WASHINGTON — A bond lawyers’ group is urging the Securities and Exchange Commission to allow issuers to disclose interim financial action without fear of possible enforcement action by the agency.
The National Association of Bond Lawyers made its case in a five-page letter sent earlier this month to commissioner Elisse Walter, who is spearheading the SEC’s effort to update its 1994 interpretive guidance on municipal issuers’ continuing disclosure obligations.
NABL’s suggestions come as market participants and municipal analysts have stepped up calls for better secondary market disclosure, including access to unaudited financial statements, such as monthly and quarterly financial and budgetary data that issuers routinely prepare and often provide to others, including their governing bodies and rating agencies.
But issuers and their attorneys have resisted calls for releasing such information, citing concerns that the documents are not vetted as carefully as bond offering documents or audited annual financial statements. Issuers have said the SEC’s 1994 guidance suggests they could be liable under the antifraud provisions of the federal securities laws if information they release later turns out to be inaccurate.
“It’s in everybody’s interest to get this more timely information out to the market, if it can be done with appropriate disclaimers that will not lead to liability, absent intentional fraud,” said NABL president John McNally, a partner at Hawkins Delafield & Wood LLP in Washington.
In particular, NABL asked the commission to “provide guidance and clarify” that an issuer who adopts and adheres to a reasonable secondary-market disclosure process — one designed to produce accurate and reliable information — could authorize its staff to release monthly budgetary and other unaudited data “even without further review or approval by the elected officials.”
The bond attorneys’ group noted that in 1994, when the SEC issued its interpretive guidance, most issuers did not have Internet access. Now, though, issuers routinely post agendas for government meetings on their websites — not a widespread practice in 1994, NABL said.
But under the SEC’s existing guidance, such a move could be considered to be publication of financial information that is reasonably expected to reach the market. As a result, issuers could be liable for any material misstatements or omissions in the documents, under the anti-fraud provisions of the federal securities laws, even though the data was not released for purposes of informing the market, NABL wrote.
Given the “exponential growth” of publicly available information, it is “imperative” for the SEC to distinguish between the types of information an issuer makes routinely available, the group said.
Specifically, NABL said information posted on the Municipal Securities Rulemaking Board’s EMMA website, such as quarterly financial data provided under a continuing disclosure agreement, is more reliable than information posted on an issuer’s website before a board meeting, such as background material for an agenda item.
Such background material, in turn, would be more reliable than information not posted on the issuer’s site, such as statements to the local media characterizing the status of labor negotiations, NABL wrote. In addition, it urged the SEC to recognize that disclaimers that “accurately describe the limitations of the information provided” could also be used in secondary market disclosures.
Specifically, the bond attorneys’ group said, the SEC should recognize issuers may wish to voluntarily provide financial or other information that’s not required under a continuing disclosure agreement.
Though the “best practice” would be to review the data before posting it on EMMA, issuers might decide it should be “disseminated as quickly as possible,” NABL wrote. In such a case, the information could be posted on the issuer’s website, perhaps in an “investor relations” section, with “an appropriate disclaimer that the information is preliminary, unaudited, partial, not presented in accordance with [generally accepted accounting principles], etc.,” the group said.
SEC Rule 15c2-12 prohibits broker-dealers from underwriting municipal securities unless an issuer contractually agrees to adhere to the rule, which requires issuers to file financial and operating information annually and event notices as they occur with the MSRB.
The agreements are considered contracts with bondholders and only bondholders can enforce them.
An issuer group said its leadership and debt committee have not reviewed NABL’s letter.
“Upon review, [the Government Finance Officers Association] will likely request a conversation with NABL to best understand their comments on issuers’ disclosure responsibilities,” Susan Gaffney, the director of GFOA’s federal liaison center, wrote in an email.
SEC spokesman John Nester said no date has been set for completion of the updated interpretive guidance.
NABL previously wrote Walter, on May 14, 2010, with suggestions for updating the 1994 release, but its earlier guidance focused mainly on the primary market. Both letters were prepared by an ad hoc subcommittee of the group’s securities law and disclosure committee and approved by NABL’s board.
A subcommittee member said the market would benefit if issuers released interim financial data without fear of SEC scrutiny.
“It might be that the SEC is not willing to give us any comfort there,” said Jodie Smith, a partner at Maynard, Cooper & Gale PC in Birmingham. “But we hope they will.”
