A Missed Filing and What Must Be Said About It

A continuing disclosure undertaking is breached the moment the promised date passes without the promised material. What follows is unusual among contract breaches: the remedy for holders is thin, but the consequence for the obligated person is durable, because the next offering document must describe what happened and every offering document for five years must do the same.

Where the description obligation comes from

The requirement is not a separate rule but part of a definition. A final official statement, as the federal rule defines it, is a document that sets out the terms of the securities and the information material to an evaluation of the offering, and that describes the undertakings to be provided and any instances in the previous five years in which each person specified in the undertaking failed to comply, in all material respects, with any previous undertaking. Because an underwriter must obtain and review a document that meets that definition, the description is a condition of the offering itself.

Two features of the drafting matter. First, the look-back runs to each specified person, not only to the issuer, so a conduit borrower's history follows the transaction even where the issuer's own record is clean. Second, the test is compliance in all material respects, which admits of judgment but does not admit of silence: a genuinely material failure has to be described, and a description that understates what occurred is worse than none.

What a lapse usually looks like

Most failures are administrative rather than deliberate. An audit finishes late and nobody files the notice that the annual information will be delayed. A finance director leaves and the schedule of deliverables leaves with the knowledge. An issue closed years earlier carries an undertaking with a different annual date than the rest, and the outlier is forgotten. A dissemination agent submits the audited statements but not the operating tables the undertaking also promised, which leaves the filing incomplete though it appears in the record.

A subtler variety involves filings that exist but do not work. Material submitted under the wrong security identifiers is technically in the repository and practically invisible, because a person searching the affected securities will not retrieve it. The same is true of a document posted as a general financial report without being associated with the categories the undertaking promised. In each case the obligated person believes it complied, and the record shows a gap that only a direct search reveals.

A second family of failures involves the event notices rather than the annual package. Rating changes and defeasances carry no materiality filter and are frequently missed, particularly upgrades and routine defeasances that nobody in the finance office regards as news. Because those entries are absolute, a missed notice is a plain breach regardless of how unremarkable the underlying event was, and it appears in the record as an absence.

Drafting the compliance statement

A usable statement does four things. It identifies the undertakings in question and the securities they relate to. It states what was owed and what was actually provided, with the interval expressed in plain terms rather than as a euphemism. It states what has since been filed to close the gap. And it describes the procedures adopted so that the reader can judge whether the cause has been addressed. Vague formulations such as substantially complied or inadvertently delayed are the recurring defect, because they convey that something happened without conveying what.

Where the failure belongs to a conduit borrower rather than to the issuer, the statement should say so and should say what the issuer did about it. An issuer that pressed the borrower under the loan agreement, filed what it received, and disclosed the shortfall stands differently from one that let the obligation lapse without inquiry. The distinction is factual, it is verifiable from correspondence, and it is exactly what a reader of the compliance statement is trying to assess.

The statement is also cumulative in an awkward way. An issuer that comes to market three times within the period repeats the description each time, and the descriptions must agree with each other and with the repository record. Inconsistency between successive offering documents is easy to detect and difficult to explain, since the underlying filings carry their own submission dates and are permanently retrievable.

The underwriter's parallel problem

A history of lapses is not only the issuer's difficulty. An underwriter must have a reasonable basis for the statements it passes to investors, and a record of unreliable reporting is precisely the circumstance that calls for more inquiry rather than less. In practice that means checking the repository record directly rather than accepting a summary, asking what caused each gap, and asking what has changed. Those obligations are described in the underwriter's own duties.

The two reviews interact. An issuer that has adopted written procedures, filed the missing material and described the history plainly gives the underwriter something to rely on. An issuer that offers only a general assurance leaves the underwriter to build the record itself, which is slower and, where the record turns out to be worse than described, leaves both parties exposed on the same set of facts.

How a lapse becomes an enforcement matter

The breach of the undertaking is rarely the charge. The charge is the statement in the offering document, because that statement was made in connection with the sale of securities and was relied on. An offering document asserting full compliance when material filings were missing is an untrue statement of material fact, and it exposes the issuer and, where the facts support it, the officials who approved the document. The theories used are set out in enforcement actions over municipal disclosure.

That structure explains why remediation is worth the effort even where holders have suffered nothing. The filings themselves can be completed at modest cost; the description can be written accurately at no cost at all. What cannot be repaired later is an offering document that told the market the record was clean. The underlying promises are set out in the continuing disclosure undertaking and in the listed events and their ten business day period.