A Survey of Selected Recent SEC Guidance Helpful for Municipal Securities Disclosure

2020 Summer Issue The Ledger, the GFOA-PA Quarterly Newsletter
by Mark H. Vacha, Esq.
Cozen O’Connor

Overview and Purpose

This article is intended to provide issuers, and particularly their financial officers and solicitors, exposure to a sampling (partial in nature) of recent United States Securities and Exchange Commission (SEC) guidance for purposes of disclosure for public bond and other debt offerings. This article is not intended to “solve” any particular issue or problem, but rather to provide context so that an issuer’s internal and day-to-day advisors can have more fruitful deliberations with their financial advisors, bond counsel and underwriters (and to some extent, that board members and elected officials can have more meaningful discussions with the issuer’s top management in the same general vane) when preparing to access the capital markets and fashion appropriate disclosures that meet legal requirements, meet investors’ expectations and help issuers provide their narrative in a way that can inform various stakeholders.

While admittedly, the following is only a survey of a few key matters of guidance, the guidance can help issuers think about the right questions to ask of themselves and their consultants- which one of the author’s early mentors once said is half the battle. Very deliberately, some of the guidance is from the corporate securities sector, which can be a useful lens (and not a “paint by numbers” approach) for the municipal sector.

This article surveys three topics of 2020 guidance: (i) considerations related to statements and disclosures by municipal issuers (outside of the scope of doing a bond deal) that may reach the secondary bond markets, (ii) COVID-19 considerations for issuers, and (iii) 2020 SEC statements (more principal oriented than granular in nature) regarding climate change.

Statements that Reach the Municipal Securities Markets

On February 7, 2020, the SEC Office of Municipal Securities (OMS) published “Application of Antifraud Provisions to Public Statements of Issuers and Obligated Persons of Municipal Securities in the Secondary Market: Staff Legal Bulletin No. 21 (OMS)”. The staff legal bulletin provides the views of the staff of the Office of Municipal Securities (the “Office” or the “staff”) regarding the application of the federal securities law antifraud provisions to public statements made by issuers of municipal securities and obligated persons (each, an “issuer” and, together, “issuers”) in the secondary market. The staff’s views essentially speak to two basic points. First, they address when statements of issuers (outside of disclosure in connection with a new bond issue) are subject to the antifraud provisions. Second, they speak to the circumstances surrounding the making of these statements which impact their materiality to an investor.

The staff legal bulletin reinforces the general need for an issuer to be sensitive to the possibility that its public statements (beyond official statements and continuing disclosure filings) may reach investors and the trading markets and therefore create potential liability under the antifraud provisions.

Reasonable Expectation to Reach Investors and Trading Markets Test

  • The antifraud provisions apply to any statement of an issuer that is reasonably expected to reach investors and the trading markets because such statements are a principal source of significant, current information about the issuer. The Commission has taken the view that since access to “current and reliable information is uneven and inefficient” in the municipal securities market, various types of public statements are “a principal source of significant, current information about the issuer of the security, and thus reasonably can be expected to reach investors and the trading markets.”
  • The antifraud standard potentially applies to all such statements by an issuer, whether on the MSRB’s EMMA system or elsewhere, whether written or oral, regardless of whether the statements are made through channels normally expected by investors to provide information about the issuer, and regardless of the extent to which the issuer has fulfilled its contractual continuing disclosure obligations.
  • The fact that such statements (in some circumstances) are not published for purposes of informing the securities markets does not alter the mandate that they not violate the antifraud provisions.
  • Neither the intended audience nor the medium, can necessarily remove any statement from the requirements of the antifraud provisions.

Examples of Types of Statements that May Be Subject to Antifraud Provisions

Examples of types of statements that may be subject to the antifraud provisions beyond continuing disclosure filings (both required and voluntary) include, among others:

(i) information on issuer websites;

(ii) reports prepared by issuers (e.g., CAFRs, budgets, and other reports filed with other governmental entities);

(iii) public statements by issuers including speeches, public announcements and interviews with media representatives;

(iv) discussions with groups whose members have a particular interest in an issuer’s affairs (e.g., investor presentations); and

(v) statements disseminated through other avenues such as, in the staff’s view, social media.

A Few Practical Considerations

The SEC’s guidance suggests certain best practices. A few of these practices would include providing for major press releases, public testimonies and statements, and website updates to be reviewed by officials who have had disclosure and securities law training, Issuer websites especially should be reviewed from time to time with cognizance that investors may review such materials. Issuers should consider including cross-references (or links) for readers to source information to the extent that summary financial information is put on a website. Additionally, issuers ideally should treat social media with as much scrutiny as traditional media in terms of its potential to reach investors and the trading markets.

