Regulation FD prohibits public companies from disclosing material nonpublic information to designated classes of persons such as securities professionals and holders of the issuer’s securities without, in most cases, simultaneous public disclosure. For many good reasons, public companies generally prohibit disclosure of material non-public information to anyone not subject to a confidentiality obligation.
But Regulation FD does not apply to issuers of municipal securities because municipal issuers are exempt from regulation by the SEC with limited exceptions. To help plug that gap, the Municipal Securities Rulemaking Board, or the MSRB , has warned municipal issuers, underwriters and municipal advisors about the consequences of selective disclosure of material nonpublic information. The MSRB cannot impose a Regulation FD like rule on municipal issuers because it does not have authority to write rules governing the activities of issuers.
The MSRB notes municipal issuers are subject to the antifraud provisions of the Securities Act and the Exchange Act, which generally prohibit fraud in the offering, purchase or sale of securities. Accordingly, there are multiple ways in which selective disclosure could lead to potential violations of these provisions. For example, to the extent the selective disclosure is of nonpublic material information and that information was known to the issuer at the time of, but was not included in, a preliminary official statement, official statement or other required disclosure, the relevant documents likely would suffer from a material omission or misstatement.
The MSRB also notes that should an individual make a selective disclosure in breach of a duty to the issuer, and the recipient of the nonpublic material information purchases or sells the issuer’s securities on the basis of that information, it could constitute insider trading.
The MSRB’s warning discusses the role underwriters and municipal advisors may play in selective disclosure. According to the MSRB, dealers and municipal advisors often plan and participate in road shows and investor conferences. Given this direct connection to the selective disclosure, these intermediaries may also incur liability under the antifraud provisions for their part. This liability could include aiding and abetting, or causing, the issuer’s violations, or their own direct violations. In addition, any selective disclosure that creates potential liability under the Securities Act and the Exchange Act could similarly trigger potential violations by dealers or municipal advisors of MSRB Rule G-17, which requires that dealers and municipal advisors deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice. The rule contains an antifraud prohibition similar to the standard set forth in the Exchange Act; however, it also establishes a general duty to deal fairly, even in the absence of fraud.
The MSRB encourages issuers and their financial professionals to implement practices to ensure that all investors and stakeholders have equal access to the same information in a timely manner. The MSRB recommends that:
- Presale documents, such as rating agency presentations, be publicly filed with preliminary official statements on EMMA.
- Issuers disseminate non-transaction-based material information to the marketplace on EMMA by posting a voluntary continuing disclosure and associating such disclosure with all of the issuer’s bonds.