The Chairman of the Securities and Exchange Commission (SEC) and the Director of the Office of Municipal Securities issued a public statement on May 4, 2020 (the Statement) with observations and requests regarding COVID-19 and disclosures by the issuers of municipal securities. This public statement is intended to mirror a public statement for corporate issuers on COVID-19 disclosures that it issued on April 8, 2020 (the Corporate Statement). The statement encouraged municipal issuers to provide investors with as much information about their current financial and operating condition as reasonably practicable given the rapid changes occurring due to the pandemic, and provided guidance for such disclosures. The Statement also highlighted that the typical practice of providing historic information through annual filings may not permit investors to make informed decisions in today’s markets and particularly in times of economic distress.
Examples of Information to Provide to Investors
The Statement included examples of the types of COVID-19 related disclosures that it believes would be most beneficial for investors and the marketplace. It also noted that these disclosures could be provided in an offering document, a required filing under a continuing disclosure agreement, or in a voluntary public statement, which would be filed to the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA) website or an investor relations website.
- Information Regarding the Impact of COVID-19 on Operations and Financial Condition. Municipal issuers should provide information regarding: (1) current operational and financial status, including any decreases in revenue and collection delays; (2) how the issuer’s COVID-19 response has impacted their operational and financial condition to date, including un-budgeted costs; and (3) the anticipated impact on its operational and financial condition as the COVID-19 response continues.
- Information Regarding Sources of Liquidity. These disclosures could include cash on hand, access to reserves or other funds and any limitations on accessing such funds, access to liquidity facilities and whether the issuer’s current liquidity is expected to be sufficient to fund essential services and make debt service payments.
- Information Regarding Availability of Federal, State and Local Aid. If the municipal issuer has applied or plans to apply for any federal, state or local aid, the disclosures should include the anticipated timing of the aid, the nature, amount and other material terms if it would materially affect the issuer’s operational or financial condition.
- Reports Prepared for Other Governmental Purposes. When reports are prepared for other governmental purposes that provide current information regarding the COVID-19 response, municipal issuers are encouraged to make these reports available to investors.
Factors in Favor of Providing Disclosure—Including Forward-Looking Information
There are challenges under the current circumstances in compiling information about the current financial status and operating conditions of municipal issuers, but the Statement encouraged municipal issuers to provide as much issuer- and security-specific information as is practicable. Additionally, in those cases where municipal issuers do not currently have pending offerings or required filings, municipal issuers are being urged to consider providing voluntary disclosure regarding current and reasonably anticipated impacts of COVID-19 on their financial and operating conditions.
Despite the potential for legal liability in connection with voluntary and forward-looking disclosures, the Statement set forth the following factors in favor of providing the suggested disclosure.
- Disclosures will aid investors and assist the overall performance of the municipal securities market, including the ability to refinance outstanding debt and raise new capital.
- Including meaningful cautionary language will enable municipal issuers to improve the quality of the disclosures and reduce legal risks. Examples of cautionary language include descriptions of (1) the facts or assumptions underlying the reasonableness of reliance on and materiality of the information in the disclosure; (2) how certain information may be incomplete or unknown; and (3) the process and methodology used to produce the information, including whether audited or unaudited financial information is used.
- Municipal issuers are likely producing disclosures of similar information for other purposes. The SEC noted the critical importance of keeping these disclosures (1) confidential until the initial disclosure and then broadly disseminated once public and (2) consistent across all platforms.
- It is not expected that good faith efforts to provide appropriately framed current and/or forward-looking information would be second guessed by the SEC.
- Municipal issuers should be guided by the judicially developed “bespeaks caution” doctrine regarding forward-looking disclosures. Under this doctrine, a forward-looking statement accompanied by sufficient cautionary language is not actionable because a reasonable investor would not find the statement materially misleading.
This Statement follows on the heels of the SEC’s staff legal bulletin issued on February 7, 2020 (the SLB). As noted in our recent White Paper analyzing the SLB, the SEC Office of Municipal Securities clarified its view that any public statement made by issuers of municipal securities and obligated persons that is reasonably expected to reach investors and the trading markets is subject to the same antifraud standards applicable to primary offerings. When considering disclosure – whether primary or secondary, required or voluntary – issuers should consider the specificity and meaningfulness of information provided and, as noted in the Statement, endeavor to provide consistency and fair dissemination of disclosure to the market. For additional analysis on disclosure of COVID-19 risks and impacts in connection with municipal securities, including a review of the SEC’s Corporate Statement, see our April 8, 2020 alert.
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