proper securities law compliance when it occurs or in the next public disclosure document.

· An underwriter must have a “reasonable belief” in the accuracy and completeness of the key representations in an issuer’s or obligor’s official statement, including its obligation to disclose any failures in the prior five years to materially comply with prior continuing disclosure undertakings.

Practices and Procedures for Issuers and Obligors (continued)

· Underwriter needs to do its own research, using its own staff, underwriter’s counsel, or a third party service, or a combination of these before the mailing of a POS. It cannot rely solely on the representations of the issuer or the obligor.

· Underwriter needs to establish policies and procedures of what transactions it will review (check one or all credits or just sample), how it will check event notice compliance and what it considers material compliance. Training on these policies and procedures should be provided at least annually.

· Underwriter can ask to review policies and procedures of an issuer or obligor. Underwriter can request written evidence of past compliance by an issuer or obligor. Underwriter can conduct due diligence calls in order to ask questions but must keep answers to questions in their files.

· Some underwriter’s engagement letters/guidelines contain instructions regarding the role they expect underwriter’s counsel to play in assisting the underwriter to meet its obligation to verify the issuer’s or obligors past compliance with CDAs.

Practices and Procedures for Underwriters

· Underwriter needs to keep a file to show how it complied with the obligation to reach its “reasonable belief.” It can hire a third party or have underwriter’s counsel conduct the research and provide a copy of the research memo or other written record of their activities. It is important to keep a record of compliance.

· Is there a need for an underwriter to monitor the issuer’s or obligor’s compliance and policies and procedures after issuance? If there is likely to be an ongoing relationship with the issuer or obligor, this may be a good idea, and would simplify the due diligence process for the next transaction, especially if it is a competitive deal.

Practices and Procedures for Underwriters (continued)

Continuing Disclosure Agreements

Questions? Contact:

Christine ReynoldsOrrick, Herrington & Sutcliffe LLP (503) 943-4821cereynolds@orrick.com