|Dear Continuing Disclosure Clients,
As your disclosure dissemination agent, we want to make you aware of an important public statement the Securities and Exchange Commission (SEC) released last week. In it, SEC Chair Jay Clayton and Rebecca Olsen, Director of the Office of Municipal Securities, stressed the heightened importance of disseminating timely disclosures to investors due to the potential financial impacts of COVID-19, as well as encouraging municipal issuers to voluntarily provide meaningful forward-looking information with respect to both issuer and issue-specific implications of the pandemic. “We observe that, in today’s markets, the typical practice of providing historic financial information in the form of an annual information filing or similar disclosure may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition,” they said. “Today, in light of the potentially significant effects of COVID-19 on the finances and operations of many municipal issuers, we increase this focus and request that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable.”
Read the full statement.
What does this mean for you?
As an issuer of municipal securities, you are required to provide information to investors in the form of both primary (initial offering) and secondary (continuing – over the term of securities issued) disclosures. Because secondary market disclosures typically require annual filings of audited financial statements and operating data, as well as notification of certain material events, they are – by their very nature – backward looking. For example, notification of any material event must be disseminated within 10 business days of its occurrence and annual filings may be submitted as long as one year after the end of any fiscal period.
Voluntary disclosures, on the other hand, can be made by any issuer at any time for the benefit of investors (e.g. disclosing the incurrence of private debt that does not otherwise require public notification). Municipal issuers have generally shied away from voluntarily disclosing non-required events, making forward-looking statements or posting unaudited financial and operating data, however, for fear that regulatory authorities may take action against them if such disclosures might be deemed inaccurate, misleading or contain material omissions. There are two reasons for this:
- Acting in good faith provides no exemptive relief under SEC regulations.
- Municipal issuers are not afforded many of the safe harbors that corporate issuers may rely on relative to forward-looking statements, even when those statements are accompanied by explicit disclaimers or other cautionary remarks.
Today, in what has quickly become a “new normal” in dealing with COVID-19, the SEC urges municipal issuers to rethink their historical stance on both required and voluntary disclosures.
Here’s the primary issue: Investors want the closest thing to real-time information to support their transaction decisions, while municipal issuers are either unwilling and/or unable to provide voluntary disclosures that depict potential financial and operating effects in an uncertain environment for fear of regulatory repercussions. This historical dissonance is exponentially magnified in our unprecedented COVID-19 environment.
Here’s the good news: Through this statement, the SEC encourages municipal issuers to provide forward-looking information relative to COVID-19 impacts, making sure to include important cautionary statements regarding its accuracy or completeness, and provides several specific examples to help you do so. You can also leverage the SEC’s EMMA platform to explore how other issuers have handled COVID-19 disclosures.
The statement further offers some level of reassurance to issuers: “We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second- guessed by the SEC.” While this comment may not entirely allay municipal issuers’ concerns about the ramifications of unintentionally delivering inaccurate disclosures to investors during this fluid and challenging time, it is perhaps the most favorable public pronouncement to have come from SEC officials in this context.
One important note: If you find yourself grappling with the decision to formally disclose the potential impacts of COVID-19 or not, please remember the SEC views any public comments made by issuer officials (elected or appointed) as carrying added weight in the absence of other publicly available information (e.g. interim or unaudited financial data).
Ehlers can help.
The free flow of timely and accurate information is one of the most critical elements of a well-functioning capital market. At Ehlers, we are constantly monitoring the state of municipal disclosures to keep you informed of industry standards and best practices. While we recommend consulting with legal counsel given these extraordinary times, our professionals are fully prepared to help you with any disclosure filings you may need. Please don’t hesitate to contact us for assistance.
We hope all of you stay healthy and safe.
Ehlers’ Continuing Disclosure Team