COVID-19 Considerations

The impact of COVID-19 has been front and center in the thinking of municipal market participants regarding disclosure (both in the primary market and, to some extent, in voluntary and other continuing disclosures for the secondary market) and has been commented upon extensively from many sources. The following discussion is intended to provide a summary of certain SEC guidance from the corporate context that may be helpful by analogy for municipal sector disclosure (and may especially be helpful for enterprise/revenue bond credits and major non-profit entities, but still can be useful for context for general purpose governments). Specifically, the Securities and Exchange Commission issued CF Disclosure Guidance: Topic No. 9A, dated: June 23, 2020 which the SEC staff summarized as providing additional views of the Division of Corporation Finance regarding operations, liquidity, and capital resources disclosures companies should consider with respect to business and market disruptions related to COVID-19.

The SEC guidance posed a number of questions for securities issuers which it encourages them to consider (note: the emphasis should be on “consider” rather than a per se approach to determining what should be addressed for disclosures for investors)including, among other things:

  • What are the material operational challenges that management and the governing body are monitoring and evaluating?
  • How and to what extent has the issuer altered the issuer’s operations, such as implementing health and safety policies for employees, contractors, and customers, to deal with these challenges, including challenges related to employees returning to the workplace?
  • How are the changes impacting or reasonably likely to impact financial condition and short- and long-term liquidity?
  • How is the issuer’s overall liquidity position and outlook evolving?
  • To the extent COVID-19 is adversely impacting the issuer’s revenues, consider whether such impacts are material to the issuer’s sources and uses of funds, as well as the materiality of any assumptions being made about the magnitude and duration of COVID-19’s impact on revenues.
  • Are any decreases in cash flow from operations having a material impact on the issuer’s liquidity position and outlook?
  • Has the issuer accessed revolving lines of credit (TANs, RANs or TRANs by analogy) or raised capital in the public or private markets to address liquidity needs?
  • Have COVID-19 related impacts affected the issuer’s ability to access the issuer’s traditional funding sources on the same or reasonably similar terms as were available to the issuer in recent periods?
  • Have there been material changes in the issuer’s cost of capital? How has a change, or a potential change, to the issuer’s credit rating impacted the issuer’s ability to access funding?
  • Does the issuer’s financing arrangements contain terms that limit the issuer’s ability to obtain additional funding? If so, is the uncertainty of additional funding reasonably likely to result in the issuer’s liquidity decreasing in a way that would result in the issuer being unable to maintain current operations? (Or more likely in the general governmental context, being unable to maintain essential services at adequate levels?)
  • Is the issuer at material risk of not meeting covenants (e.g., a rate or toll covenant) in the issuer’s credit and other agreements?
  • Has the issuer reduced its capital expenditures and if so, how?
  • Has the issuer ceased any material business operations or disposed of a material asset or line of business?
  • Has the issuer materially reduced or increased the issuer’s human capital resource expenditures? Are any of these measures temporary in nature, and if so, how long does the issuer expect to maintain them? What factors will the issuer consider in deciding to extend or curtail these measures? What is the short- and long-term impact of these reductions on the issuer’s ability to generate revenues and meet existing and future financial obligations?
  • Has the issuer taken advantage of available payment deferrals, forbearance periods (a more likely concept for entities such as charter schools, cultural institutions or other non-profits rather than governmental revenue bond issuers), or other concessions? What are those concessions with respect to meeting financial obligations and how long will they last? Does the issuer foresee any liquidity challenges once those accommodations end?
  • Has the issuer altered terms with the issuer’s customers (i.e., analogize depending on context to ratepayers, toll payers, patients, students, taxpayers), such as extended payment terms or refund periods, and if so, how have those actions materially affected the issuer’s financial condition or liquidity?
  • Has the issuer modified contractual arrangements in response to COVID-19 in such a way that the revised terms may materially impact the issuer’s financial condition, liquidity, and capital resources?
  • Is the issuer relying on supplier finance programs, otherwise referred to as supply chain financing, structured trade payables, reverse factoring, or vendor financing, to manage the issuer’s cash flow?
  • Have these arrangements had a material impact on the issuer’s balance sheet, statement of cash flows, or short- and long-term liquidity and if so, how?
  • Has the issuer assessed the impact material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on the issuer’s liquidity and capital resources and considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required? (Editorial comment: This is a corporate point that is quite helpful for municipal issuers to take to heart given the much longer period (on average) for municipal issuer’s audited financial statement preparation process to run as opposed to those for a corporate issuer with the prevalence for some municipal issuers of longer periods of time since the release of the last audit and the question mark of what subsequent events may have occurred).

