On February 7, 2020, the Securities and Exchange Commission’s Office of Municipal Securities issued Staff Legal Bulletin No. 21 (OMS) (“SLB 21”) to provide its views on the application of the antifraud provisions to public statements made by municipal issuers and obligated persons in the secondary market. SLB 21 implements the directive that SEC Chairman Clayton gave in mid-2019 for the SEC staff to provide guidance and address misunderstandings about application of the antifraud provisions, specifically Rule 10b-5. It provides useful guidance to municipal issuers, reaffirms and updates prior SEC guidance, and offers some helpful suggestions for meeting disclosure obligations and avoiding liability.
SLB 21 begins with the broad statement, consistent with prior SEC positions, that the antifraud provisions apply to any statement by municipal issuers that is reasonably expected to reach investors and the trading markets. The SEC staff reiterated an observation from its 1994 interpretive release regarding this topic that
“. . . municipal issuers do not have the option of remaining silent. Given the wide range of information routinely released to the public, formally and informally, by these issuers in their day-to-day operations, the stream of information on which the market relies does not cease with the close of a municipal offering.”
Exposure to liability is not limited to information that is intended or designed to reach investors but extends more broadly. Thus, the antifraud provisions apply both to information formally provided to investors and posted on EMMA and to information disclosed to investors through other means, such as public announcements, press releases, interviews with media representatives, public meetings or discussions with interested groups and social media. However, being subject to the antifraud provisions is not a reason for municipal issuers to be discouraged from making disclosures useful to investors through informal channels.
The SEC staff notes in SLB 21 that scienter is required for Rule 10b-5 liability, with scienter including an intent to deceive or recklessness in disregarding the danger of misleading an investor. Misleading information must also be material, which means that there is a substantial likelihood that the information would be viewed by a reasonable investor as significantly altering the total mix of information available, which is determined based on the particular facts and circumstance. Thus, SLB 21 points out, for example, that if required continuing disclosure is regularly and timely provided, other information may be less important, and conversely failure to provide required information can result in other statements being entitled to more weight. Designating information as intended for use by investors, and using appropriate disclaimers for other information, could be part of the context entitled to be taken into account when assessing materiality and the total mix of information.
In view of the breadth of the information that can provide a basis for 10b-5 liability, we recommend that municipal issuers consider specific ways to mitigate or protect against that liability. The following are some examples noted in SLB 21 or otherwise worth considering:
SLB 21 concludes with the important message that municipal issuers should have in place appropriate policies and procedures tailored to their particular circumstances reasonably designed to ensure the accuracy, completeness and timeliness of information provided to investors. These include identifying who is involved in the disclosure process, who has responsibility for compliance with the policies and procedures, monitoring the range of formal and informal disclosures that can be made, establishing where information intended for investors will be available, and ensuring that those involved with disclosure have effective and periodic training. Having these policies and procedures in place and following them can help avoid disclosure problems and provide a defense against claims for violation of the antifraud provisions by negating the existence of scienter.
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