Wednesday, May 06. 2020
The Corporate Issuer Statement urged companies to provide investors with as much information as practical and practicable regarding their current financial and operating status. Recognizing the difficulties in providing accurate and meaningful forward-looking disclosure, this statement also advised companies to disclose material information regarding their planning for and expectations regarding the company’s future financial condition and operating status. Finally, the Corporate Issuer Statement reminded corporate issuers to strive for consistency across their various public and confidential disclosures and to fulfill their legal requirements with respect to the disclosure and dissemination of material non-public information.
To similar ends, municipal securities issuers are encouraged in the new statement to pay the same attention to the accuracy and integrity of their disclosures in light of the impacts of COVID-19. Generally and particularly in times of sweeping societal and economic stress, forward-looking information can be subject to various assumptions and factors beyond the control of the company. As said in the Corporate Issuer Statement, good faith attempts to provide appropriately framed forward-looking information would not be second guessed by the SEC. The Corporate Issuer Statement also highlighted the availability of (and encouraged the use of) safe harbors for forward-looking statements. While there are significant differences between corporate capital markets and municipal securities markets, a similar approach to the provision of current and practicable forward-looking disclosure can provide significant benefits to investors, issuers, and the municipal securities market generally.
The SEC wishes to facilitate the provision of these important municipal securities-related disclosures by offering these requests and statements of advice.
Recognizing the Size, Importance, Complexity, and Specialized Nature of the Municipal Securities Market
The municipal securities market is a large, diverse, complex, and specialized segment of the US capital markets and the domestic economy. Municipal securities are generally issued by states, cities, local governments, and special-purpose entities to raise long-term funding and, to a more limited extent, short-term funding for a variety of projects that support societal functions. Providing a capital markets-based funding source for these vital, public-sector needs is the role of the municipal securities market. The functioning of this market is essential to the continued funding and operation of state and local governments and the economy more generally.
The municipal securities market is driven by retail investors. In addition to being largely retail investor driven, the municipal securities market differs from other fixed income markets (e.g., corporate bonds and U.S. Treasuries) in other important respects. The market is remarkably diverse since issuers vary tremendously in size,purpose, and capital needs. Issuers include states, their political subdivisions (such as cities, towns, counties, and school districts), their agencies and instrumentalities (such as housing, health care, airport, port, and economic development authorities and agencies), as well as a variety of private entities that access the market through “conduit” financings (such as hospitals, senior living and continuing care retirement communities, and museums). There are approximately one million different municipal securities outstanding compared to approximately 30,000 corporate bonds outstanding, and offerings of municipal securities range in size from thousands of dollars to billions of dollars.
The municipal securities market also is generally more fragmented than other fixed income markets. In ordinary market conditions, a significant number of municipal bonds never trade or only trade infrequently after the initial offering period. Generally this means that liquidity can vary significantly depending on the issuer, how long the bonds have been outstanding, the size of the series, and other idiosyncratic factors. Regardless, daily trade volume remains significant, and health of the market is vital.
In addition to these characteristics, the municipal securities market is complex. Municipal issuers may employ a variety of complex and issuer-specific credit structures to support their bonds. They also utilize a variety of derivative products as part of their capital financing portfolios and other risk-management strategies. These derivatives generally are designed to reduce risks, but there are times where their performance may be material to an investment decision.
Given these factors, municipal issuers and investors in municipal securities should recognize that both issuer-specific disclosures and security-specific disclosures can be material to investment decisions. This underlying principle drives the following discussion.
The Importance of Robust, Timely, and Accurate Municipal Issuer Disclosures Has Become Even Greater as a Result of the Effects of COVID-19
Over the years, the SEC has encouraged municipal issuers to provide robust, timely, and accurate information to investors and market participants. The SEC’s focus on this issue has intensified in the past several years as the SEC and the Office of Municipal Securities have frequently called on municipal issuers to provide investors with more timely information. There has also been an effort to raise general awareness about the importance of investor access to current financial information.
Given the potentially significant effects of COVID-19 on the finances and operations of many municipal issuers, the SEC requests that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable. The unpredictable nature of the public health crisis and its financial and economic impacts on municipal issuers has heightened investor need for timely financial information. 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.
