Certain state and local government issuers and their attorneys have something to ponder in the wake of a recent Department of Justice announcement: What inclusion on an updated list of sanctuary jurisdictions requires from a disclosure perspective.
On Aug. 5, the DOJ published a list of states, counties and cities deemed to have policies, laws, or regulations that hamper enforcement of federal immigration laws. The list was much slimmer than a sanctuary jurisdictions
An executive order President Donald Trump signed on April 28 directed the attorney general in coordination with the secretary of homeland security to publish a list of sanctuary jurisdictions within 30 days of the date of the order and to update the list as needed. Immediately after each publication, the order directs that the AG and the DHS secretary are to notify each sanctuary jurisdiction about its defiance of federal immigration law enforcement and any potential federal criminal law violations.
"Looking at this from a securities law and SEC enforcement risks perspective, the question is to what extent this DOJ list would result in risks and impact that would require disclosure of material information in municipal bond offerings for municipalities that are on the list," said Peter Chan, a partner at law firm Baker McKenzie who formerly served as assistant regional director in the Securities and Exchange Commission's Chicago regional office, where he also supervised enforcement investigations and led national initiatives involving public finance and public pensions.
"At a minimum, these municipalities should have a reasonable process with the right experts to assess potential disclosure," Chan said in an email "As a start, the narrow focus is what information if any would be material to bond investors in assessing credit risks of a municipality in this situation as opposed to information that would be of general interest to the public or to voters."
In a section regarding consequences, the president's executive order directs the head of each executive department or agency in coordination with the director of the Office of Management and Budget to "identify appropriate Federal funds to sanctuary jurisdictions, including grants and contracts, for suspension or termination, as appropriate."
In addition, when it comes to jurisdictions that remain in defiance of federal law even after state or local officials there have been notified of their sanctuary jurisdiction status, the AG and the DHS secretary "shall pursue all necessary legal remedies and enforcement measures to end these violations and bring such jurisdictions into compliance with the laws of the United States," the executive order said.
When analyzing materiality, Chan said questions should include what impact being on the sanctuary jurisdictions list could have on a municipality's finances, including the potential amount of federal funding that might be suspended or potential costs tied to responding to any federal action. Other questions to consider "may include likelihood of success in legal challenges to any federal action," he said.
"But the alpha and omega of this is having the right experts going through a reasonable process to assess potential disclosure of material information in connection with bond offerings, particularly because the SEC Enforcement's Public Finance Abuse Unit likely is keeping an eye on this very issue," Chan said.
Timothy J. Horstmann is a member at law firm Eckert Seamans Cherin & Mellott where he practices in the firm's public finance group. For issuers that find themselves on the updated list, the disclosure obligation question "can be boiled down into two distinct issues," said Horstmann, who works out of the firm's Harrisburg, Pennsylvania office.
The first issue is whether being on the list creates a disclosure obligation under an issuer's continuing disclosure certificates or agreements, he said.
SEC Rule 15c2-12 requires an underwriter in a primary offering of certain municipal securities to reasonably ascertain that an issuer or obligated person has entered into a continuing disclosure agreement. Issuers entering into such agreements commit to supply certain information to the Municipal Securities Rulemaking Board on an ongoing basis. Amendments to Rule 15c2-12 added two events for CDAs entered into on or after Feb. 27, 2019, expanding the list to 16 events from 14.
"Under those agreements that issuers enter into, the mere fact that you're included on that list, it doesn't create – in my view – a mandatory obligation to file an event notice on EMMA through the MSRB," said Horstmann, referencing the MSRB's Electronic Municipal Market Access website.
Assuming that an issuer's CDA is limited to the standard Rule 15c2-12 disclosure requirements, "none of those 16 material events really capture this idea of a potential loss of federal funding," the attorney said.
While it's possible that some issuers on the sanctuary jurisdictions list might consider making voluntary disclosures, "I personally have not seen any," Horstmann said.
"And if I had a client that was faced with that issue, I likely would not advise them to file a voluntary disclosure," he said, adding that, as an attorney advising clients in the public finance space, his "general rule of thumb is to not recommend those types of voluntary disclosures just because of the liability that potentially attaches with that."
Especially in situations involving litigation, "an initial voluntary disclosure could very quickly become stale, and a failure to file additional information may be viewed as a potential violation," he said.
The second and more significant disclosure issue, however, would arise if a municipality on the sanctuary jurisdictions list was planning to issue bonds, Horstmann said.
"There is certainly, I think, a need to disclose that and address it in the official statement for the bond offering," the attorney said regarding a sanctuary jurisdiction status. "This is not the first instance this year of issuers and obligors being faced with the potential loss of federal funding. We've seen it with colleges and
While it's clear that being on the list is a material item that would be of interest to potential purchasers of the bonds and should be disclosed, "then it just becomes a question of how you craft that," Horstmann said.
"I think you have to be careful about what you say in that," he said, adding that "very likely the scope of the disclosure would be similar to what's been disclosed among some of the higher ed deals we've seen this year where it's been addressed."
Ed Fierro, a partner at law firm Bracewell who previously served as senior counsel to the director of the SEC's Office of Municipal Securities, said disclosure regarding a sanctuary jurisdiction designation "depends on the facts and circumstances" of each such jurisdiction.
"The designation of sanctuary jurisdiction does not trigger an event notice under Rule 15c2-12 or automatically disqualify a sanctuary jurisdiction from receiving federal funds," Fierro said in an email. "The relationship between sanctuary jurisdiction status and federal funding is complex."
While the initial DHS list named nearly 400 counties as sanctuary jurisdictions, the updated list published by the DOJ included just four, Mark Ritacco, chief government affairs officer for the National Association of Counties, said.
"What's important for counties as intergovernmental partners is to have clarity about what these designations mean, what the criteria are, and what impacts can be expected for listed counties – as well as impacts for counties located in states designated as sanctuary states," Ritacco said. "Our analysis is ongoing and we continue to communicate with counties, including facilitating direct contact with DOJ for clarification and assistance."
