More clarity needed in disclosure counsel's role, investors say

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CHARLESTON, S.C. — Lawyers in the municipal space are contributing to disclosure problems by telling issuers not to divulge information that could be important to investors, stakeholders said Wednesday..

Those comments and more came during a panel discussion at the National Federation of Municipal Analysts annual conference in Charleston South Carolina this week. Late last week, NFMA said disclosure in the market has gotten worse, calling for the Securities and Exchange Commission to provide interpretative guidance for issuers to disclose more information on a continuing basis.

Panelists at the conference said the decline in disclosure quality over the years is in part due to lawyers protecting the issuer and issuers placing expectations onto their counsel to provide information they may not know.

“They call themselves securities lawyers, but in some cases they know very little about securities law,” said Peg Henry, deputy general counsel at Stifel, a brokerage and investment banking firm. “They think that their job is to protect the issuer at all cost.”

However, Henry said they’re hurting issuers in the process by not disclosing, and she doesn’t see that attitude changing anytime soon. Henry told the Bond Buyer she wasn’t optimistic for change since lawyers are looking out for the issuer, protecting them from securities laws and are looking for more guidance from regulators on disclosure.

There is a general problem where issuers trust too much in the experts, said Daniel Deaton, partner at law firm Nixon Peabody, and issuers need to not place those expectations on their lawyers.

The role of disclosure counsel is varied, and sometimes when deciding what should or shouldn’t be disclosed, they aim to protect the issuer from over-disclosing in the process, Deaton said. Under the securities laws, lawyers should be looking out for the needs of investors, he added.

Deaton called it a cultural problem in the industry and said it couldn’t be pinned on a particular segment of the market., The problem could be solved if issuers knew what their responsibilities are in disclosure, he said.

Specifically, disclosure and bond counsels’ roles need to be defined versus the finance director’s role, Deaton continued. Some believe that bond and disclosure counsel should know what needs to be disclosed when that should really be the finance director’s task, Deaton said.

“The role and the relationship between the finance director and the bond disclosure counsel is too often this weird, awkward relationship where the finance director is asking this Wizard of Oz figure whether it needs to be disclosed,” Deaton said. “There’s no way that person has a clear sense of what needs to be disclosed.”

Issuers have talked in the past about creating a safe harbor on the Municipal Securities Rulemaking Board’s EMMA site to file unaudited financials, a common practice in some markets and something many investors have said they would like to see. But issuer officials have said they are hesitant to file potentially inaccurate information without some kind of assurance from the SEC that they won't face fraud charges for doing so.

Deaton called for a more proactive SEC to give more concrete responsibilities to issuers via some kind of interpretive guidance. He said after the Municipalities Continuing Disclosure Cooperation initiative would have been a perfect time for them to put out an interpretive release.

The initiative, launched in March 2014, promised underwriters and issuers they would receive lenient settlement terms if they self-reported instances over the previous five years when issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. However, it led to more questions than answers from issuers.

The SEC hasn’t published official guidance on the subject since 1994.

The term safe harbor is “misappropriated” and the SEC should give guidance on what exactly disclosure should look like, said Stephen Heaney, director of public finance at Stifel.

The SEC also needs to provide guidance on unaudited financials, Henry said.

“If Chairman Clayton is really interested in having more financial information provided sooner to the marketplace, then that’s an area that could be particularly helpful,” Henry said.

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Municipal disclosure Securities law Municipal analysts SEC NFMA South Carolina
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