The Importance of Disclosure for our Municipal Markets
May 4, 2020
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; Financial Professionals are Encouraged to Discuss These Matters With Main Street Investors
On April 8, the Chairman and the Director of the Division of Corporation Finance issued a statement (Corporate Issuer Statement) with observations and requests about the disclosures of public companies in light of the effects and uncertainties created by COVID-19. The Corporate Issuer Statement noted the presence of significant investor uncertainty—for both equity and fixed income investors—regarding the financial and operating status of many companies, as well as their future prospects, and the resulting thirst for information from investors and the marketplace more generally.
This statement is directed to issuers of municipal securities as well as investors and market participants more generally and is intended to parallel the Corporate Issuer Statement.
The Corporate Issuer Statement urged companies to provide investors with as much information as practicable regarding their current financial and operating status. In addition, and recognizing the difficulties in providing accurate and meaningful forward-looking disclosure, the Corporate Issuer Statement also urged companies to disclose as much material information as is practicable regarding their planning for, and expectations regarding, the company’s future financial condition and operating status. The statement also reminded corporate issuers to strive for consistency across their various public and confidential disclosures and to fulfill their legal requirements with respect to the disclosure and dissemination of material non-public information.
Following on from the recognition that forward-looking information, generally and particularly in times of broad societal and economic stress, is subject to various assumptions and factors beyond the control of the company, the Corporate Issuer Statement noted that good faith attempts to provide appropriately framed forward-looking information were not expected to be second guessed by the SEC. The Corporate Issuer Statement also highlighted the availability of (and encouraged the use of) safe harbors for forward-looking statements.
While there are significant differences between our corporate capital markets and our municipal securities markets, the importance of high quality disclosure, particularly in times of uncertainty, is consistent. Accordingly, we believe a similar approach to the provision of current and, to the extent practicable, forward-looking disclosure would provide significant benefits to investors, issuers and the municipal securities market generally.  In order to facilitate the provision of these important municipal securities-related disclosures, and the digestion of those disclosures by investors and other market participants, we offer the following observations and requests.
Market Participants Should Recognize the Size, Importance, Complexity and Specialized Nature of the Municipal Securities Market
The municipal securities market is a large, diverse, important, complex and specialized segment of the U.S. capital markets and our domestic economy more generally. States, cities, local governments and special-purpose entities issue municipal securities to raise long-term funding, and, to a more limited extent, short-term funding. These funding needs support a vast array of important projects that promote the public good such as hospitals, transportation systems, schools and utilities. Providing a capital markets-based funding source for these vital, public-sector needs has long been the role of our municipal securities market. It is generally accepted that the continued functioning of this market is essential to the continued funding and operation of state and local governments and our economy more generally.
The municipal securities market is dominated by retail investors. At the end of 2019, Main Street investors held directly, and indirectly through funds and other managed products, over 72 percent of the market, or approximately $3 trillion of outstanding municipal securities. This retail focus is driven largely by the favorable federal, state and local tax treatment holders of municipal securities often receive. As a result, investors and accounts that do not benefit from favorable municipal securities tax treatment—e.g., pension funds and retirement accounts—generally do not purchase municipal securities.
In addition to being largely retail investor driven, the municipal securities market differs from other fixed income markets—e.g., corporate bonds and U.S. Treasuries—in other important respects. The market is remarkably diverse and issuers vary tremendously in size, purpose, and capital needs. There are approximately 50,000 issuers of municipal securities, including states, their political subdivisions (such as cities, towns, counties, and school districts), their agencies and instrumentalities (such as housing, health care, airport, port, and economic development authorities and agencies), as well as a variety of private entities that access the market through “conduit” financings (such as hospitals, senior living and continuing care retirement communities, and museums). There are approximately one million different municipal securities outstanding compared to approximately 30,000 corporate bonds outstanding. Offerings of municipal securities range in size from thousands of dollars to billions of dollars, and the payments of principal and interest on these securities come from a variety of sources, including general revenues, specific tax receipts, or revenues from a particular project, among others.
The municipal securities market also is generally more fragmented than other fixed income markets. Typically characterized as a “buy and hold” market, in ordinary market conditions, a significant number of municipal bonds never trade or only trade infrequently after the initial offering period. This generally means that liquidity can vary significantly depending on the issuer, how long the bonds have been outstanding, the size of the series and other idiosyncratic factors. Nevertheless, daily trade volume when measured in dollars and number of trades is significant—approximately $12.4 billion and 34,467 per day, respectively.
