On May 4, 2020, the U.S. Securities and Exchange Commission (the “SEC”) released a Public Statement (the “Statement”)1 from Chairman Jay Clayton and Rebecca Olsen, Director of the SEC’s Office of Municipal Securities (“OMS”), directed primarily to issuers of municipal securities (or conduit borrowers, and for purposes of this article, “obligated persons”) and is intended to parallel the Corporate Issuer Statement issued by the SEC on April 8, 2020 in response to the uncertainties created by COVID-19. The Statement acknowledged there are significant differences between the corporate capital markets and the municipal securities markets (for example, the lack of a regulatory safe harbor for forward-looking statements in a municipal disclosure), but stated that the importance of high quality disclosure, particularly in times of uncertainty, is consistent. According to the Statement, the SEC “believe[s] a similar approach to the provision of current and, to the extent practicable, forward-looking disclosure would provide significant benefits to investors, issuers and the municipal securities market generally.”
The Statement acknowledged that developing voluntary, unaudited and non-routine disclosure regarding current financial status and operations may be challenging, especially under the current circumstances; however, obligated persons are encouraged to “provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions.” Meaningful cautionary language should accompany any such disclosure. The cautionary language may include, for example:
The cautionary language is important both to improve the quality of the disclosure and to reduce legal and other risks associated with the disclosure. An obligated person, in many cases in consultation with legal counsel, will have to carefully draft and include cautionary language as appropriate. The issue of liability often is raised when voluntary disclosures—or the expansion of required disclosures—are considered. The Statement provided some additional comfort by including the following observation: “We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.”
COVID-19 Generic Event Notice. Does every obligated person need to submit a COVID-19 event filing? A March 19, 2020 webinar by the Municipal Securities Rulemaking Board (the “MSRB”), Ahmed Abonamah, Deputy Director of OMS, explained that there is no such requirement under the enumerated events in the SEC’s Rule 15c2-12 (“Rule 15c2-12”) based on the mere fact of the COVID-19 pandemic occurring; however, the recent Statement specified in light of the “potentially significant effects of COVID-19 on the finances and operations of many municipal issuers, we . . . request that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable.”
Voluntary Filings. Some obligated persons have elected to voluntarily post information on the impact of COVID-19 to its operations and access to liquidity. The Statement addressed the concern that this type of disclosure does not have the benefit of a formal audit process and is based instead on estimates, assumptions and projections regarding future circumstances, and concluded that, “[n]evertheless, providing as much current issuer- and security-specific information as is practicable will benefit issuers, investors and our municipal securities markets more generally.” Many of these filings raise questions about compliance with Rule 15c2-12, which is further discussed here.
Since the outbreak of COVID-19, certain types of disclosures made their way to public filings whether in a primary offering document, a contractually required continuing disclosure filing, or in a voluntary public statement. The SEC noted in the Statement that while the examples listed below are non-exhaustive, the SEC believes that these types of disclosures are “important to provide to investors and the marketplace more generally at this time.”
An obligated person should:
Even in the absence of a contractual or regulatory obligation to disclose the effects of COVID-19 or related events, obligated persons should weigh their decision not to disclose against the potential for improved transparency and investor relations in today’s market.
For more information regarding continuing disclosure obligations under 15c2-12 in light of COVID-19, please contact your Foley relationship partner. Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.
1 The Statement represents the views of the Chairman and the Director of the Office of Municipal Securities of the SEC. It is not a rule, regulation, or statement of the SEC. The SEC Commission has neither approved nor disapproved its content. The Statement does not alter or amend applicable law and has no legal force or effect. The Statement creates no new or additional obligations for any person.