Municipal Disclosure: A New EMMA Feature and Recent SEC Actions Continuing Disclosure Tools.
The Municipal Securities Rulemaking Board (the “MSRB”) recently launched a number of new features on its Electronic Municipal Market Access (“EMMA”) website designed to help participants in the municipal bond market better understand market activity and comply with continuing disclosure undertakings. EMMA is a centralized web-based source of information maintained by the MSRB to provide information about the municipal bond market to issuers, investors, broker-dealers, advisors, and other market participants.
Issuers of municipal bonds and other obligated parties subject to the annual filing requirements under Securities and Exchange Commission (the “SEC”) Rule 15c2-12 (the “Rule”) are required to submit annual information and timely notice of certain listed events on the EMMA website. Submissions must be in electronic, word-searchable form, and should be linked to CUSIP numbers assigned to the issuer. Annual filings typically include financial information and operating data about the issuer and the security for the bonds, changes in fiscal year, and audited financial statements. The deadline for filing annual information is included in the issuer’s continuing disclosure undertaking, and is often the end of the seventh or ninth month after the end of the issuer’s fiscal year. The Rule also requires issuers to provide timely notice of certain listed events with respect to the bonds. Amendments to the Rule in 2010 expanded the list of events requiring disclosure and added a 10 business day compliance period for undertakings effective after December 1, 2010.
A new EMMA feature may be helpful for issuers. The MSRB recently created an automated email reminder system to remind issuers and obligated parties about approaching deadlines for providing annual (or quarterly, if applicable) information. The automated email reminders may be helpful as additional “ticklers” that alert issuers to upcoming filing deadlines for financial or operating information. More information on how to sign up for email reminders is available at http://www.msrb.org/msrb1/pdfs/Financial-Disclosure-Email-Reminders-Fact-Sheet.pdf.
Issuers will not be able to rely on the automated email reminders for filing event notices, which under the 2010 amendments to the Rule need to be filed in a timely manner not in excess of 10 business days after the occurrence of the event.
Recent SEC Actions.
Recent settlements between the SEC and cities, as well as a new charge against the City of Miami and its former Budget Director, demonstrate the SEC’s continued focus on the municipal market, and emphasize the importance of the following for municipal issuers:
- Developing policies and procedures with respect to:
- Initial disclosure (preliminary and final official statements); and
- Continuing disclosure (annual filings and material event notices); and
- Completing annual filings and event notices in a timely manner.
City of Harrisburg Settlement.
On May 6, 2013, the City of Harrisburg settled cease-and-desist proceedings with the SEC, neither admitting to nor denying the SEC’s charges under Section 10(b) of Securities Exchange Act, and Rule 10b-5. The SEC emphasized that, because the City fell behind in posting its annual financial statements to EMMA, investors may have been more likely to rely upon statements from public officials included on the City’s website. The City had undertaken to post its annual financial statements within 270 days after the end of its fiscal year, and apparently failed to timely file within this timeframe over several years. The City also undertook to provide the standard notices of material events, but did not file notices of rating changes or of its failure to timely submit annual financial information.
Specifically, in the view of the SEC, the City was reckless in regard to the financial information and other statements, publicly available on City’s website at the time, which omitted mention of a ratings agency downgrade and, among other omissions, did not explain that the City had set aside funds in anticipation of having to make debt guarantee payments. The Mayor’s annual State of City address, posted on the City website, likewise is alleged to have omitted material information.
The take-away for municipal issuers is clear: stay current in filing your annual financial statements and operating data to EMMA, as well as in filing notices of ratings changes and other listed events. If you fall behind in your continuing disclosure filings you may be inviting investors to rely instead on information on your website or even on speeches by your public officials. EMMA’s new feature providing calendar reminders of annual filing deadlines may be helpful in this regard. See “Continuing Disclosure Tools” above.
The settlement also highlights the SEC’s view that issuers should have written disclosure policies and procedures. These policies and procedures should be reasonably designed to ensure accurate, timely and complete disclosures under the federal securities laws by identifying responsible individuals, setting forth a process for reviewing financial and other information prior to posting or other release, and providing for training of responsible individuals.
City of South Miami.
On May 22, 2013, the City of South Miami settled a cease-and-desist proceeding with the SEC, neither admitting nor denying charges. Of note, the City was charged with material misrepresentations not in its initial and continuing disclosure documents, but rather in its communications with the conduit entity that issued bonds to finance the City’s project. Instead of alleging fraud in connection with the sale of bonds under Section 10(b) of Securities Exchange Act, and Rule 10b-5, the SEC alleged fraud under Section 17(a) of the Securities Act of 1933, which prohibits, in the offer or sale of securities, obtaining money through material misrepresentation. Specifically, the SEC focused on misrepresentations and omissions in closing documents (tax certificate and loan agreement) and in post-issuance tax certifications. These documents disclosed neither private use of the project nor a loan to the private developer. In other words, the statements at issue were not made directly to investors, but were made to the conduit issuer and bond counsel. In the settlement, the City agreed to a number of remedial steps, including retaining an independent third-party consultant for three years to review the City’s disclosure policies and practices, and implementing the consultant’s recommendations.
This settlement likewise reinforces the importance of having written disclosure policies and procedures. In hindsight, these procedures could have been helpful to the City as it experienced significant finance staff turnover in the period at issue. The policies may have been helpful in identifying and then periodically training responsible individuals, reducing the City’s vulnerability to a loss in institutional knowledge regarding the City’s tax and disclosure responsibilities as personnel changed.
New Charges Against the City of Miami and Its Former Budget Director.
On July 19, 2013, the SEC brought action to enjoin the City of Miami and its former Budget Director from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act. The City was the subject of a 2003 SEC cease-and-desist order, in connection with the City’s 1995 Bonds. The SEC alleges that the City violated this order in connection with its 2009 bonds. Specifically, the SEC alleges that the bond offering documents and the City’s Comprehensive Annual Financial Reports included material misrepresentations regarding interfund transfers from the City’s capital projects funds to its general fund, and the availability of the transferred funds. In the SEC’s view, these misrepresentations were intended to hide the City’s general fund deficits and obtain more favorable bond ratings. In its charges against the City’s former Budget Director, the SEC alleges that Mr. Boudreaux misled the City Commission about the transfers, and concealed the transfers in the City’s records.
The substance of this newest SEC case is not particularly noteworthy – the SEC has long focused on material misrepresentations in bond offering documents (the preliminary official statement and official statement, and financial statement appendices). What is noteworthy is that, according to the SEC’s news release, this is “the first time the SEC has alleged further wrongdoing by a municipality subject to an existing SEC cease-and-desist order.” The case, therefore, may shed light on the penalties the SEC will seek against “repeat violators”, including the penalties the SEC may pursue against individual public officials in this context.
For more information regarding municipal issuer responsibilities under the federal securities law, contact any of our public finance attorneys:
Edward “Mac” McCullough
Faith Li Pettis
Jay A. Reich