Locke Lord QuickStudy: SEC Provides Disclosure Guidance on Public Statements by Municipal Issuers

On February 7, 2020, the Securities and Exchange Commission’s Office of Municipal ‎Securities issued Staff Legal Bulletin No. 21 (OMS) (“SLB 21”) to provide its views on the ‎application of the antifraud provisions to public statements made by municipal issuers and ‎obligated persons in the secondary market.  SLB 21 implements the directive that SEC Chairman ‎Clayton gave in mid-2019 for the SEC staff to provide guidance and address misunderstandings ‎about application of the antifraud provisions, specifically Rule 10b-5.  It provides useful ‎guidance to municipal issuers, reaffirms and updates prior SEC guidance, and offers some ‎helpful suggestions for meeting disclosure obligations and avoiding liability.‎

SLB 21 begins with the broad statement, consistent with prior SEC positions, that the ‎antifraud provisions apply to any statement by municipal issuers that is reasonably expected to ‎reach investors and the trading markets.   The SEC staff reiterated an observation from its 1994 ‎interpretive release regarding this topic that

‎ “. . . municipal issuers do not have the option of remaining silent. Given the wide ‎range of information routinely released to the public, formally and informally, by these ‎issuers in their day-to-day operations, the stream of information on which the market ‎relies does not cease with the close of a municipal offering.”‎

Exposure to liability is not limited to information that is intended or designed to reach ‎investors but extends more broadly.  Thus, the antifraud provisions apply both to information ‎formally provided to investors and posted on EMMA and to information disclosed to investors ‎through other means, such as public announcements, press releases, interviews with media ‎representatives, public meetings or discussions with interested groups and social media.  However, ‎being subject to the antifraud provisions is not a reason for municipal issuers to be discouraged ‎from making disclosures useful to investors through informal channels.‎

The SEC staff notes in SLB 21 that scienter is required for Rule 10b-5 liability, with ‎scienter including an intent to deceive or recklessness in disregarding the danger of misleading an ‎investor.  Misleading information must also be material, which means that there is a substantial ‎likelihood that the information would be viewed by a reasonable investor as significantly altering ‎the total mix of information available, which is determined based on the particular facts and ‎circumstance.  Thus, SLB 21 points out, for example, that if required continuing disclosure is ‎regularly and timely provided, other information may be less important, and conversely failure to ‎provide required information can result in other statements being entitled to more weight.  ‎Designating information as intended for use by investors, and using appropriate disclaimers for ‎other information, could be part of the context entitled to be taken into account when assessing ‎materiality and the total mix of information.‎

In view of the breadth of the information that can provide a basis for 10b-5 liability, we ‎recommend that municipal issuers consider specific ways to mitigate or protect against that ‎liability.  The following are some examples noted in SLB 21 or otherwise worth considering:‎

• Information on websites needs to be accurate and not misleading.  Posted information ‎should be dated so its relevance has context and historical information should regularly be ‎archived to a separate section.  Websites in this context means an issuer’s entire website, ‎not just a portion specifically designated for investor information.  Issuers should still ‎consider either establishing a specific investor relations section or otherwise inform ‎investors that information intended to reach them will be made available on that portion ‎of their website or will be posted to EMMA.‎
• Hyperlinks should be used carefully to avoid the municipal issuer becoming entangled ‎with or being considered to be adopting the linked information when that is not intended.  ‎The SEC has provided extensive guidance on this issue to public companies.  Factors to ‎be considered in evaluating potential liability include why a hyperlink is being used, the ‎nature of it and the use of appropriately worded disclaimers, “exit notices,” or ‎‎“intermediate screens.”‎
• Summary information can be helpful for investors, but it should be identified as such ‎and hyperlinks to the more detailed information used when appropriate to avoid ‎potentially misleading investors.‎
• Reports to other governmental bodies or to the public can reasonably be expected to ‎reach investors, even if not prepared or expected to be used for that purpose, and ‎therefore should be treated with the same care as other information intended to reach ‎investors.  SLB 21 specifically mentions annual CAFRs, budgets and mid-year financial ‎reports as being subject to the antifraud provisions, but specifically notes that other ‎reports, especially those with significant current information about the issuer, could ‎similarly be subject to the antifraud provisions depending on the particular facts and ‎circumstances.   ‎
• Statements by municipal issuer officials are also subject to the antifraud provisions if ‎reasonably expected to reach investors or the securities markets.  Speeches, public ‎announcements, interviews and social media postings may create potential liability. The ‎officials most likely to be exposed to potential liability are those who likely know about ‎the financial condition and operation of the issuer and thus could be seen as a source of ‎significant current information about the issuer and therefore be reasonably expected to ‎influence investors and the secondary market.  Accordingly, appropriate training for these ‎officials is important, as are procedures for ensuring the accuracy of those statements and ‎monitoring when clarifications may be necessary.‎

SLB 21 concludes with the important message that municipal issuers should have in place ‎appropriate policies and procedures tailored to their particular circumstances reasonably designed ‎to ensure the accuracy, completeness and timeliness of information provided to investors.  These ‎include identifying who is involved in the disclosure process, who has responsibility for ‎compliance with the policies and procedures, monitoring the range of formal and informal ‎disclosures that can be made, establishing where information intended for investors will be ‎available, and ensuring that those involved with disclosure have effective and periodic training.  ‎Having these policies and procedures in place and following them can help avoid disclosure ‎problems and provide a defense against claims for violation of the antifraud provisions by ‎negating the existence of scienter.‎