Manner of disclosure doesn't change liability

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The Securities and Exchange Commission considers issuers responsible for the information they release to investors regardless of the channel, though there appears to be consensus that they can protect themselves from fraud liability with good formal disclosure.

At a Government Finance Officers Association conference in Washington Thursday, SEC Chairman Jay Clayton said the SEC is focused on transparency about the timeliness of issuers' financial reporting. Muni analysts have long desired more frequent disclosures from issuers, including interim or unaudited financial information, but some issuers and their lawyers have posed questions on how federal antifraud provisions would apply to interim financial information that may not match the audited numbers.


“The channel doesn’t matter in terms of responsibility for the information,” Clayton said. “If you release something in a press release versus putting it in a report, it is still information that investors are going to rely on. So we have to treat it the same.”

The SEC’s Office of Municipal Securities plans to release a staff bulletin soon that would summarize the application of federal securities laws to various disclosures.

Timeliness of issuers’ financial documents have been a focus of the SEC chairman along with his emphasis on retail investors.

“Timely financial reporting not only aids investors and making informed decisions, but is critical to the functioning of an efficient trading market,” Clayton said.

The application of antifraud laws is not limited to information on the Municipal Securities Rulemaking Board’s site EMMA, said Rebecca Olsen, director of the SEC’s Office of Municipal Securities, during one of the panels.

However, the extent to which an issuer has made other disclosures may increase or decrease the risk municipal officials are misleading or omitting material information, Olsen said.

During the panel discussion, a consensus appeared to emerge that issuers diligent about their disclosure practices can probably disclose interim or unaudited financial information without incurring much risk of facing enforcement action.

Voluntary basis interim financial information can’t be done with no liability, but minimal liability, said John McNally, a partner at Hawkins Delafield & Wood LLP.

In the Securities Act of 1933, Section 17a prohibits fraud and misrepresentations in the offer or sale of securities. It is primarily applied to the offering and sale of securities. Section 10b5 of the Securities Exchange Act prohibits making untrue statements of material fact and material omissions.

Olsen said an important distinction between the two rules is that enforcement can bring a case under Section 17a if it is negligence based. If the SEC were to bring a proceeding under 10b or 10b5, it would have to show that the municipal issuer acted with scienter — that it had a mental state of intending to deceive, manipulate or defraud.

Regarding the 10b-5 standard, McNally said it requires a higher standard of recklessness or intent. Negligence would not be sufficient.

Minimal liability can be established with appropriate disclaimers, written disclosure controls and associated disclosure training, McNally said.

That, as well as written procedures, could go a long way in establishing a defense to securities law liability, he added.

The conference occurred a day after the MSRB proposed displaying the timing of annual financial disclosures on the securities detail pages on the site.

Last December, Clayton asked SEC offices to work with the MSRB to explore potential approaches to improve transparency with financial reporting.

“It's much better if we have an organic collaborative market-based solution to more timely and better financial disclosure than one that's mandated by a regulator,” Clayton said.

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Securities law SEC enforcement Fraud liability MSRB rules Municipal disclosure GFOA MSRB SEC Washington DC
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