Market participants were left with unanswered questions following the release of a long-awaited bulletin by Securities and Exchange Commission staff that was meant to clarify the SEC's stance on how anti-fraud laws apply to issuers’ public disclosures.
The bulletin was released late in the day Friday and did not give much solace to issuers and bond lawyers. The SEC announced in September 2019 that it would release the bulletin to clarify its stance on the application of anti-fraud laws amid heightened focus from SEC Chair Jay Clayton on a more consistent release of unaudited interim financial information from issuers.
Given that the bulletin did not provide the market with new information, lawyers and other market participants interviewed generally did not predict it would encourage more disclosure.
“An unintended consequence might be that there’s a reticence to provide additional information by issuers given the stress of all information coming into the market place potentially being subject to the antifraud rules,” said Teri Guarnaccia, president-elect at the National Association of Bond Lawyers.
In the bulletin, SEC staff stayed consistent with its message that federal antifraud provisions apply to all statements made by issuers that provide information that is reasonably expected to reach investors.
Rule 10b-5 of the Exchange Act prohibits in connection with the purchase or sale of a security, the making of any untrue statement of material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Issuers have been concerned that by providing more interim financial information that it could bring more risks of violations of the anti-fraud provisions.
Staff also again discussed the “total mix” of information, which Rebecca Olsen, director of the SEC's Office of Municipal Securities, has brought up at many municipal market conferences. Staff used Harrisburg, Pennsylvania as an example where city officials released statements and financial information that omitted or misstated material information about Harrisburg’s financial condition. At the same time, the city did not submit annual information through EMMA as it was supposed to. The SEC charged the city with fraud in 2013.
The staff doesn’t believe that Harrisburg officials not fulfilling the city's contractual continuing disclosure obligations makes it subject to liability for violations of the antifraud provisions. However, staff said the extent to which an issuer has made other statements may increase or decrease the risks that statements may significantly alter the total mix of information.
Guarnaccia said Harrisburg was more of an outlier in antifraud cases.
“They highly contextualize this in terms of Harrisburg, which was a little bit of an outlier in terms of enforcement cases,” Guarnaccia said. “There hasn’t been a whole lot of Harrisburg-type cases.”
The SEC staff’s heavy reliance on Harrisburg and the SEC’s stance that all information that ends up in the market would be subject to antifraud does not encourage issuers to disclose more, Guarnaccia said.
Though the SEC had said the bulletin would be a compilation of statements made in the past, Guarnaccia wanted them to answer questions on parameters for information issuers put out to the public versus to investors.
“I would hope that there is room in the future to give parameters to issuers and some comfort about putting information out that is useful to the public but does not rise necessarily to the level of the same scrutiny that it would give for information that they were deliberately posting on EMMA or that was limited to specifically speaking to the marketplace,” Guarnaccia said.
From an issuer’s perspective, Kenton Tsoodle, assistant city manager for Oklahoma City, said he was pleased at the SEC’s discussion of the legal concept of scienter, but was disappointed that it was only briefly mentioned compared with a list of examples where issuers could be exposed to anti-fraud laws.
Scienter is a legal term meaning an intent or knowledge of wrongdoing. Courts and the SEC have said recklessness by an issuer can prove scienter, SEC staff said.
“On one hand, from an issuer’s perspective, that is helpful to point that out in terms of giving us comfort in terms of sharing interim financial information, other types of information, things that aren’t necessarily required in our continuing disclosure agreements,” Tsoodle said.
However, the scienter paragraph compared to a list of examples regarding a total mix of information including speeches from public officials, hyperlinks, etc. is disappointing, Tsoodle said.
“I think it’s disappointing that in the world that we’re in with the talk of additional information and putting information out there, it’s a little bit concerning on how little time was spent on that intent to defraud language and how there was a lot in the bulletin about all the different examples where things could be used against us.”
Tsoodle said it does not give issuers more comfort and may raise more concerns.
The SEC has said in the past that they want to update its 1994 interpretive release.
The SEC's 1994 release reiterates that any information could potentially violate the securities laws, even if the information was not published specifically for public consumption.
The bulletin signaled that public reports delivered from one governmental body to another could be subject to the antifraud provisions.
Those would include reports submitted by a municipality to a state agency, reports made by a state or local official to a legislative body and other reports made part of a public record and available to the public, SEC staff wrote.
Some might say that those reports are often generated in response to a state or local government requirement and not designed for informing investors, said Paul Maco, counsel at Bracewell law firm.
Issuers will be talking with their lawyers to make sure they’re in compliance, Maco said.
Frederic Weber, counsel at Norton Rose Fulbright, was also hoping the SEC would talk about disclaimers as a possibility so issuers would feel more comfortable disclosing interim financial information, calling it a missed opportunity.
Issuers could write a disclaimer noting that information they’re providing may change, reducing the risk of them violating antifraud laws.
If the SEC wants to induce more voluntary disclosure, they should have discussed disclaimers on omission of information, Weber said.
