On May 4, 2020, Jay Clayton, Chairman of the Securities and Exchange Commission (SEC) and Rebecca Olsen, Director of the Office of Municipal Securities, released a public statement (the Statement) entitled “The Importance of Disclosure for our Municipal Markets.” The Statement, which parallels recent guidance directed to public companies, discusses the SEC’s concerns and expectations regarding disclosure by municipal issuers of the effects of COVID-19 on their financial condition and operations.
The Statement discusses the impact of the coronavirus pandemic on the municipal securities market and suggests the type of disclosures issuers of municipal securities should consider, whether in connection with offerings or on a voluntary basis.
- “[W]e…request that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable…. [I]n today’s markets, the typical practice of providing historic financial information in the form of an annual information filing or similar disclosure may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.”
- “We also encourage municipal issuers to provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions. We understand that providing detailed information regarding future operating conditions and resource needs is challenging, particularly as response strategies designed to mitigate and more effectively treat COVID-19 are evolving rapidly and are likely to change in the future.”
- “We acknowledge that developing voluntary, unaudited, and non-routine disclosures regarding current financial status and operating conditions may be challenging, particularly under the current circumstances…. Nevertheless, we believe providing as much current issuer- and security-specific information as is practicable will benefit issuers, investors[,] and our municipal securities markets more generally.”
Diversity, complexity of municipal market heightens SEC’s COVID-19 disclosure concerns.
The SEC is concerned that investors in the municipal securities market increasingly will strain to understand how COVID-19 is impacting the financial condition and operations of municipal issuers. Noting the diversity among types of municipal issuers and securities offered, including complex issuer-specific credit structures, pledged revenue streams, and derivative products, the Statement suggests that meaningful issuer- and security-specific disclosures of COVID-19 impacts will be needed to inform investors. Recognizing the difficulties faced by a municipal issuer to accurately explain how coronavirus will impact its finances and operations as the pandemic is rapidly evolving, the SEC “request[s] that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable.”
The SEC underscores the importance of forward-looking information that meaningfully informs investors.
The SEC acknowledges the challenges faced by municipal issuers in developing “voluntary, unaudited, and non-routine disclosures,” such as a lack of formal process or framework. However, the SEC notes that in this environment, the “typical practice” of disclosing historical financial information (e.g., audited financial statements) on an annual basis or similar disclosure “may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.” That is, while noting the challenges in doing so, the SEC urges municipal issuers to provide as much forward-looking information to the markets as possible.
The SEC suggests types of information relating to COVID-19 impacts for disclosure.
The Statement sets forth types of financial and operating information that could be of particular importance to investors in light of COVID-19: “Disclosures should reflect the issuer’s assessment of [the] state of affairs and outlook and, in particular[,] municipal issuers should provide information regarding: (1) their current operational and financial status, including decreases in revenues and delays in collection of revenues; (2) how their COVID-19 response[,] including efforts to protect the health and well-being of residents and employees[,] has impacted their operational and financial condition, including un-budgeted costs; and (3) how their operational and financial condition may change as efforts to fight COVID-19 evolve.”
How can the Statement help municipal issuers?
In addition to extending to the municipal securities markets the SEC’s prior guidance for corporate issuers, the Statement provides guidance specifically targeted to municipal issuers, described below.
The SEC lists types of information relating to COVID-19 impacts that municipal issuers should consider disclosing.
The Statement provides a non-exclusive list of the type of information that could be of particular importance to investors in light of the pandemic, whether in connection with a primary offering, a required disclosure, or a voluntary disclosure:
- Decreases in revenues or delays in the collection of revenues.
- Increases in unbudgeted costs.
- Sources of liquidity (e.g., cash on hand and reserves), access to additional liquidity, and “whether current liquidity is expected to be adequate to fund essential services and make timely debt service payments.”
- “A description of available federal, state[,] or local aid the issuer has sought or is planning to seek and the anticipated timing of such aid. In addition, if the municipal issuer has obtained any such aid, it should disclose the nature, amount, and other material terms of the aid if it materially affects or reasonably likely will materially affect its operational or financial condition.”
- Reports prepared for governance purposes (i.e., not primarily for securities disclosure purposes), which “…could provide powerful insight into local, regional, and sector-specific strategies to fight and recover from COVID-19.”
The SEC describes factors to mitigate perceived legal risk arising from voluntary disclosures.
The SEC notes that “the issue of liability often is raised when voluntary disclosures—or the expansion of required disclosures—are considered.” But the SEC describes various factors that it believes weighs in favor of making such disclosures:
- Robust disclosure will assist the general functioning of the municipal securities market and could assist issuers by enhancing their ability to refinance existing debt or raise new capital.
- Accompanying disclosure with “meaningful cautionary language” (e.g., relevant facts or assumptions, information which may be complete or unknown, and a description of the methodology used to produce the disclosure) will improve the quality of the information and mitigate risks.
- Information relating to the effect of COVID-19 on an issuer’s financial condition or operations may be furnished for purposes other than disclosure to the municipal securities market (e.g., a report to the federal government to assess the financial impact of the pandemic). Issuers should ensure that disclosures are “(1) consistent across all contexts, regardless of the purpose and (2) kept confidential until disclosed and, when disclosed, disclosed broadly….”
The SEC specifically provides in the Statement, “[w]e would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second[-]guessed ….” Thus, the SEC is focused on municipal issuers providing good faith estimates that are properly framed so that investors and the market understand the uncertainty inherent in those estimates and understand that many of those good faith estimates may prove to be significantly incorrect after the fact.