The U.S. Securities and Exchange Commission (SEC) continues to increase its enforcement efforts in the municipal bond market by focusing on the sufficiency and timeliness of disclosure in initial municipal securities offerings and in fulfilling continuing disclosure obligations after issuance. Following the conclusion of the SEC’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC has made it clear in public statements by the SEC and its staff that it will continue to be aggressive in its enforcement actions against issuers. One item that continues to be raised by the SEC is the importance of an issuer’s written disclosure policies in crafting disclosure documents. The purpose of this Alert is to provide issuers with a brief overview of the reasoning for having written disclosure policies and to discuss several key points to consider in drafting written disclosure policies. Both governmental issuers and other entities (such as nonprofits) that borrow on a tax-exempt basis and prepare initial and continuing disclosure for municipal securities offerings should consider implementing or revising existing written disclosure policies in light of this SEC focus.
Under the federal securities laws, issuers of municipal securities (as well as conduit borrowers) may neither make a misstatement of a material fact nor make a statement that is misleading in light of the circumstances in which it was made due to the omission of a material fact in connection with the offer and sale of securities. If such a misstatement or omission by an issuer occurs, the issuer risks facing an action by investors for damages, if the issuer’s misstatement or omission is reckless or intentional, or an enforcement action by the SEC, if such misstatement or omission is negligent, reckless or intentional.
Beginning in 2010 with the SEC’s enforcement action against the State of New Jersey, the SEC has repeatedly placed an emphasis on written disclosure policies with respect to issuers’ preparation of offering documents. The SEC’s view in these negligence-based enforcement actions has been that the material misstatements or omissions occurred as a result of the issuer’s failure to exercise reasonable care in crafting its disclosure documents. While there is no general requirement under federal securities laws that issuers adopt written disclosure policies, issuers should consider doing so in order to help facilitate compliance with federal securities laws and continuing disclosure undertakings. Written disclosure policies, if properly implemented, should reduce the chances of making a material misstatement or misleading omission in disclosure documents and may establish a defense of reasonable care against actions for misstatements or omissions that may occur despite the issuer’s best efforts. Written disclosure policies also can aid an issuer in meeting its contractual obligations under continuing disclosure undertakings.
Key Components of Disclosure Policies
Recently, the National Association of Bond Lawyers described four core components of good disclosure policies:
- a description of the types of disclosures to investors that are covered by the disclosure policies;
- a clear statement of the process by which each type of disclosure to investors will be undertaken, drafted, reviewed and approved, the specific individuals responsible for various disclosures, and how compliance with the process will be documented;
- inclusion of adequate supervision and reasonable disbursement of responsibilities; and
- provision for associated training of officials and employees, including education regarding responsibilities under federal securities laws and the adopted disclosure policies, and specific training on the particular person’s role and responsibilities in the disclosure process.
In developing a disclosure policy, issuers should first consider what types of disclosures will be covered by their disclosure policies. A thorough disclosure policy will govern all potentially material statements that are reasonably expected to reach investors. Some examples of documents that should be considered for inclusion in a written disclosure policy are offering documents in primary offerings (e.g., official statements, remarketing memoranda), continuing disclosure filings made on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website, audited financial statements filed on EMMA, investor relations websites and other statements such as press releases.
Second, after developing an understanding of the types of disclosures that will be covered by their disclosure policies, issuers should begin to develop the procedures for reviewing, revising and developing such various disclosures. Some questions that an issuer may consider are:
- Will the issuer create an internal working group to review the issuer’s disclosure?
- Which senior officials will be reviewing and signing off on the disclosure on behalf of the issuer?
- Will any outside consultants play a role in reviewing or advising on disclosure?
- Will the issuer’s governing body have a role in the disclosure review process?
- Who at the issuer will ensure that continuing disclosure filings are timely and properly filed?
- How often does the issuer plan to review and update its disclosure policies?
Third, an issuer should consider how it will document compliance with its disclosure policy. If the SEC conducts an investigation into an issuer’s disclosures, the issuer should be prepared to prove that it complied with its own disclosure policy. Issuers may consider having certain officials involved in the disclosure process provide internal certifications regarding disclosures or may retain evidence that show that the issuer complied with its own procedures.
Fourth, an issuer should train its personnel who are involved in the preparation and review of its disclosures. All issuer staff involved with issuer disclosures need to understand how the disclosure policy works, why the disclosure policy is in place and what the obligations of the issuer are under the federal securities laws. In particular, senior staff should be made aware of the importance of the disclosure policies and producing timely and accurate disclosure.
Disclosure policies should be tailored to each specific issuer and should be thorough, yet practical in scope. Disclosure policies need to embody processes that the issuer can actually follow. An issuer’s admission of non-compliance with its disclosure policies could potentially be worse than having no disclosure policies at all because such non-compliance may evidence failure to exercise reasonable care by the issuer or demonstrate negligence. Also, in certain cases, issuer officials may benefit from a good faith defense that could be undercut by non-compliance with its disclosure policies.