From the inception of COVID-19, issuers of municipal securities have been faced with financial and operational uncertainty that is likely to intensify as the fallout from the public health and financial crises continues to develop. Whether an issuer is preparing an offering document, operating subject to a contractual continuing disclosure agreement or weighing whether to make a voluntary disclosure, recent guidance from the Securities and Exchange Commission (“SEC”) and commentary from ratings agencies have important implications for these decisions.
SEC Guidance Regarding Public Statements, Antifraud Provisions and COVID-19 Disclosures
On February 7, 2020, the Office of Municipal Securities (“OMS”) issued Staff Legal Bulletin No. 21 (the “Bulletin”) pertaining to the applicability of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (together, the “Antifraud Provision”) to the public statements of municipal issuers. The Antifraud Provision generally prohibits, in connection with the purchase and sale of any security, making any untrue statement of material fact or omitting to state a material act necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading. On May 4, 2020, the Chairman of the SEC together with the OMS issued a public statement relating to disclosure issues arising from the COVID-19 crisis (the “COVID-19 Statement”). Together, the Bulletin and the COVID-19 Statement outline important considerations for issuers with respect to disclosure.
Applicability of Antifraud Provision to Certain Public Statements
The Bulletin states that any public statement made by an issuer of municipal securities that is reasonably expected to reach investors and trading markets is subject to the Antifraud Provisions. Examples of public statements that are subject to the Antifraud Provisions include web-based reports, public reports to other governmental or legislative bodies (including state legislatures and city councils), social media posts and
oral statements. The Bulletin further describes measures an issuer of municipal securities can undertake to comply with the Antifraud Provisions. These measures include:
- Updating information on websites, including hyperlinks, reports and statistics to ensure accuracy;
- Ensuring that all public reports to other governmental or legislative bodies are accurate and incorporate the most updated information available;
- Implementing reasonably designed policies and procedures that designate an individual responsible for compliance and require ongoing training; and
- Identifying the documents and reports that contain current information about the
financial and operational condition of the issuer and establish a process by which the issuer makes such documents and reports broadly available through means such as EMMA or other posting platforms intended to reach the municipal market.
The Bulletin’s guidance as to whether a public statement is subject to the Antifraud Provisions is qualified by a “facts and circumstances” test that considers each public statement in its own context.
Disclosures on the Impact of COVID-19
The COVID-19 Statement describes certain circumstances
under which the SEC and the OMS believe disclosure may be beneficial to investors and to the marketplace, whether through a primary offering document, a contractually required continuing disclosure filing, or a voluntary public statement. The specific circumstances warranting a potential COVID-19 disclosure include the following:
- Disclosures regarding current operation and financial status, including any decrease in revenues and/or collection delays;
- Disclosures regarding sources of liquidity, including cash on hand, access to reserves, or other funds and any limitations on accessing such sources;
- Disclosures regarding pending applications or plans to apply for federal, state
or local aid, including the amount of aid received or applied for and the timing for receiving the aid; and
- Disclosures related to reports prepared for other governmental purposes such as information regarding an issuer’s response to financial or operational challenges stemming from COVID-19.
In light of the Bulletin’s guidance regarding the breadth of public statements, the COVID-19 Statement recognizes that municipal issuers will be confronted with difficult decisions with respect to what COVID-19 information, if any, requires disclosure. The SEC has acknowledged that there is no requirement to provide disclosure under Rule
15c2-12 (the “Rule”) based on the mere fact of the COVID-19 pandemic. Nevertheless, as guidance for making the decision whether or not to disclose information, the COVID-19 Statement indicated that it would not expect the SEC to second-guess good faith efforts to provide robust, timely and accurate information.
Finally, it is worth noting that the Bulletin and the COVID-19 Statement are statements from the SEC. While they have no legal effect, they serve as a summary of the SEC’s view on the subject matter.
Material Events Requiring Disclosure Under Rule 15c2-12
Under the Rule, issuers of municipal securities with obligations that are subject to continuing disclosure agreements are required to disclose ratings changes, including ratings downgrades. On April 1, 2020, S&P Global Ratings (“S&P”) published a comment stating that all of its public finance sector outlooks were negative. While a change in outlook does not constitute a ratings change for purposes of the Rule, S&P could proceed to downgrade the ratings of individual issuers of municipal securities. In the event of a ratings downgrade, issuers of municipal securities should contact their disclosure counsel to assist with the required filings under the Rule.
In addition to rating changes, issuers of municipal securities may be required to disclose certain other material events required by the Rule. Some of those material events, include, but are not limited to: (i) principal and interest payment delinquencies; (ii) non-payment related defaults; (iii) unscheduled draws on debt service reserves
reflecting financial difficulties; (iv) the incurrence of a financial obligation, such as a line of credit or issuance of privately placed bonds with a financial institution or other entity; and (v) a default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person – any of which reflect financial difficulties.
Attorneys in Calfee’s Commercial and Public Finance practice group will continue to monitor and analyze updated guidance regarding continuing disclosure and related issues. As issuers of municipal securities are faced with critical and time-sensitive disclosure decisions, they should contact their attorney to assist with evaluating their options and undertaking any corresponding action.
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