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Top US SEC officials urge voluntary municipal securities COVID-19 disclosure: Have they overstated their case?

United States Publication June 3, 2020


On May 4, 2020, the Chair and the Director of the Office of Municipal Securities of the US Securities and Exchange Commission (the Commission) issued a statement (the Statement1) urging municipal securities issuers to disclose as much information as practicable regarding the current and potential future impact of COVID-19 on their financial and operating conditions, regardless of whether they are then issuing securities in the primary market.2 Providing as much current and forward-looking issuer- and security-specific information as is practicable, they state, will benefit municipal securities issuers. That conclusion is certainly debatable, and it is our view that such issuers should consult with their advisors before acting on the recommendations in the Statement. We summarize the Statement below and also include caveats to the Statement's advice.

Despite muni market complexity/diversity, Statement defaults to voluntary disclosure; areas highlighted

The Statement notes the complexity and diversity of the municipal securities market, its issuers and investors (about one million different debt securities outstanding issued by about 50,000 different issuers with a range of security structures and held predominately by retail3, buy-and-hold investors), factors that are largely absent from the corporate securities market. It fails to note that, unlike the overall corporate securities market, the municipal securities market is limited to debt securities, the trading value of which fluctuates much less than equity securities in reaction to changes in an issuer's financial performance. It is also predominately a market for investment grade debt securities where defaults, despite certain high-profile exceptions, are very rare. Nevertheless, the Statement claims that investors in both markets have an equal "need" for timely, accurate, consistent and fairly disseminated current and forward looking information regarding an issuer's financial and operating status. Whatever the "need" of investors, the Statement observes that it has grown in the face of the COVID-19 pandemic and its effect on state and local governments, many of which are in the front lines dealing daily with this once-in-a-hundred-years public health crisis4.

As a consequence, the Statement's authors "urge [municipal] issuers to consider providing voluntary disclosure regarding the current and reasonably anticipated future impacts of COVID-19 on their operational and financial condition," including in the following areas:

  • Tax revenue payment delays and declines and un-budgeted operating expense increases resulting from their COVID-19 response, including "how their operational and financial condition may change as efforts to fight COVID-19 evolve" (asserting that municipal issuer "[d]isclosures should reflect the issuer's assessment" of its state of affairs "and outlook" and, in particular should provide information regarding the above items even if "[i]n these circumstances, comparisons to historical information may be relatively less significant.").
  • Cash on hand and cash reserves, including liquidity facilities (and ease or difficulty of accessing same; whether it is anticipated that such reserves/facilities will be drawn upon; and a summary of material terms of any such liquidity facility5), together with a statement whether its "liquidity is expected to be adequate to fund essential services and make timely debt service payments."
  • Availability and receipt of government aid (federal, state or local); whether the issuer has sought or is expected to seek such aid, the timing of receipt, and if aid has already been received, whether it "materially affects or…likely will materially affect" the issuer's operating or financial condition.
  • Issuer reports on COVID-19 effects and responses prepared for governing bodies or other government entities, because "these reports could provide powerful insight into local, regional, and sector-specific strategies to fight and recover from COVID-19;" noting that consideration should be given to "making these reports more readily accessible to investors."

Statement says liability risks can be addressed and Commission "second guessing" unlikely

The complexity and diversity of the municipal securities market noted above makes a "one size fits all" approach to municipal disclosure difficult if not impossible to implement, despite the exhortations in the Statement. In addition, compiling and then distilling for investors information about an issuer's financial status and operating condition, when the issuer is simultaneously addressing an "all hands on deck" pandemic within its jurisdiction, might (if not will) necessitate diversion of finite resources from more important needs. Without acknowledging these realities, the authors of the Statement conclude that, in their opinion, these disclosures "will benefit issuers," and the scale tips in favor of making them because, among other things:

  • They will aid investors and the "general functioning of the municipal securities market."
  • The information may be required to be provided to other government entities (federal or state) as part of the ongoing COVID-19 response, and consistency "across all contexts, regardless of the purpose" of the information is "extremely important" along with the need for maintaining the to-be-disclosed information confidential until it can be disclosed broadly (and to all investors6 to avoid giving advance access of it to certain, typically institutional, investors and not others).
  • The recommended disclosures may in certain instances be necessary to avoid a misleading omission of a material fact ("For municipal issuers with pending offerings of securities or required filings, we encourage you to include the disclosures discussed above, including for reasons of completeness." (emphasis added)).
  • The risks of incurring securities law liability will be reduced by including "meaningful cautionary language," such as, for example, stating (i) the assumptions used in preparing the disclosed data, (ii) that the data are evolving and some related information may be unknown, and (iii) whether audited or not, and adding statements "informed by the judicially developed 'bespeaks caution'" liability protection doctrine established by various federal circuit courts of appeal.7

By including such "cautionary language" in any voluntary public disclosure, the Statement's authors, speaking only on their behalf, as noted in footnote 1 above, "would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed" by the Commission (presumably through an after-the-fact SEC enforcement action), although the Statement is not binding on it.

Contra considerations the Statement does not address

That said, absent an issuer being "in the market" offering its debt securities (including "rolling" commercial paper or possibly remarketing demand paper) or facing a Rule 15c2-12 contractual continuing disclosure undertaking filing deadline (either with respect to its annual financial and operational information update or the occurrence of one or more of the 16 listed events8), municipal issuers are not under a general obligation to update investors and the market regarding material changes in financial and operating condition. The Statement acknowledges this fact.

