Retail time of trade disclosure and coronavirus
On May 4, the Securities and Exchange Commission issued a Public Statement, “The Importance of Disclosure for our Municipal Markets,” that encouraged municipal issuers to provide updated financial and other disclosures associated with the effects of COVID-19, seemingly making an effort to put issuers at ease with respect to the risks of making these types of disclosures so long as done so responsibly. The three primary headlines from the Public Statement were:
The effects of COVID-19 have raised uncertainties regarding the financial status of state and local governments and special purpose entities;
Municipal securities issuers are encouraged to provide updated financial and other disclosures; and,
Financial professionals are encouraged to discuss these matters with Main Street investors.
The focus of this article is the third point above, the SEC’s Public Statement encouraging “Financial Professionals … Discuss These Matters With Main Street Investors.” MSRB Rule G-47 seemingly requires disclosure of “these matters with Main Street investors.”
MSRB Rule G-47 provides that:
No broker, dealer, or municipal securities dealer shall sell a municipal security to a customer, or purchase a municipal security from a customer, whether unsolicited or recommended, and whether in a primary offering or secondary market transaction, without disclosing to the customer, orally or in writing, at or prior to the time of trade, all material information known about the transaction, as well as material information about the security that is reasonably accessible to the market. (Emphasis added by the author.)
Let’s start with an assumption that updated financial and other disclosures regarding the effects of COVID-19 are material. The basis for this broad generalization is, as many have noted, COVID-19 may be the most significant credit event in memory. Further, the filings and statements in new issue documents we have seen support this characterization. It is feasible that not all such filings are or will be material but one may want to err on the side of caution in this regard.
Assuming there is a Rule G-47 disclosure obligation, the challenge is how to effectively and efficiently meet this obligation. There is no “COVID-19” filing category on EMMA and, even if there was, filers periodically mis-categorize filings. Further, as noted in the Bond Buyer on May 7, “thousands of COVID-19 related disclosures have flooded the MSRB’s EMMA site through more than 20 categories …” and, with the SEC’s Public Statement, there is a likelihood that many more will follow.
It is daunting to contemplate Finance Professionals combing through EMMA filings for a bond to identify COVID-related filings, making a materiality determination and then, prior to the purchase or sale of a bond to the retail or non-SMMP client, disclose/discuss (as the SEC suggests) the same with the client. Moreover, simply sending the retail client a list of filings made with the MSRB for a given bond may not be the best approach to client service and management in these times.
A solution is to leverage technology to identify continuing disclosure filings made and official statements containing disclosures regarding COVID-19 and match them to the associated bonds. To ensure efficiency and alleviate the burden to Financial Professionals, the dedicated service should allow the Financial Professional to quickly understand if a COVID-19 related filing has been made and to access the filing for disclosure and discussion to the retail or non-SMMP client. This service is being made available through Lumesis’ DIVER Advisor platform.