Just as it is diverse, the municipal securities market is also complex. In addition to the traditional general obligation bonds backed by the taxing power and/or “full faith and credit” of the issuing entity, municipal issuers employ a variety of complex and issuer-specific credit structures to support their bonds. For example, municipal issuers also issue revenue bonds backed by specific revenues such as sales and use taxes, tax increments, or the revenues of the enterprise being financed—e.g., a utility system, a toll road or transit system. In a conduit revenue bond financing, the bondholder generally cannot look to the issuer of the bonds, but instead must rely on the revenue stream pledged by the conduit borrower. Adding complexity to these myriad credit structures, municipal issuers also utilize a variety of derivative products as part of their capital financing portfolios and other risk-management strategies. These derivatives generally are designed to reduce risks, but in some cases their performance may be material to an investment decision.
Municipal issuers and investors in municipal securities should recognize that these factors generally mean that to some meaningful extent both issuer-specific disclosures and security-specific disclosures are material. In addition, we encourage financial professionals to discuss the importance of issuer-specific and security-specific disclosures with the Main Street investors they serve and to consider the extent of such disclosures when providing recommendations and investment advice to Main Street investors.
The Importance of Robust, Timely and Accurate Municipal Issuer Disclosures Has Become Even Greater as a Result of the Effects of COVID-19
Over the years, the Commission has encouraged municipal issuers to provide robust, timely and accurate information to investors and market participants. The SEC’s focus on this issue has intensified in the past several years as we, together with our colleagues in the Office of Municipal Securities, have frequently called on municipal issuers to provide investors with more timely information, and also generally raised awareness about the importance of investor access to current financial information.
Today, in light of the potentially significant effects of COVID-19 on the finances and operations of many municipal issuers, we increase this focus and request that municipal issuers provide investors with as much information about their current financial and operating condition as is reasonably practicable. The fluid and unpredictable nature of the public health crisis and its financial and economic impacts on municipal issuers has placed investor need for timely financial information into stark relief. We observe that, in today’s markets, the typical practice of providing historic financial information in the form of an annual information filing or similar disclosure may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.
Important Considerations that Generally Weigh in Favor of Providing Updated Investor-Oriented Disclosures that Discuss the Current and Anticipated Effects of COVID-19
We acknowledge that developing voluntary, unaudited, and non-routine disclosures regarding current financial status and operating conditions may be challenging, particularly under the current circumstances. For example, we recognize that such disclosures likely would not have the benefit of a formal audit process or an established framework. We also recognize that, in many cases and even for disclosures regarding current status, certain financial disclosure would be based on estimates and assumptions as well as projections regarding future circumstances. Nevertheless, we believe providing as much current issuer- and security-specific information as is practicable will benefit issuers, investors and our municipal securities markets more generally.
We also encourage municipal issuers to provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions. We understand that providing detailed information regarding future operating conditions and resource needs is challenging, particularly as response strategies designed to mitigate and more effectively treat COVID-19 are evolving rapidly and are likely to change in the future.
We recognize that the issue of liability often is raised when voluntary disclosures—or the expansion of required disclosures—are considered. While each issuer, in many cases in consultation with legal counsel, will have to assess this risk in the context of its particular circumstances, we believe there are various factors that generally weigh in favor of making these disclosures.
- Disclosure of the current financial and operating condition will not only aid investors in making informed investment decisions, but will also be important to the issuer-specific and more general functioning of the municipal securities market, including the ability to refinance existing obligations and raise new capital.
- Accompanying those disclosures with meaningful cautionary language—including, for example, (1) a description of relevant facts or assumptions affecting the reasonableness of reliance on and the materiality of the information provided, (2) a description of how certain important information may be incomplete or unknown, and (3) the process or methodology (audited vs. unaudited) used by the municipal issuer to produce the information—will not only improve the quality of the disclosure but also will reduce legal and other risks.
- Issuers may be required to disclose similar information to other parties, including, for example, in connection with (1) efforts by federal and state governments to assess the financial impact of COVID-19 on states, municipalities and special purpose entities and (2) the pursuit by municipal securities issuers of funding or other support from governmental authorities and private parties. For various legal and other reasons, ensuring that disclosure of this type is (1) consistent across all contexts, regardless of the purpose and (2) kept confidential until disclosed and, when disclosed, disclosed broadly, is extremely important.
- We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.
- While the safe harbors for forward looking statements that are available to certain corporate issuers are not available to issuers of municipal securities, we believe that a municipal issuer’s approach to forward-looking disclosures should be informed by the judicially developed “bespeaks caution” doctrine.
We also recognize the issue of timing—e.g., when to make updating disclosure—often is raised in these circumstances. For municipal issuers with pending offerings of securities or required filings, we encourage you to include the disclosures discussed above, including for reasons of completeness. We also observe that not all municipal issuers with outstanding securities will conduct new offerings or be required to make a disclosure filing in the coming months. However, for the reasons of consistency and fair dissemination of disclosure discussed above, and because the operational and financial condition of a municipal issuer, particularly under the current circumstances, can change rapidly, we urge these issuers to consider providing voluntary disclosure regarding the current and reasonably anticipated future impacts of COVID-19 on their operational and financial condition.
