The antifraud provisions apply to all statements of municipal issuers that can be expected to reach investors and trading markets.
A new Staff Legal Bulletin sets out guidance by the staff of the Office of Municipal Securities on applying the antifraud provisions to public statements made by issuers of municipal securities. The antifraud provisions of the Exchange Act apply to the purchase and sale of municipal securities in the secondary market, including to statements made by municipal issuers that are reasonably expected to reach investors and trading markets. Staff Legal Bulletin No. 21 presents the staff's views on which statements are covered by the antifraud provisions and explains the role of policies and procedures in providing accurate, timely, and comprehensive information to investors and the trading markets.
Need for guidance. According to the staff, market participants have asked about how the antifraud provisions apply to statements of municipal issuers. This includes annual and continuing disclosures accessible on the MSRB's Electronic Municipal Market Access (EMMA) system. While municipal issuers are not subject to the continuous reporting requirements of the Exchange Act, the Commission has long encouraged municipal issuers to provide information to investors and the markets. Interpretive guidance issued in 1994 provided guidance to issuers: when a municipal issuer releases information to the public that is reasonably expected to reach investors and the trading markets, those disclosures are subject to the antifraud provisions.
Statements covered. The bulletin notes that municipal issuers disclose information about themselves in a number of ways. Information is revealed not only in avenues such as public announcements, press releases, and interviews, but also as collected by state and local government agencies. Since these types of statements are a principal source of current information about an issuer, they can reasonably be expected to reach investors and are thus subject to the antifraud provisions, despite the fact that they are not published for the express purpose of informing the securities markets.
The bulletin stresses that the antifraud provisions apply to all municipal issuer statements that provide information that is reasonably expected to reach investors and the trading markets. This standard applies regardless of the intended primary audience, how the information is delivered, and whether or not the issuer has fulfilled its contractual continuing disclosure obligations. The bulletin then provides some examples of statements (other than disclosures on EMMA) that could be subject to the antifraud provisions:
- Information on Municipal Issuer Websites: Municipal issuers should ensure that the information on their websites is accurate and not misleading. This includes historical information, hyperlinked information, and summary information.
- Public Reports Delivered to other Governmental or Institutional Bodies: The staff believes that these types of reports could be a source of significant, current information about the municipal issuer and thus could reasonably be expected to reach investors and the trading markets
- Statements Made by Municipal Issuer Officials: This includes verbal statements made by municipal issuer officials, such as speeches, public announcements, and media interviews, as well as statements disseminated through avenues such as social media
Policies and Procedures. Finally, the staff recommends that a municipal issuer's statements, or those of its officials who may be seen as having knowledge of the issuer's financial condition and operations, should be carefully evaluated to assure that they are not materially false or misleading. In the 1994 Interpretive Release, the Commission stated that municipal issuers "should establish practices and procedures to identify and timely disclose, in a manner designed to inform the trading market, material information reflecting on the creditworthiness of the issuer and obligor and the terms of the security."
In the bulletin, the staff encourages the adoption of policies and procedures such as: the designation of an individual responsible for compliance; establishing a periodic training schedule for issuer staff and officials responsible for developing, reviewing, and disseminating issuer disclosures; identifying the relevant documents and reports and establishing a process by which they are made regularly available to investors; and identifying the place or places at which the issuer makes these documents and reports regularly available to the public.
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