Despite the liability protections noted above and the Statement authors' opinions regarding Commission enforcement action being unlikely if such protections are availed of, not all liability under the federal securities laws can be cautioned away. Once an issuer voluntarily speaks publicly about its financial or operating affairs in a manner expected to reach investors (even if the issuer didn't intend that investors rely on this information and even if it is not "in the market" offering its securities), it is obligated not to misstate or misleadingly omit a material fact. In the absence of a voluntary public statement, the only obligation of an issuer that is not currently engaged in the primary market is complying with its contractual continuing disclosure undertaking.

That undertaking, required pursuant to the Commission's regulatory supervision (as set forth in the Rule) over broker-dealers, not municipal issuers, is not an obligation to supply current or forward-looking information (aside from currently notifying the market of the occurrence as to the particular issuer of any of the 16 listed events). It does not require an issuer to disclose more recent information or forecast future prospects regarding COVID-199. When historical information is provided in accordance with a continuing disclosure undertaking, an issuer could (i) note that the information is provided to comply with a contractual undertaking, (ii) explain how the COVID-19 pandemic has affected and may continue to affect the issuer’s financial and operating performance and (iii) caution that the historical information provided is, therefore, not indicative of future financial results. With such language accompanying an issuer’s annual information or listed event filing under the Rule, no investor can be misled by the omission of more recent quantitative information or forecasts from the filing.  Disclosing the information urged by the Statement’s authors would, thus, not appear to be required to avoid a violation of the anti-fraud provisions of the federal securities laws.


The SEC's statutory purposes include the protection of investors and maintenance of fair capital markets. A municipal issuer has a different mission, one of protecting the health, safety and welfare of its residents, employees and customers, including taking all necessary (and at times unpopular) action to deal with COVID-1910. The Commission has the benefit of 20-20 hindsight in its enforcement actions that help carry out those (and its other) purposes. Municipal issuers do not have that benefit11. Even taking into account the potential benefit of improved investor relations, municipal issuers may reasonably determine that the burden and risks of providing voluntary disclosure outweigh the benefits. Accordingly, under the current circumstances of dealing with COVID-19 and the uncertainties of a rapidly changing information landscape, many issuers may appropriately decide not to make voluntary market disclosures of their current or projected financial condition, despite the Statement's urging to the contrary.

Further information

If you have further questions regarding the impact of the Statement on a particular issuer, or would like advice concerning possible voluntary COVID-19 current or forward-looking disclosure, please reach out to Lawrence Bauer, Fredric (Rick) Weber, Paul Braden or your customary Norton Rose Fulbright lawyer or lawyers.


1   The Statement is an expression only of the authors’ views, “observations and requests” regarding COVID-19 market disclosure. It is not a rule, regulation, or statement of the Commission, which has neither approved nor disapproved its content. The Statement does not modify applicable law and has no legal force or effect. This Statement creates no new or additional obligations for any person.

2   The Statement follows and parallels a similar statement by the Commission Chair and the Director of the Division of Corporation Finance issued April 8, 2020.

3   The Commission appears to include, as “retail,” holdings through mutual and other professionally managed funds that regularly access, ferret out and analyze in depth publicly available information from municipal securities issuers for their customers.

4   Not-for-profit healthcare providers (particularly hospitals and hospital systems) and not-for-profit as well as public colleges and universities are among the corporate-type borrowers that are beneficiaries of municipal securities issued on their behalf. Like state and local governments, health care providers are also on the front lines, while education institutions are grappling with integrating remote learning into their operations for at least the upcoming summer and fall academic periods, if not beyond. The “need” for investors to obtain current and forward-looking information regarding these municipal securities’ obligors is no different than investors in direct state and local government debt, the Statement notes. References in this alert to municipal securities issuers include these and all other obligors on whose behalf municipal securities have been issued.

5   The writers “encourage” issuers to disclose these material terms and whether any such facility has been used or is expected to be used.

6   For almost 20 years, corporate securities issuers have faced express liability if they disclose material financial and operating information only to certain investors. Exchange Act Release No. 43154, 65 FR 51716 (August 24, 2000)(“Reg. FD”). While Reg. FD does not apply directly to municipal issuers, the Commission has in recent years urged similar efforts to minimize if not eliminate “selective disclosure” by such issuers. See our client alert.

7   This doctrine can be traced to a Second Circuit panel, which in 1986 stated it was “not inclined” to impose [anti-fraud] liability on the basis of” investor disclosure that included cautionary statements. Luce v. Edelstein, 802 F.2d 49, 56 (2d. Cir. 1986). See, generally, Langevoort, Disclosures that “Bespeak Caution”, 49 Bus. Law. 481 (1994). To qualify for application of the doctrine, forward-looking statements must be accompanied by a discussion of the significant risks that may prevent forecasted results from being realized.

8   17 CFR 240.15c2-12 (1989); 54 FR 28813, as amended (the Rule). The 16 listed events and certain other continuing disclosure requirements are found in subparagraph (b)(5) of the Rule.

9   Or, it should be added, any other headline-grabbing or other significant event affecting an issuer.

10   The Statement closes with an acknowledgement of this difference (even if it might not have been intended) by “recognizing that various municipal issuers are integrally involved in [the country’s] efforts to fight COVID-19, including employing many front-line responders” and thanking “them for their selfless and lifesaving efforts.”

11   While private rights of action against a municipal issuer for investor directed material omissions or misstatements require proving that the issuer had at least a “reckless” intent to deceive (or scienter), the Commission’s liability bar is lower; it need only prove an issuer acted negligently. In the current pandemic, with facts on the ground changing daily, if not sooner, it is not difficult to conceive of situations in which some financial or operating information might slip through the cracks because municipal issuer staffs are stretched. If, in hindsight and perhaps at a quieter time, the Commission concludes looking back and in advancing its investor protection mission, that an issuer was negligent in omitting information from a voluntary COVID-19 disclosure and brings an enforcement action, significant defense costs would be incurred even if the issuer ultimately prevails.

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