Examples of Information Municipal Issuers Could Provide to Investors
While not intended to be an exclusive list, the following sets forth examples of certain types of disclosures that we believe may be important to provide to investors and the marketplace more generally at this time, whether in a primary offering document, a contractually required continuing disclosure filing, or in a voluntary public statement.
- Information Regarding the Impact of COVID-19 on Operations and Financial Condition. Our collective national effort to mitigate the COVID-19 pandemic has caused a deep contraction in vast areas of our economy, with many municipal issuers facing potentially sharp declines in revenues and, in some cases, with increases in un-budgeted costs.
Disclosures should reflect the issuer’s assessment of this state of affairs and outlook and, in particular municipal issuers should provide information regarding: (1) their current operational and financial status, including decreases in revenues and delays in collection of revenues; (2) how their COVID-19 response including efforts to protect the health and well-being of residents and employees has impacted their operational and financial condition, including un-budgeted costs; and (3) how their operational and financial condition may change as efforts to fight COVID-19 evolve. In these circumstances, comparisons to historical information may be relatively less significant.
- Information Regarding Sources of Liquidity. A description of cash on hand, access to reserves or other funds (and to what extent such access is limited), access to liquidity facilities and whether current liquidity is expected to be adequate to fund essential services and make timely debt service payments. If not otherwise disclosed, we encourage municipal issuers to disclose the material terms of any liquidity facility the issuer has used or expects it may use.
- Information Regarding Availability of Federal, State and Local Aid. A description of available federal, state or local aid the issuer has sought or is planning to seek and the anticipated timing of such aid. In addition, if the municipal issuer has obtained any such aid, it should disclose the nature, amount, and other material terms of the aid if it materially affects or reasonably likely will materially affect its operational or financial condition.
- Reports Prepared for Other Governmental Purposes. Municipal issuers routinely prepare reports for governance purposes that may be significant sources of current information. As front-line responders, these reports could provide powerful insight into local, regional, and sector-specific strategies to fight and recover from COVID-19. Accordingly, municipal issuers should consider making these reports more readily accessible to investors.
We welcome engagement on these matters and encourage participants in the municipal securities markets to continue to reach out to us on these and other important issues. We also again encourage financial professionals to discuss these matters with their investors who buy, sell and hold municipal securities, including in particular when providing recommendations and investment advice to Main Street investors.
In these challenging times, it is only appropriate to conclude by recognizing that various municipal issuers are integrally involved in our efforts to fight COVID-19, including employing many front-line responders. On behalf of all our colleagues, we thank them for their selfless and lifesaving efforts.
 This statement represents the views of the Chairman and the Director of the Office of Municipal Securities of the U.S. Securities and Exchange Commission (“SEC” or “Commission”). It is not a rule, regulation, or statement of the SEC. The Commission has neither approved nor disapproved its content. This statement does not alter or amend applicable law and has no legal force or effect. This statement creates no new or additional obligations for any person.
 See Chairman Jay Clayton and William Hinman, the Director, Division of Corporation Finance, The Deep and Essential Connections Among Markets, Businesses, and Workers and the Importance of Maintaining those Connections in our Fight Against COVID-19 (Apr. 8, 2020), available at https://www.sec.gov/news/public-statement/statement-clayton-hinman.
 For purposes of this statement, the term “municipal issuer” includes an obligated person, as defined in 15 U.S.C. § 78o-4(e)(10) and 17 C.F.R. § 240.15c2-12(f)(10).
 See also Regulation Fair Disclosure, Exchange Act Release No. 43154, 65 FR 51716 (Aug. 24, 2000) (addressing selective disclosure by public company issuers). Regulation FD codified best practices by corporate issuers and while it does not apply to municipal issuers, it provides municipal issuers with a helpful guide for framing their disclosure practices and procedures.
 We note that municipal issuers do not have a safe harbor from private liability for forward-looking statements. The safe harbor for forward-looking statements from private actions set forth in Section 27A of the Securities Act and Section 21E of the Exchange Act applies to issuers that are reporting companies under Sections 13(a) or 15(d) of the Securities Exchange Act and, accordingly, has limited application for municipal issuers. As discussed below, see infra n. 13, a municipal issuer’s approach to forward-looking statements may be informed by the judicially created “bespeaks caution” doctrine.
 We make this statement mindful of the many municipal issuers that have already provided, and continue to provide, information to investors about the impacts of COVID-19 on their financial and operating condition. We commend these municipal issuers for providing such voluntary disclosures and encourage others to provide this important information to investors.
