On May 4, 2020, the Securities and Exchange Commission (SEC) Chairman Jay Clayton and the SEC’s Office of Municipal Securities Director Rebecca Olsen released a statement encouraging issuers as well as conduit borrowers and other obligated persons under continuing disclosure undertakings to provide investor-oriented disclosures that discuss the current and anticipated effects of COVID-19. The SEC officials encourage such disclosures to be included in primary offering documents, such as official statements, required annual continuing disclosure filings and voluntary market filings.
The SEC previously provided similar guidance to corporate issuers and noted in both cases that, should an issuer provide forward-looking information, it was anticipated that the SEC would not second-guess these disclosures to encourage issuers to provide more transparent information to the market. In this statement, the SEC officials observed that the COVID-19 crisis makes the typical disclosures of historical information less relevant because historic information may be considerably different than both the issuer’s current or expected financial position, as well as the pledged security revenue stream. However, the SEC officials noted that disclosures should include appropriate cautionary language and the assumptions contained in the statements, and any statements made publicly by the issuer regarding its financial condition, should be consistent.
The SEC officials added that certain factors weigh in favor of making disclosures to assist with the general functioning of the municipal market by assisting investors with obtaining the information that they need to make an informed investment decision. If an issuer is trying to evaluate whether an additional disclosure is necessary, begin with considering whether the disclosure is required. Issuers have certain required disclosures when they are issuing bonds with official statements and have agreed to provide other information under its continuing disclosure obligations, including annual filings and certain reportable events. If there are other statements being made to the market, then the issuers should consider all the facts and circumstances around those disclosures and discuss any questions with bond counsel/disclosure counsel. Any statement made by an issuer or its officials to the market, whether voluntary or required, is subject to anti-fraud laws, so it is important to make sure the disclosures are accurate and complete.
Consider the following:
If an issuer is in the process of releasing an offering document, they should determine if there are any material misstatements or omissions that a reasonable investor would want to know before purchasing the securities being offered. Think about whether you would want to know certain things about the COVID-19 impact before buying the security. If there is any question, then discuss the appropriate disclosures with your bond counsel/disclosure counsel and financing team. The SEC officials’ statement encourages issuers to make “good faith attempts” to provide current and/or forward-looking statements accompanied by sufficient cautionary language.
Most issuer offering documents currently being completed include a statement that addresses the economy-wide impacts of the COVID-19 pandemic. Depending on the type of security, a general disclosure may be sufficient. For example, if a city is selling a general obligation bond, and there is nothing unusual about its tax base, then a general description of how issuers of general obligation bonds within their state are impacted might suffice.
The SEC officials’ statement also addresses certain areas where an issuer may want to report current and forward-looking statements to supplement historical information, including (but not limited to) the issuer’s liquidity position, including cash on hand; access to reserves and other funds, access to and use of a liquidity facility or other governmental aid; and whether the current liquidity will allow the issuer to fund its operations and make debt service payments. Additionally, if an issuer is preparing reports containing significant current financial information for governance purposes or to seek aid, then issuers should consider making these reports public and available to investors.
Disclosures should be tailored to the specifics of both the issuer overall as well as the security of the credit. If there are current measurable impacts from COVID-19, or if there is a foreseeable impact such as a delay or decrease in taxes, revenue decreases for revenue bonds or other anticipated collection delays, these should be the type of disclosures that issuers should consider, as well as the potential of short-term borrowings.
With respect to continuing disclosure (CD) filings, start with what must be disclosed under the terms of your CD agreements for outstanding financings. After you have reviewed these requirements, consider whether a COVID-19 disclosure may be appropriate. If you believe a disclosure is appropriate, then consult with disclosure counsel and your dissemination agent. The SEC officials’ statement encourages issuers to consider making similar disclosures on outstanding bonds to what it may include in current offering documents. However, unless there is a contractual obligation to include current or forward-looking information in your CD reporting requirements, then any filings would be voluntary. If the information is not contained in your CD obligations, it may be more transparent to consider a separate voluntary filing, as there is a dedicated effort by the Municipal Securities Rulemaking Board (MSRB) to track these filings.
Unrelated to the SEC officials’ statement, but important to remember during the COVID-19 crisis, is that neither the SEC nor the MSRB are able to extend deadlines on annual filings because the continuing disclosure obligations are contractual. If any of the annual information that is required to be reported is not available when the reporting is due, the obligor will need to file a failure to timely file notice.
Issuers should review the list of reportable events and report any material events within a 10-business-day period, such as draws on debt service reserves or credit enhancements which reflect financial difficulties or a late principal and/or interest payment. If your disclosure is not required, you may want to consider a voluntary filing, particularly in light of the SEC guidance.
Issuers’ ongoing disclosure requirements are only contractual because neither the SEC nor the MSRB regulates issuers of municipal securities. Any disclosures not included under the contractual terms of a continuing disclosure undertaking related to outstanding debt would be voluntary. The SEC officials’ statement encourages voluntary disclosure related to current and forward-looking COVID-19 impacts. Any voluntary filings should include the appropriate cautionary statements and underlying assumptions that are prepared in conjunction with bond counsel/disclosure counsel and input from your dissemination agent.
There should also be a statement that limits the issuer’s responsibilities to continue to update the statements made within any disclosures. While there is no requirement for an issuer to update voluntary information, an issuer may need to consider providing updates to these disclosures as the information may become stale as impacts continue to change over time. Below are some considerations around voluntary filings:
Keep in mind, the SEC officials’ statement encourages issuers to disclose, but does not place any new requirements on issuers to disclose. The statement is not an official action of the SEC, but rather is intended to provide issuers with some direction to assist with determining what to share with the market. It also serves as providing additional insight into the SEC leadership’s goal of encouraging transparency around COVID-19. As always, any disclosure should be carefully considered, and issuers should seek counsel and guidance from its finance team.
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