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Voluntary Disclosures in the Age of COVID-19 – SEC Guidance for Municipal Issuers

On May 4, 2020, the Chairman of the Securities and Exchange Commission (“SEC”) and the Director of the SEC’s Office of Municipal Securities issued a public statement (the “Public Statement”) expressing their views regarding the need for voluntary COVID-19-related disclosures by issuers of municipal securities.[1]  The Public Statement can be found at: https://www.sec.gov/news/public-statement/statement-clayton-olsen-2020-05-04#   In short, the Public Statement encourages municipal issuers to provide investors with voluntary disclosures concerning the current and reasonably anticipated future impact of COVID-19 on their operational and financial condition.  Even if issuers are not required to do so under their existing continuing disclosure agreements, the Chairman and Director argue that providing such timely information would better equip investors to make informed investment decisions.[2]

Nevertheless, an issuer could be found liable under the antifraud provisions of the federal securities laws if they either provide material information that is inaccurate or misleading or otherwise omit material information.[3]  Therefore, issuers looking to follow the guidelines set forth in the Public Statement should consider the risks associated with such voluntary disclosures and take appropriate steps to mitigate them.

Content of COVID-19-Related Disclosures

For purposes of preparing COVID-19-related disclosure, the Public Statement provides examples of the types of information that might be useful to investors and the marketplace:

  1. As assessment of the issuer’s declining revenues (including collection delays) and increases in un-budgeted costs relative to COVID-19. In particular, issuers should provide information regarding: (a) their current operational and financial status; (b) how their COVID-19 response has affected their operational and financial condition; and (c) how their operational and financial condition may change as a result of evolving efforts to mitigate COVID-19;
  2. A description of the issuer’s cash on hand, access to reserves or other funds (including any limitations thereon) and liquidity facilities (including disclosure of the material terms thereof) and whether such funds are expected to be adequate to fund essential services and make timely debt service payments;
  3. A description of any federal, state or local aid that: (a) the issuer has applied for or intends to apply for (including the anticipated timing of the aid) or (b) the issuer has received, including a description of the nature, amount, and other material terms of the aid received by the issuer, if such aid has materially affected or is reasonably likely to materially affect the issuer’s operational or financial condition; and
  4. Reports prepared for governance purposes that provide current information regarding local, regional, and sector-specific strategies to address the COVID-19 pandemic.

Mitigating the Risks to Issuers of COVID-19 Related Disclosures

Given the evolving nature of the COVID-19 pandemic, the types of current or forward-looking information outlined above may lack the benefit of an established framework and/or include unaudited financial information, as well as estimates, assumptions and projections of future circumstances.  Such information is also susceptible to rapidly-evolving response strategies designed to address COVID-19.  As a result, issuers risk liability under the anti-fraud provisions of the federal securities laws for providing such inherently uncertain and/or fluid information to investors, even on a voluntary basis.

The Public Statement addresses this concern, however, by stating the Chairman’s and Director’s expectation that an issuer’s good faith attempt to provide appropriately-framed information to investors would not be second-guessed by the SEC.  To give some context to this expectation, the Public Statement cites the “bespeaks caution” doctrine as a way of informing an issuer’s approach to such disclosure.  The “bespeaks caution” doctrine provides that forward-looking statements are not misleading (and therefore actionable under the anti-fraud provisions) if they are accompanied by adequate disclosure cautioning the reader about specific risks that may materially affect such statements.  Therefore, in preparing COVID-19-related disclosure, issuers can mitigate the risk of a securities law violation by including cautionary language such as the following, as suggested by the Public Statement: (1) a description of relevant facts or assumptions affecting the reasonableness of reliance on and the materiality of the information provided, (2) a description of how certain important information may be incomplete or unknown, and (3) the process or methodology (audited vs. unaudited) used by the issuer to produce the information.

Final Thoughts

The Public Statement encourages voluntary COVID-19-related disclosures as a good market practice. Given the risks associated with voluntary disclosures generally, compounded by the evolving nature of the COVID-19 pandemic in particular, however, issuers should proceed with caution.  Issuers can take some comfort in the Chairman’s and Director’s expectation that good faith attempts to disclose appropriately qualified current and forward looking information would not be “second guessed” by the SEC.  Nevertheless, issuers should consult with their legal counsel in assessing the risks and benefits of providing any COVID-19-related disclosure generally, and in making the determinations outlined in the Public Statement.  If you have any questions regarding disclosure obligations or filings, please contact Neal Pandozzi at npandozzi@apslaw.com or Jonathan Cabot at jcabot@apslaw.com.

[1] In this context, an “issuer” includes an obligated person, as such term is defined in Rule 15c2-12 of the Securities Exchange Act of 1934 (“Rule 15c2-12”).

[2] Although the Public Statement is meant to encourage such disclosures, it does not constitute a new rule, regulation or statement of the SEC, establish any new or additional obligations, or alter or amend applicable securities or other laws, and has no legal force or effect.  Rather, investor protection in the municipal securities market is accomplished through the antifraud provisions of the federal securities laws (i.e., Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5) governing disclosures by issuers and obligated persons to investors, as well as the regulation of underwriters including through Rule 15c2-12.

[3] To illustrate the concept of “materiality,” the Public Statement cites to Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590, 59593 (Nov. 17, 1994).  In that regard, a fact is considered to be material if there is a substantial likelihood that a reasonable investor would view it as having significantly altered the total mix of information available, considering the particular facts and circumstances of the situation.

About The Authors

Jonathan L. Cabot

Jonathan is a member of the firm’s Business & Corporate Law Group.  His practice involves mergers and acquisitions, commercial finance, and… Read More

Neal R. Pandozzi

Neal Pandozzi is a member of the firm’s Public Finance group.  He has served as bond counsel, disclosure counsel, borrower’s counsel,… Read More

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