 See MSRB, Self-Regulation and the Municipal Securities Market (Jan. 2018), available at http://www.msrb.org/Market-Topics/~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx.
 See MSRB, Muni Facts, available at http://www.msrb.org/msrb1/pdfs/MSRB-Muni-Facts.pdf. Notably, municipal securities often trade in minimum denominations of $5,000 and, accordingly, an individual bond could be held by hundreds or even thousands of investors.
 Average figures based on trading activity from January 2, 2019 through March 31, 2020. MSRB, Municipal Trade Statistics, available at https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.
 See Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590, 59593 (Nov. 17, 1994). The Commission has previously noted that the diverse nature of this market means it is particularly ill-suited to a “one size fits all” approach to such disclosure. The Commission has historically taken a principles-based approach to disclosure in the municipal securities market, guided by the doctrine of materiality. As a general matter, a fact is material if there is a substantial likelihood that the information would have been viewed by a reasonable investor as having significantly altered the total mix of information available. This assessment necessarily involves a consideration of the particular facts and circumstances of the situation. As we encourage municipal issuers to make COVID-19-related disclosures, we continue to use materiality as our guide and follow a principles-based approach that recognizes the unique nature of each municipal issuer.
 See, e.g., Exchange Act Release No. 33741 (Mar. 9, 1994), 59 FR 12748, 12755-56 (Mar. 17, 1994) (the “1994 Interpretive Release”); Securities and Exchange Commission, Report on Municipal Securities Market (Jul. 31, 2012), available at https://www.sec.gov/news/studies/2012/munireport073112.pdf. In the absence of a statutory scheme for municipal securities registration and on-going reporting requirements, the Commission’s investor protection efforts in the municipal securities market have been accomplished through the antifraud provisions of the federal securities laws and regulation of broker-dealers and municipal securities dealers, including through Exchange Act Rule 15c2-12 (“Rule 15c2-12”), which facilitates annual and event-based disclosures for the benefit of municipal investors.
 See, e.g., Exchange Act Release No. 34-83885 (Aug. 20, 2018), 83 FR 44700 (Aug. 31, 2018) (adopting two new material event disclosures “designed to facilitate investors’ and other market participants’ access to important information in a timely manner[.]”); Staff Legal Bulletin No. 21 (OMS), available at https://www.sec.gov/municipal/application-antifraud-provisions-staff-legal-bulletin-21; Remarks of Rebecca J. Olsen at the Municipal Finance Leadership Conference (Oct. 10, 2018), available at https://www.sec.gov/news/speech/olsen-remarks-municipal-finance-leadership-conference-101018. See generally Remarks of Chairman Jay Clayton at Municipal Securities Disclosure Conference, available at https://www.sec.gov/news/public-statement/statement-clayton-120618 (stating, “Timely and accurate financial information is essential for investors and analysts. Without that, it is challenging to accurately evaluate the current financial condition of a municipal issuer (or any issuer for that matter). However, despite the importance of timely financial information, some municipal issuers make their annual financial information available significantly after the end of their fiscal year or fiscal period.”); Remarks of Chairman Jay Clayton at Government Finance Officers Association (GFOA) Mini-Muni Conference (Nov. 14, 2019), available at https://www.sec.gov/news/speech/clayton-gfoa-conference-111419; Press Release 2018-158, SEC Adopts Rule Amendments to Improve Municipal Securities Disclosure (Aug. 20, 2018), available at https://www.sec.gov/news/press-release/2018-158 (quoting Chairman Clayton, “Disclosures required by these [Rule 15c2-12] amendments will better equip investors and intermediaries to make informed investment decisions about municipal securities.” ); Remarks of Chairman Clayton, Transcript of Meeting of Fixed Income Market Structure Advisory Committee (Jul. 29, 2019) (“I’m especially looking forward to the discussion on the content and timeliness of municipal issuer disclosures. This is an important topic particularly for our Main Street investors that I have addressed before.”), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-072919transcript.txt.
 For a description of the “bespeaks-caution” doctrine developed by the federal courts of appeals, see generally Robert A. Fippinger, The Securities Law of Public Finance, §8:3.4[B] (3d. ed. 2019).
 Because of the contractual nature of a municipal issuer’s Rule 15c2-12-related continuing disclosure obligations, we expect municipal issuers to continue to make their annual and event-based disclosures through the Electronic Municipal Market Access (“EMMA”) system of the Municipal Securities Rulemaking Board (the “MSRB”).
 We encourage municipal issuers to make such statements available to the public in the place or places at which they regularly make information available; such places may include the MSRB’s EMMA system or an investor relations webpage maintained by the municipal issuer.