Important Considerations that Generally Weigh in Favor of Providing Updated Investor-Oriented Disclosures that Discuss the Current and Anticipated Effects of COVID-19
The SEC acknowledges that developing voluntary, unaudited, and non-routine disclosures regarding current financial status and operating conditions may be challenging, particularly under the current circumstances. It also recognizes that certain financial disclosure would be based on estimates and assumptions as well as projections regarding future circumstances. However, the SEC believes providing as much current issuer- and security-specific information as is practicable will benefit issuers, investors, and our municipal securities markets in a broad sense.
To these ends, the SEC encourages municipal issuers to provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions. Providing detailed information regarding future operating conditions and resource needs is challenging. There may also be an issue of liability, which is often raised when voluntary disclosures (or the expansion of required disclosures) are considered. While each issuer in many cases in consultation with legal counsel, will have to assess this risk in the context of its particular circumstances, the SEC believes there are various factors that generally weigh in favor of making these disclosures.
- Disclosure of the current financial and operating condition will not only aid investors in making informed investment decisions, but it will also be important to the issuer-specific and more general functioning of the municipal securities market, including the ability to refinance existing obligations and raise new capital.
- Accompanying those disclosures with meaningful cautionary language (including, for example, a description of relevant facts or assumptions, a description of how certain important information may be incomplete or unknown, and the process or methodology used by the municipal issuer to produce the information) will not only improve the quality of the disclosure but also will reduce legal and other risks.
- Issuers may be required to disclose similar information to other parties, including in connection with efforts by federal and state governments to assess the financial impact of COVID-19 on states, municipalities, and special purpose entities. For various legal and other reasons, ensuring that disclosure of this type is consistent across all contexts regardless of the purpose is extremely important. Also important is keeping such disclosures confidential until disclosed and, when disclosed, ensuring they are disclosed broadly.
- Good faith attempts to provide appropriately framed current and/or forward-looking information are not expected to be second guessed by the SEC.
- While the safe harbors for forward looking statements that are available to certain corporate issuers are not available to issuers of municipal securities, a municipal issuer’s approach to forward-looking disclosures should be informed by the judicially developed “bespeaks caution” doctrine.
The issue of timing (e.g., when to make updating disclosure) often is raised in these circumstances. For municipal issuers with pending offerings of securities or required filings, the SEC encourages issuers to include the disclosures discussed above. The SEC also recognizes that not all municipal issuers with outstanding securities will conduct new offerings or be required to make a disclosure filing in the coming months. Still, for the reasons of consistency and fair dissemination of disclosure discussed above and because the operational and financial condition of a municipal issuer can change rapidly in this situation, the SEC urges these issuers to consider providing voluntary disclosure regarding the current and reasonably anticipated future impacts of COVID-19 on their operational and financial condition.
Examples of Information Municipal Issuers Could Provide to Investors
The following list offers some examples of certain types of disclosures that may be important to provide to investors and the marketplace.
- Information Regarding the Impact of COVID-19 on Operations and Financial Condition. The collective national effort to mitigate the COVID-19 pandemic has caused a deep contraction in vast areas of our economy, with many municipal issuers facing potentially sharp declines in revenues and, in some cases, with increases in un-budgeted costs. Disclosures should reflect the issuer’s assessment of its state of affairs and outlook. 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, and 3) how their operational and financial condition may change as efforts to fight COVID-19 evolve. Under the current these circumstances, comparisons to historical information may be relatively less significant.
- Information Regarding Sources of Liquidity. This should include a description of cash on hand, access to reserves or other funds (and to what extent such access is limited), access to liquidity facilities, and whether current liquidity is expected to be adequate to fund essential services and make timely debt service payments. If not otherwise disclosed, the SEC encourages municipal issuers to disclose the material terms of any liquidity facility the issuer has used or expects it may use.
- Information Regarding Availability of Federal, State and Local Aid. This should include 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. 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 may affect its operational or financial condition.
- Reports Prepared for Other Governmental Purposes. Municipal issuers routinely prepare reports for governance purposes that may be significant sources of current information. These reports could provide powerful insight into local, regional, and sector-specific strategies to fight and recover from COVID-19. Accordingly, municipal issuers should consider making these reports more readily accessible to investors.
These disclosure topics may be part of a primary offering document, a contractually required continuing disclosure filing, or a voluntary public statement. Financial professionals are encouraged to discuss the importance of issuer-specific and security-specific disclosures with the main street investors they serve and to consider the extent of such disclosures when providing recommendations and investment advice to main street investors.
The SEC welcomes engagement on these matters and encourages participants in the municipal securities markets to contact them on these and other important issues.