SEC to clarify stance on reach of anti-fraud laws

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A Securities and Exchange Commission staff legal bulletin will be coming out in the next couple of months to clear up confusion about what types of public disclosures are subject to the anti-fraud provisions of the federal securities laws.

At a National Association of Bond Lawyers conference in Chicago on Thursday, Rebecca Olsen, director of the SEC’s Office of Municipal Securities said any information that could reasonably be expected to reach the public could be subject to the anti-fraud provisions. But issuers could make themselves less likely to face fraud charges by maintaining accurate continuing disclosures in a place readily accessible to investors.


“If you drive traffic to an environment where you have current and reliable information that’s gone through your internal protocols, that’s where people are going to go,” Olsen told The Bond Buyer.

The SEC issued guidance on this subject in 1994, 2000 and 2008, though Olsen said it was somewhat dated in the age of the internet and social media. Muni market participants have recently questioned whether all interim financial information is subject to anti-fraud and whether there is heightened scrutiny for information posted on the Municipal Securities Rulemaking Board’s EMMA site. Issuers can also post on their own investor relations sites. When issuers are speaking to the market, no matter the capacity, it is open to anti-fraud laws.

The SEC's 1994 release said that any information could potentially violate the securities laws, even if the information was not published specifically for public consumption.

“The fact that they are not published for purposes of informing the securities market does not alter the mandate that they not violate anti-fraud provisions,” the SEC wrote in its 1994 interpretive release.

Sandy MacLennan, a partner at Squire Patton Boggs and chair of the panel, said she felt the link between the 1994 release was contradictory of recent 15c2-12 amendments and a general encouragement to increase muni disclosure. 15c2-12 spells out specific events that issuers have to contract to provide investors notice of on a continuing basis, and amendments effective in February expanded that list.

Olsen said it does help for issuers to speak to the market and post to EMMA, however it is sometimes sparse.

“If those postings are only once a year, or sometimes less for some then it’s reasonable to expect investors are going to be looking, especially in the age of the internet and social media, and other information put out by public officials,” Olsen said.

MacLennan also asked Olsen about issuers posting information that has not been run through their finance offices and with the securities laws in mind.

“I can tell you, particularly my smaller municipal clients do not think about municipal securities liability when they post their city council agenda or minutes on their website,” MacLennan said.

Olsen said investors will go to EMMA or on an investor’s website that has been checked.

The upcoming staff bulletin, which will be released in the coming months will draw on existing guidance, Olsen said.

Conversation about postings on EMMA stems from an observation SEC Chair Jay Clayton made in July at an SEC Fixed Income Market Structure Advisory Committee meeting. He said issuers were being advised that information they supply on EMMA is subject to more scrutiny under federal anti-fraud laws than other platforms. He asked the OMS to put together the bulletin.

Some lawyers said his observation could be plausible since the site has more exposure to the industry.

Some lawyers told the SEC that they told their clients not to submit anything to EMMA on a voluntary basis because it is subject to anti-fraud liability, Olsen said. The context of those meetings was to discuss voluntary interim financial reporting.

Olsen also said the MSRB had reported similar feedback and said some in the industry have the impression that the scope of the anti-fraud laws is limited to disclosures submitted to EMMA.

“The standard really is whether the information is reasonably expected to reach investors,” Olsen said.

Olsen told The Bond Buyer that Clayton’s main focus is still retail investors, adding that many times for some issuers, there isn’t any current information available.

“When they’re (investors) deciding to buy or sell a security, how can they really assess their value if there isn’t good current information out there?” Olsen said.

The bulletin will summarize the application of the federal securities laws to various disclosure scenarios and will not be open for comments.

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SEC regulations EMMA Municipal disclosure Securities law SEC MSRB NABL Illinois
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