Municipalities are finding assurance in Securities and Exchange Commission Chair Jay Clayton’s stance on corporate disclosure as they wade through the question of how to manage disclosure during the pandemic.
In a statement April 8, Clayton said he is encouraging corporations to provide as much financial information as practical, and provide forward-looking information on how the coronavirus will impact their business.
Though the SEC has no explicit authority to mandate the content of disclosure by municipal issuers, lawyers say Clayton’s statement is useful to assess their own voluntary disclosure.
“It’s often been quite useful for issuers of municipal securities and their advisors to look to the corporate disclosure requirements as a means of evaluating and assessing the disclosure that they may choose to make either voluntarily or in an offering document when accessing the market,” said Paul Maco, counsel at Bracewell in Washington D.C.
Clayton said company disclosures should reflect its state of affairs and outlook and in particular where the company stands currently operationally and financially, how the company is responding to COVID-19 and how its operations and financial condition may change because of the virus.
Clayton also said historical information may be less significant.
Clayton’s comments come in a time of uncertainty for issuers. In early February, the SEC’s Office of Municipal Securities released a long-awaited staff legal bulletin to explain how antifraud laws apply to disclosure. The bulletin left many market participants with unanswered questions.
The SEC scheduled a municipal conference on disclosure slated for March 10, where participants planned to ask questions about the bulletin. However, the conference had to be postponed because of COVID-19.
Maco said issuers too would have liked to see an update to the SEC’s 1994 interpretive guidance that said any information could potentially violate the securities laws, even if the information was not published specifically for public consumption.
Maco said he would be surprised if the SEC spoke on municipal disclosure and COVID-19 specifically, but said it would be welcome if the commission chose to do so. Issuers are being reminded that their statements are still subject to antifraud provisions, Maco said.
Ben Watkins, director of Florida’s Division of Bond Finance, was looking for the SEC to endorse the disclosure of interim financial information in the February bulletin. That didn't happen, but Watkins said he now has that from Clayton’s corporate disclosure statement.
Issuers do work with a lot of historical information, Watkins said, and they get comfort out of a strenuous process in evaluating their comprehensive annual financial reports. Historical information can be less useful under current circumstances, Watkins said. Forward-looking information would be more helpful to investors.
“We don’t really get into a lot of looking forward but that’s critically important with the circumstances we find ourselves in now is to get some idea for investors of where we are currently and what does this look like for us going forward,” Watkins said. “That’s exactly what this statement tells us to do, what it tells the corporate market to do.”
Watkins is hopeful that the SEC will come out with a statement for municipal issuers instead of regulating through enforcement.
“This is an opportunity for them to lead, rather than them coming in after the fact and being critical of what we do, which is what enforcement action is,” Watkins said.
Clayton’s comments gave great assurances to the corporate world and David Erdman, Wisconsin’s capital finance director, said it would be great to have those same assurances provided directly to municipal issuers.
Erdman said Clayton's comments are in line with Wisconsin's current approach.
“I’m an advocate that we need to have interim disclosures,” Erdman said.
COVID-19 is introducing complexities to disclosures across all markets, said Dan Deaton, a partner at Nixon Peabody. Clayton’s statement identifies that difficulty to fully assess what the impact of COVID-19 will be on the financial and operating condition of any business or state and local government, Deaton said.
He added there was nothing in Clayton’s reasoning that shouldn’t apply to the municipal market as well.
There is concern that an issuer could decide to just not disclose, Deaton said.
“It can lead someone into the place of believing that the best thing they can do is just say nothing or create a paralysis of disclosure,” Deaton said. “On the other hand you have investors that are increasingly desperate to find out what they can about the credit. So I think what Clayton does is set the framework and context for that tension that is going to naturally develop given the extremities of the situation that we face.”
Clayton's comments also emphasize the importance of providing to investors what issuers’ forward-looking picture is going to be, Deaton said.
“People don’t want to end up with a month long delay until everyone is certain about the information that they’re providing and then very significant disclosures hitting the market and creating price changes when in fact a steady diet of iterative disclosures would have addressed that,” Deaton said.
For now, it’s good practice for issuers to disclose what they now know, said Rick Weber, counsel at Norton Rose Fulbright.
Weber said there is potential to mislead investors by just providing historical financial and operating data. He said it’s good practice for issuers to file disclaimers when they file annual or interim reports.
“Issuers that are doing an offering now would have to supplement the historical information certainly by including a statement that says now things are much worse and the historical information is not indicative of this,” Weber said.
Weber said parts of the SEC’s statements for corporate issuers wouldn’t make sense for municipal issuers such as Clayton advising issuers to do forecasts on how COVID-19 will affect businesses.
“Municipal issuers, if they haven’t done a forecast, can certainly issue municipal securities without a forecast safely as long as they say we expect things to be much worse but by a degree to which we can’t currently estimate,” Weber said.
