WASHINGTON — Issuers believe guidance recently released by bond lawyers will help them determine whether they made materially misleading statements in offering documents that they could consider self-reporting to the Securities and Exchange Commission.
The National Association of Bond Lawyers paper is designed to provide issuers with an analytical framework to decide whether they made material misstatements about their continuing disclosure compliance that could be reported under the SEC's Municipalities Continuing Disclosure Cooperation Initiative.
The MCDC allows both issuers and underwriters to get favorable settlement terms if they voluntarily report, for bonds issued in the last five years, any time they materially misled investors about their compliance with their continuing disclosure obligations.
But there has been confusion over what the SEC considers "material" misstatements for purposes of the program, an issue addressed by the NABL's paper, written by a team led by former NABL president John McNally, a partner with Hawkins & Delafield.
Ben Watkins, chairman of the Government Finance Officers Association's debt committee and Florida's bond finance director, said the paper should help lawyers advising issuers by providing a standardized analysis that will lead to more consistent conclusions across the issuer community.
"I think it's a positive contribution," Watkins said. "At least you have a uniform analysis."
Most issuers are not actively going through their past OS' to see which ones might warrant MCDC participation, he said. Instead, they're waiting for their underwriters to contact them and tell them which ones are problematic. Most market participants believe underwriters will err on the side of over-reporting, but Watkins said an issuer and its counsel could make use of the NABL framework when discussing with its underwriter whether a deal should be self-reported to the SEC or not.
McNally told The Bond Buyer that issuers should be doing their own analysis, rather than relying on an underwriter to do it for them. "It would be prudent for issuers to do their own analysis, and to compare their findings with whatever their underwriters uncover," he said.
The SEC's Rule 15c2-12 requires an underwriter to contract to receive a final official statement, defined to include a description of any instances in the previous five years in which the issuer or borrower that promised to provide annual financial information and notices of material events failed to comply "in all material respects." Issuers have been including in their bond documents phrases which duplicate the language of that rule, saying that they have been complying "in all material respects" with their obligations. Materiality has been defined by the courts to mean something a reasonable investor would want to know before making an investment decision,
There are two distinct materiality questions that an issuer has to analyze to determine whether a recent OS contains a "material misstatement" eligible for self-reporting under the MCDC, the NABL paper explains. One is whether an issuer makes a misstatement if it says in its OS that it has complied in all material respects with its continuing disclosure obligations when there has been some noncompliance.
The second is whether the misstatement would be material to investors.
The NABL paper said some disclosure failures will result in misstatements and some failures may be so minor that they would not result in a misstatement, such as a delay in filing an annual report by a few days. The question of materiality will depend on the facts and circumstances of each case, but could include analysis of such things as how important the withheld disclosures were and whether that information was publicly available elsewhere.
