Two distinct events have created both opportunity and concern for Municipal Advisors. These events are the SEC’s Municipal Continuing Disclosure Cooperation Initiative (“MCDC”) and the implementation and enforcement of MSRB Rule G-42 (“The MA Rule”). The former most certainly has created opportunity while the latter has caused some concern – but perhaps it may bring some opportunity as well.
The MCDC Opportunity
The SEC’s MCDC initiative highlighted the critical importance of an Issuer ensuring that representations regarding disclosures in the Preliminary Official Statement and the final Official Statement are accurate. The difficulty associated with ensuring this obligation is complicated by the uncertainty Issuers (and underwriters) face trying to determine “materiality” and what disclosure is required.
The focus on the Issuer’s disclosure comes from two sources. The first source of focus is the SEC and the tools it can utilize to punish Issuers. These can include cease and desist orders and actions against municipalities and individuals. The other source of focus is underwriters who, while also the subject of the SEC’s MCDC initiative, are seemingly more scrupulous than they have been in the past when it comes to ensuring proper disclosure in new issue documents. Failure to satisfy either the SEC or the underwriters can limit an Issuer’s access to the capital markets and may increase the cost of a new issuance (not to mention, expose the Issuer or individuals to an enforcement action).
The MA Rule Opportunity
The MA Rule, MSRB Rule G-42, went into effect on June 23, 2016 and, in addition to its registration and continuing education requirements for municipal advisors, establishes core standards of conduct and duties when engaging in municipal advisory activities.
- A standard of conduct consistent with the fiduciary duty owed by a MA to municipal entity clients, which includes a duty of care and a duty of loyalty
- Requiring an MA to exercise due care when performing municipal advisory activities for their obligated person clients
As part of the municipal advisor’s “duty of care” he or she must have a reasonable basis for advice provided, representations that may be relied upon by the client or others involved in transactions and most importantly, information provided to the client or others regarding the preparation of the OS.
As Issuers struggle with the heightened scrutiny and municipal advisors must ensure they have a reasonable basis for representations that may be relied on by others in the OS, the municipal advisor community has a golden opportunity to strengthen their bond with Issuer clients by offering services to help address these obligations. Fortunately, both the SEC and GFOA have provided a road map of sorts.
The MCDC cease and desist orders provide a series of steps that Issuers who have entered into such orders must undertake. These include:
- Policies, procedures and training
- Clean-up of past filings which should include the following – not from the Orders per se: “Reclassification” of Misclassified Filings or Refile; File Where Missing
- Disclose non-compliance and MCDC settlement terms
The GFOA, on August 24, 2016, issued an Alert to their members that set forth “Five Essential Practices” to help Issuers with their new issue and ongoing disclosure obligations. These include:
- Understanding/discussing Issuer’s disclosure policies and procedures
- Knowing who is filing what, when and where
- Awareness of what was posted on EMMA
- Knowing what the Issuer committed to in its CDA
- OS statement that Issuer failed to materially comply with prior commitments
Thus, municipal advisors have a directional foundation for serving the needs of Issuer clients resulting from the SEC’s MCDC initiative and recent enforcement activity. Moreover, to the extent the municipal advisor is providing advice about the preparation of the OS, these combined needs and obligations form the basis of an opportunity to support the Issuer client and meet the municipal advisor’s G-42 requirements. To this end, engaging a resource with experience and know-how to perform an analysis of disclosure obligations and compliance therewith can be a cost-effective approach. Moreover, engaging a party that offers an independent view of annual filing obligations, point in time status and alerts – can mean the difference between meeting needs and enhancing capital markets access and not.