The Securities and Exchange Commission should clarify the responsibilities of elected issuer officials who approve or authorize primary offering documents and secondary market disclosures, the National Association of Bond Lawyers said this week.
NABL made its case
NABL’s suggestions come as Walter and the SEC staff have met with several market groups, including NABL, to solicit their views on the forthcoming guidance, though the bond attorney group is the first to put its suggestions in writing and release them to the public. Other groups also are working on written comments, market participants said.
Walter declined to comment on the guidance yesterday, though in an October speech she said it could make the disclosure obligations of municipal issuers more explicit, which in turn “could help ensure that disclosure is as completely, timely, and accessible as possible.”
Staff have indicated to market groups that they are trying to release a draft proposal soon, about the time the SEC considers the proposed changes to 15c2-12 that it floated last summer to increase the quantity and timeliness of continuing disclosures.
Specifically, NABL said the need for the SEC to clarify the roles of issuer officials regarding their potential liability for reviewing and approving offering materials stems from the so-called 21(a) report the SEC issued in January 1996 with regard to Orange County, Calif.
The report established two principles allowing issuers to either approve offering materials as long as they do not contain any knowingly false statements or authorize staff to prepare them as long the officials do not recklessly disregard facts that suggest the disclosures will be misleading.
In the Orange County report, the SEC took issue with resolutions adopted by the county’s Board of Supervisors that approved misleading offering documents and authorized the retention of certain public finance professionals to assist in the preparation of those documents.
NABL said the SEC should clarify an elected official’s responsibilities by stating that the official has a legal duty to exercise care in approving the text of an offering document that will be distributed to investors.
Alternatively, the SEC should state that an elected official who chooses to authorize staff and public finance professionals, whom he or she reasonably believes to be capable, to prepare and approve such documents would not be liable for violation of the federal securities laws if the documents contain material misstatements or omissions. However, the issuer, through the actions of its staff, might be liable for such a violation, NABL said.
While an elected official could help an issuer satisfy its securities law duties by reviewing the primary offering and comparing it to facts known to the official, the reality is that there are often significant differences between the knowledge levels of a member of an issuer’s governing body and a member of the issuer’s staff with respect to the finances of a governmental entity, NABL said.
“In most cases, governing body members would almost certainly need to rely on the issuer’s staff and retained professionals in compiling and preparing the document,” the bond attorney group wrote, suggesting that the SEC confirm that, in approving offering documents, governing body members may rely on public finance professionals to the extent that such reliance is reasonable.
The reasonableness of an issuer’s reliance on such professionals could be based on the issuer adopting and adhering to a process reasonably designed to produce accurate and reliable information, NABL said.
The SEC also could clarify that whether reliance is reasonable depends on facts and circumstances, such as the experience and expertise of the retained professionals and whether the governing body members have reason to question the accuracy of the information provided by the professionals.
Turning to a separate enforcement action involving Miami in 2003, NABL noted that one of the lessons from that case is that a materially misleading statement in an issuer’s secondary market disclosures may violate the antifraud provisions in connection with the issuance and sale of a security because it affects trading on the secondary market.
But the bond attorney group suggests that the SEC clarify whether members of an issuer’s governing body have the same duty to exercise care in approving secondary market disclosures that they have in approving primary market disclosures.
“In short, do the principles of the Orange County report extend beyond disclosure documents use in the primary offering?” NABL asked.
Though the SEC’s 1994 guidance suggests an issuer is liable for misleading disclosures reasonably expected to reach investors, the commission should clarify that individual members of a governing body are liable only for secondary market disclosures that they approve with knowledge of, or reckless disregard for, a material misstatement or omissions, NABL recommended.
It also addresses how changes to statements made in preliminary official statements or final official statement be disclosed to investors. It recommends that the SEC recognize that, given the wide variations of municipal credits and disclosure, there are a variety of appropriate practices relating to updates and amendments that can properly be used to meet the central goal: “Namely, ensuring that the bond investor has a reasonable opportunity to consider all information material to the investor’s decision to purchase.”
“The commission should not require any single approach to this problem since the facts and circumstances often vary,” NABL wrote. “Minor changes in document definitions, for example, of qualified investments of bond proceeds do not require the kind of highlighting that would be appropriate” for other changes.
In addition, NABL asks the SEC to provide guidance for the first time on the appropriate uses and limitations of disclaimers in official statements.
Generally speaking, NABL wants the SEC to clarify that OS disclaimers may be used to “appropriately limit the disclaiming party’s liability with respect to information provided by third parties, provided that the disclaimer is specific and appropriately tailored as to the information disclaimed, and the disclaiming party does not know, and is not reckless in not knowing, that the statements disclaimed are materially false and misleading.”
The NABL suggestions were prepared by an ad hoc subcommittee of its securities law and disclosure committee, comprised of 20 individuals, including Teri Guarnaccia, a partner at Ballard Spahr LLP in Baltimore; Kenneth Artin, a shareholder at Bryant, Miller & Olive PA in Orlando; Jodie Smith, a shareholder at Maynard, Cooper & Gale PC in Birmingham; and John McNally, a partner at Hawkins Delafield & Wood LLP here.
The four attorneys, along with Victoria “Penny” Rostow, NABL’s director of governmental affairs, met with Walter and SEC staff on April 12 to discuss the guidance and related matters.
