Municipal Issuer COVID-19 Disclosure Obligations

Many issuers have questions regarding their disclosure obligations in these uncertain times caused by the spread of the COVID-19 coronavirus. 

Required Disclosure. For any issuers in the midst of a primary offering, general disclosures of the short-term impacts and long-term uncertainties posed by the public health emergency may be appropriate.  Recent representative examples of such disclosures may be found in offering documents posted on EMMA or on www.munios.com.

For those issuers with bonds already in the public market, the requirements of secondary market continuing disclosure only require disclosure in the case of a material event under Rule 15(c)(2)-12. The most likely material events requiring disclosure are discussed below:

• Principal and interest payment delinquencies – for any issuer that misses a payment for whatever reason, including one related to the effects of the current pandemic, a disclosure notice is required.
• Disclosure is also required for unscheduled draws on debt service reserves reflecting financial difficulties and unscheduled draws on any credit enhancement reflecting financial difficulties. A temporary decrease in cash flows may be a liquidity issue and not actually reflect financial difficulties.
• Issuers are receiving calls from rating agencies with questions regarding the effects of the pandemic on their financials and some rating agencies are issuing negative outlooks. However, for purposes of continuing disclosure obligations, a change in outlook is not considered a material event. Obviously, changes in actual ratings are.
• Finally, in current circumstances, an issuer may miss making a timely filing of annual financial information or an event notice. This may necessitate an event notice of failure to provide such information on or before the required date.

Voluntary Disclosure. Even if the situation doesn’t meet any of the material events listed in Rule 15(c)(2)-12, issuers always have the option of making a voluntary filing; however, an issuer should proceed with caution on a voluntary COVID-19 coronavirus disclosure. Only information judged to be material should be disclosed to the market, and in making that determination an issuer should consider if there is a substantial likelihood that a reasonable investor would determine that the disclosed information significantly altered the “total mix” of information already available in the marketplace. Given the amount of information already available in the marketplace regarding the economic impact of the COVID-19 coronavirus and the rapidity with which that information changes, issuers are likely to find that a voluntary notice would not be helpful to the market at this time and may necessitate near constant updating.

Take Care with Statements of Issuer Officials. Issuers should bear in mind that the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder apply to all municipal issuer statements providing information that is reasonably expected to reach investors and the trading markets. The antifraud provisions are discussed more fully in this Client Alert.