The above guidance had a pre-cursor in the SEC’s Division of Finance CF Disclosure Guidance: Topic No. 9 (Dated: March 25, 2020). That guidance, again, was not oriented to the municipal securities market but suggested several considerations helpful for disclosure and diligence in municipal securities offering. The guidance was similarly posed in the form of several questions for consideration for issuers. The following highlights a few of the posed items that this article considers more relevant for the municipal sector:

  • Have COVID-19-related circumstances such as remote work arrangements adversely affected the issuer’s ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in the issuer’s controls have occurred during the current period that materially affect or are reasonably likely to materially affect the issuer’s internal control over financial reporting? What challenges does the issuer anticipate in the issuer’s ability to maintain these systems and controls?
  • Does the issuer anticipate increases in allowances for credit losses (e.g., allowances for delinquencies in taxes or utility bills), restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the issuer’s financial statements?
  • Will there be significant changes in judgments in determining (or simply in valuations where judgment is less of an issue (such as in pension or OPEB trust assets)) the fair-value of assets measured in accordance with GAAP?
  • Does the issuer anticipate a material adverse impact of COVID-19 on its supply chain?
  • Will the issuer’s operations be materially impacted by any constraints or other impacts on the issuer’s human capital resources and productivity?

Climate Change

On January 30, 2020, SEC Chairman Jay Clayton in a public statement, focused on a number of topics spoke to climate change which the SEC has addressed previously including prominently in an interpretive action “Commission Guidance Regarding Disclosure Related to Climate Change” (Release Nos. 33-9106; 34-61469; FR-82, effective February 8, 2010). Admittedly, a reader may find these recent statements frustrating to the extent the reader is hoping for bright line and formulaic guidance. However, perhaps the main take-aways are generally the following: the SEC remains focused on environmental and climate change impacts and considers them likely to be material for many issuers; the nature of these disclosures are forward looking into the future and likely requires an issuer’s management to consider whether their longer-term assessments and plans in this area should be disclosed (or perhaps considered more systematically and formulated more formally in the first instance!); and the particular facts and circumstances for an issuer are tantamount (for example, Gulf Coast issuers have and likely will face very different climate-related challenges than Western issuers more prone to drought, brown out and water supply considerations.)

The following summary is based closely on his public statement and paraphrases much of his discussion. The Commission has been actively engaged on the issue of environmental and climate-related securities law disclosures for over a decade. He noted that the SEC’s commitment has been, and in his view should remain, disclosure-based and rooted in materiality, including providing investors with insight regarding the issuer’s assessment of, and plans for addressing, material risks to its business and operations.

He addressed “Threshold Issues in Crafting and Evaluating Climate-Related Disclosure Mandates and Guidance” noting certain main factors noting that the characteristics are interrelated. First, the landscape around these issues is complex, uncertain, multi-jurisdictional and dynamic. Second, for both issuers and investors, capital allocation decisions based on, or materially influenced by, climate-related factors are substantially forward-looking and likely involve estimates and assumptions regarding, complex and uncertain matters that are both issuer- and sector-specific, as well as regional, national and multi- jurisdictional, in nature. Third, the United States’ disclosure-based regulatory regime is built largely around the provision by issuers of currently verifiable and largely historic issuer-specific information. (Put another way in this author’s view, climate-change related disclosure runs against many ingrained tendencies of issuers and market participants that focus more on backward-looking (i.e., historical) hard information.) Forward-looking disclosure requirements are limited and, in many cases where forward-looking information is required or provided voluntarily the information is afforded safe-harbor protection. (Note: These safe harbors do not strictly apply to the municipal sector, but market participants have in a number of instances relied on the corporate safe harbor in crafting forward looking disclosures in the municipal sector.) Fourth, when crafting and implementing disclosure mandates and guidance, he suggested regulators must remain, mindful that as a standard setter, they should not be substituting my operational and capital allocation judgments for those of issuers and investors. Fifth, he noted that experience demonstrates that facially analogous disclosure mandates should not be expected to equate to uniform effects across jurisdictions. (Perhaps said another way, the Chairman was suggesting that particular circumstances and “Location, location, location” is paramount in considering climate issues.)


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