On September 13, 2017, the Municipal Securities Rulemaking Board (the "MSRB") published a market advisory (the "Market Advisory") discussing "selective disclosure" by municipal security issuers and the potential consequences that selective disclosure may have on municipal issuers, municipal advisors and dealers/underwriters.
The practice of "selective disclosure" involves a situation where certain classes of investors, such as institutional investors, are given access to information, often inadvertently, but other classes of investors are not. The Market Advisory noted that selective disclosure can occur (a) before issuance, such as during road shows, investor conferences and one-on-one investor calls, where information is not presented consistently from one communication to the next and is not included in the offering documents or otherwise disclosed and (b) after issuance and in the secondary market, where new information is provided to some investors and such information is not required to be disclosed and is not voluntarily disclosed to the public.
Though selective disclosure is not inherently problematic, when it involves material, non-public information, the municipal issuer and the parties that participate or facilitate in the disclosure may be subject to liability under federal securities law, including the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act").
The Securities and Exchange Commission’s (the "SEC") Regulation Fair Disclosure ("Regulation FD") requires that when public companies, or persons acting on their behalf, are issuing equity or debt securities, are subject to the registration and reporting requirements of the Securities Act and the Exchange Act and selectively discloses material, non-public information to certain persons (such as brokers and dealers), the company must publicly disclose such information. The timing of the public disclosure depends on whether the selective disclosure was intentional or unintentional. If the selective disclosure was intentional, then the public disclosure must be made simultaneously with the selective disclosure; if the selective disclosure was unintentional, then the public disclosure must be made promptly. Either way, the public disclosure must be made by filing a Form 8-K with the SEC or another method reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
While Regulation FD applies to public companies, it does not apply to municipal issuers, who are generally not subject to regulation by the SEC. However, municipal issuers are subject to certain federal securities laws, including the anti-fraud provisions of the Securities Act and the Exchange Act. Thus, if a municipal issuer selectively discloses material, non-public information and such information was not included in any of the required disclosures, the issuer may be liable under the Securities Act and/or the Exchange Act for materially misstating or omitting information.
Further, dealers/underwriters, municipal advisors and investors could be indirectly liable under the Securities Act and/or the Exchange Act for aiding and abetting or for causing the issuer’s violation, and may even be directly liable for their own violation, such as insider trading if an investor was to make a trade based on selectively disclosed material, non-public information. Additionally, dealers and advisors could be liable under MSRB Rule G-17 for failing to deal fairly with all persons and for engaging in a deceptive, dishonest or unfair practice.
The MSRB suggests that municipal issuers refrain from selectively disclosing material, non-public information by implementing policies and practices, coupled with regular training, which ensures all stakeholders have equal access to the same information in a timely manner. For example, the MSRB recommends that municipal issuers adopt Regulation FD’s dissemination principles and make simultaneous or prompt public disclosures of the selectively disclosed information through a public filing with the SEC or through another method reasonably designed to effect broad, non-exclusionary distribution to the public, such as the Electronic Municipal Market Access ("EMMA"). Similarly, municipal issuers could include copies of pre-sale documents, such as transcripts of investor conferences, with its preliminary official statement or have an attorney review such documents for information which is not included in the preliminary official statement and make public disclosures as necessary.
A copy of the Market Advisory, which includes several examples of selective disclosures made by municipal issuers, can be found here.