By Anne Sherry, J.D.
With Dodd-Frank’s requirement that municipal advisors register with the SEC—but municipal securities themselves occupying a middle ground that subjects them only to the SEC’s antifraud enforcement authority—panelists at a one-day SEC conference pondered issues of disclosure, enforcement, and guidance in the evolving municipal securities markets. SEC Chairman Jay Clayton emphasized the need for timely financial disclosures in his opening remarks, while panelists described some of the obstacles, including liability fears, that could be hindering disclosure of some types of information.
Clayton’s focus on financial disclosures. In his introductory remarks, Clayton emphasized the importance of timely and accurate financial information to investors and analysts. Nevertheless, some municipal issuers release their financial information long after the end of the relevant fiscal period. Clayton said that he would put it this way to the Main Street investor: the audited financial information you’re receiving could be out of date by 18 months or more.
Clayton also stressed that Congress intentionally chose not to create a federal regulatory registration regime governing municipal issuers through the Tower Amendment, which expressly limits the authority of the SEC and MSRB to require municipal issuers to file documents prior to selling securities. The SEC’s investor protection efforts focus on regulating broker-dealers and municipal advisors, enforcing the antifraud provisions, and overseeing the MSRB. Clayton said that he has asked the Office of Municipal Securities to work with the MSRB to explore ways in which broker-dealers can increase transparency regarding financial information and to examine whether there is a role in MSRB’s version of EDGAR, EMMA, to facilitate transparency.
Stein’s remarks on transparency. Addressing the conference before it broke for lunch, Commissioner Kara Stein also spoke on transparency. Stein asked the audience to consider why municipal offerings are important: they allow investors to raise money for schools, infrastructure, fire and police departments, and other tangible benefits to their communities. These benefits only accrue where there is trust, and the foundation of trust is transparency, Stein said. Citing some of the key changes in the last decade, such as municipal advisor registration and disclosure, Stein noted that they were each meant to reinforce integrity and trust in the municipal markets. The commissioner also noted that regulation needs to be able to evolve and change, including keeping up with technological changes and the development of new products such as green bonds.
Enforcement and guidance. Clayton’s comments on the boundaries of the SEC’s jurisdiction over municipal offerings echoed throughout the four conference panel discussions. The SEC’s LeeAnn Gaunt, chief of the Public Finance Abuse Unit in the Division of Enforcement, led a discussion on enforcement issues by reiterating that the ’33 and ’34 Acts provide broad exemptions for municipal securities. With exemptions from registration, the SEC cannot review offering materials prior to sale, and investors do not receive 10-K or 10-Q-style disclosures. One area where issuers are not exempt is antifraud, she said.
John McNally, a partner at Hawkins Delafield & Wood LLP, said that enforcement actions addressing material misstatements and omissions are not particularly important to municipal securities practice. More helpful is when the SEC enforcement action provides guidance, although he would prefer interpretive guidance to an enforcement action. McNally cited the concept of selective disclosure as an area that particularly could use clarification. The SEC should make clear that this is a regulatory matter through FD, not an antifraud matter, and therefore does not directly apply to the municipal market. The guidance could note the distinction between selective disclosure and insider trading, but this would insure that municipal issuers have the freedom to talk to rating agencies and analysts.
Several panelists asked for safe harbors in certain areas. Jim Spiotto, managing director at Chapman Strategic Advisors LLC, noted that in a distress situation, people want timely and accurate information. But distress amounts to dynamic uncertainty, he said. There should be assurances that if you honestly and fairly present information, you won’t be liable if circumstances change down the road. Kenton Tsoodle, Assistant Finance Director for Oklahoma City, also suggested that issuers would be more likely to provide interim financial statements if they had a safe harbor. It is virtually impossible to supply audited interim statements because of all the steps it takes to get a clean opinion, he said.
Peg Henry, deputy general counsel at Stifel Financial Corp., agreed from the underwriter’s perspective. Issuers are tempted to include unaudited financials because their audited information may be stale, but to what extent are underwriters expected to conduct diligence on these numbers, and how? Furthermore, what should be disclosed once the underwriter has completed its due diligence, especially with respect to continuing disclosure failures? It is unclear how underwriters can satisfy the requirement that they reasonably believe the issuer will comply with the continuing disclosure agreement.
Disclosure now and in the future. The last panels of the day centered around disclosure technology and future trends. MSRB COO Mark Kim said that the board’s website has been fully designed and is ready to go for those signing in on February 27, the compliance date of the amendments to the Municipal Securities Disclosure Rule. Through EMMA, issuers can make any disclosures required under those amendments.
Ernesto Lanza, senior counsel at Clark Hill PLC, discussed technological advancements, specifically XBRL reporting. Lanza said that whether or not the market is excited about changes like big data, AI, and machine learning, it is happening. XBRL permits the aggregation of data, which facilitates comparability—of a particular issuer over the years, for example, or multiple issuers within a year. Lanza did caution that people are experiencing tagging issues in XBRL where multiple tags exist for concepts or defined terms that are the same or similar.
Returning to the theme of financial disclosures, Amy Johonnett, research analyst with Fidelity Investments, said that the buy side likes to see prompt and public sharing of material information. Issuers are surely tracking their financial benchmarks on a monthly basis, she said, so they should be disseminating this information to the public on an unaudited basis. She would also like to see issuers place the information they share with the agencies on their websites. Dee Wisor, a partner at Butler Snow LLP, said that issuers should not be required to repeat information in amendments to continuing disclosure agreements that is no longer relevant to the marketplace.