By Amanda Maine, J.D.
At a recent SEC-hosted event on secondary market disclosure practices in the municipal securities industry, participants discussed hot topics in the area of secondary market disclosure, including those relating to COVID-19 issues. Panelists applauded SEC guidance issued in May that encouraged the disclosure of voluntary, non-routine information on the impact of COVID-19, including making forward-looking statements. Speakers during an earlier panel had also spoken positively about voluntary disclosures in the municipal market.
COVID-19 disclosures. Mark Kim, executive vice president and chief operating officer of the Municipal Securities Rulemaking Board (MSRB), provided an overview of disclosures the MSRB’s EMMA system has recorded, noting in particular those related to the COVID-19 pandemic. SEC Rule 15c2-12 requires the disclosure by municipal securities issuers of Material Financial Obligation—Incurrence or Agreement Events (called "Event 15 disclosures"). Kim noted that there has been a significant increase in the number of Event 15 disclosures in the last three months on EMMA, coinciding with the pandemic.
According to Kim, since the end of May, there have been approximately 7,400 disclosures on EMMA that reference COVID-19, including 2,174 in the primary market and 5,268 continuing disclosures. He cited in particular event notices for reserve fund drawdowns, delinquent principal/interest payments, and one instance of bankruptcy precipitated by the effects of the pandemic. Kim also pointed out that the second week in May saw a sharp increase in COVID-19 disclosures submitted to EMMA, observing that in the previous week, SEC Chairman Jay Clayton and Office of Municipal Securities Director Rebecca Olsen had issued a joint statement (the Joint Statement) encouraging municipal issuers to make voluntary disclosures discussing the current and anticipated effects of COVID-19.
Lisa Washburn, managing director at research firm Municipal Market Analytics, said that her firm has also been cataloguing COVID notices since mid-March, although it differs from Kim’s EMMA list in that it leaves off boilerplate notices that do not include specifics, rating changes, or inability to meet continuing disclosure obligations due to COVID. The notices that she does catalogue include those that discuss utilization, revenues, expenses, liquidity, and reserves, she explained. The most useful disclosures are those that provide information on the impact of COVID-19 on the borrower’s operations and finances and the management’s response, according to Washburn.
Washburn observed that she has never seen so many voluntary disclosures before by borrowers on EMMA, and speculated that this may be due to the SEC’s Joint Statement. However, Washburn added that there are tens of thousands of issuers in the municipal market, so the disclosures she is tracking represent only a fraction of that. In addition, the voluntary disclosures may demonstrate a "positive bias" in that issuers that have taken the time to consider the impact of the pandemic and proactively disclose this information are probably those with better management, she advised.
Dan Deaton, a partner at Nixon Peabody, also praised the Joint Statement, especially for providing critical guidance in plain English. The SEC recognized the needs of investors in this challenging market for information, and stakeholders are clamoring for information from local issuers, Deaton said. The Joint Statement also cracked open the topic of forward-looking information by stating that the SEC would not try to second-guess good-faith efforts, he remarked. In addition, he heralded the SEC’s encouragement to issuers to take an iterative approach to COVID-19, as opposed to a once-and-final approach.
Deaton also addressed the Office of Municipal Securities’ Staff Legal Bulletin No. 21 (OMS), which provides staff views on the application of the antifraud provisions to statements made by issuers of municipal securities in the secondary market. SLB 21 clarified that the antifraud provisions apply to any statement of a municipal issuer that is reasonably expected to reach investors and the trading markets. According to Deaton, by focusing on the "total mix of information" available to the investor, an analysis that permeates the corporate securities market, SLB 21 takes the focus away from documents and annual filings and redirects it to the current information that is out there which might mislead investors and makes sure that good policies and procedures are in place. The Joint Statement and SLB 21 complement each other regarding COVID-19, he said.
Timeliness and deadlines. The panelists also discussed a recommendation made by the Fixed Income Market Structure Advisory Committee (FIMSAC) at its February meeting regarding the timeliness of financial disclosures in the municipal securities market. As Kim explained, some disclosures required to be made pursuant to a continuing disclosure agreement (CDA) involve a due date that is contingent on an event (for example, 90 days after the auditor issues its final opinion) where there is no way to know at the present time when that event will happen. FIMSAC recommended that the SEC explore ways to make disclosure deadlines for annual financial information and audited financial statements more certain and predictable, allowing municipal issuers to commit to a date without the contingency language.
Deaton said that with the annual report being fixed on one particular date, it doesn’t permit different kinds of information that can come out much earlier. For example, an issuer might have information available on its website shortly after the fiscal year, but the full annual information package might not be available for another five months as they wait for the audit to be completed. By being tied to a final statement, it can preclude issuers from making fresh, ongoing evaluations that are necessary for the marketplace. The mechanistic process centering around specific dates and forms constrains issuers from providing meaningful information that they have, he said.
Washburn said that she is more concerned about the timeliness, completeness, and accessibility of ongoing financial disclosures versus the actual compliance with the CDA. She noted that since the CDA is issuer-created, the information provided and the time it is provided is not consistent across buyers. Measuring compliance against timeliness with a CDA is flawed, Washburn advised. Noting that for many issuers, the audit is the only non-event disclosure that is posted on EMMA, Washburn speculated that more frequent, unaudited information posted on EMMA in a timely manner might alleviate some of the focus on the audit timing.