Municipal Issuers Urged to Consider Providing Voluntary Disclosure Regarding the Impacts of COVID-19 on Operations and Finances
Municipal issuers with pending offerings of municipal securities or required filings are being encouraged to provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions. Securities and Exchange Commission Chairman Jay Clayton and Director of the Office of Municipal Securities Rebecca Olsen delivered this message in a statement issued this week. Municipal issuers not in the market with a new offering or required to make a filing in the coming months are likewise being urged to consider providing voluntary disclosure regarding the current and reasonably anticipated future impacts of COVID-19 on their operational and financial condition.
The statement requests that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable in light of the potentially significant effects of COVID-19. The typical practice of providing historic financial information in the form of an annual filing may not be sufficient to enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.
The statement acknowledges the challenge of developing these voluntary disclosures and recognizes that certain disclosures would be based on estimates, assumptions and projections. Yet the statement stresses the importance of providing as much current issuer- and security-specific information as practicable.
The antifraud provisions of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 apply to any statement of a municipal issuer that is reasonably expected to reach investors and the trading markets. Section 10(b) prohibits the use or employment, in connection with the purchase and sale of any security, of any manipulative or deceptive device or contrivance in violation of such rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. In connection with the purchase or sale of any security, Rule 10b-5 prohibits the making of any untrue statement of material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
The statement recognizes that municipal issuer liability should be factored in when considering the expansion of required or voluntary disclosures. However, the statement highlights that good faith attempts to provide appropriately framed forward-looking information were not expected to be second guessed by the SEC. The statement emphasizes the extreme importance of ensuring that this type of disclosure is consistent across all contexts, kept confidential until disclosed and, when disclosed, disclosed broadly.
Issuers of municipal securities do not have the safe harbors for forward-looking statements available to certain corporate issuers. Yet the judicially developed “bespeaks caution” doctrine generally holds that forward-looking statements are not misleading if they are accompanied by adequate risk disclosure to caution readers about specific risks that may materially impact the forecasts. The statement notes that legal and other risks will be reduced by including cautionary language with the disclosure such as:
- a description of relevant facts or assumptions affecting the reasonableness of reliance on, and the materiality of, the information provided,
- a description of how certain important information may be incomplete or unknown and
- the process or methodology (audited vs. unaudited) used by the municipal issuer to produce the information.
The statement also includes the following examples of certain types of disclosures that may be important to provide, whether in a public offering document, a required continuing disclosure filing or in voluntary public statement:
- Information regarding the impact of COVID-19 on operations and financial conditions
- Information regarding sources of liquidity
- Information regarding availability of federal, state and local aid
- Reports prepared for other governmental purposes
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