In response to the COVID-19 pandemic, state and local government issuers of securities, and others generally obligated to support the payment of such securities, who entered into continuing disclosure undertakings or agreements (CDAs) in accordance with Securities and Exchange Commission (SEC) Rule 15c2-12 may have questions concerning their continuing disclosure responsibilities. The following information provides guidance with respect to some commonly asked questions many issuers and "obligated persons" currently face. (Note that its purpose is to provide information of a general nature on this topic and should not be construed as legal advice.)

Q: Do I have to make voluntary disclosure of the effects of the pandemic on my organization?

A: As the name implies, “voluntary disclosure” is not required under Rule 15c2-12 or the standard provisions of CDAs with which we are familiar. An issuer is under no obligation to speculate as to potential impacts of the pandemic.

Q: Should I make some type of disclosure via the Electronic Municipal Market Access (EMMA) website even if I’m not required to do so?

A: There are a number of factors to be considered when deciding whether to make a voluntary filing with EMMA, and every issuer’s situation is different. So, there’s no one right answer to the question. (For more discussion of the considerations relating to a voluntary disclosure, see “Voluntary disclosure considerations during the COVID-19 pandemic.”)

Q: What, then, are the factors that should be considered in deciding whether to make a voluntary EMMA filing?

A: Because a voluntary filing is not required, issuers should approach making any such statements to the marketplace with caution. This is because any statements an issuer makes to the marketplace are subject to the so-called “antifraud” provisions of federal securities laws, which are essentially embodied in Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 of the SEC. This is commonly referred to as the “10b-5” standard.

Q: What does the 10b-5 standard require?

A: Statements made in connection with initial offerings and in the secondary market must not contain an untrue statement of a material fact or omit any material fact necessary in order to make the statements, in light of the circumstances under which those statements were made, not misleading. Essentially, it means that an issuer and its officials shouldn’t say something that’s not true about something investors will think is important. Additionally, if an issuer does disclose information about something investors think important, then the issuer should not omit information when that omission would make the statement misleading.

Q: What if the offending statement was made without intention to deceive anyone, that is, it’s just incorrect?

A:  In order for an issuer to be subject to potential 10b-5 liability, the law requires “scienter,” which means an intention to deceive. However, the SEC and courts have considered recklessness – an extreme departure from ordinary standards such that the danger of misleading others was known or so obvious that it had to be known – enough to meet the scienter requirement. What constitutes “an extreme departure” is also a very fact-sensitive question, so in all events care must be taken with respect to any statements likely to reach the secondary market.

Q: But how does that all relate to whether I should make a voluntary filing with EMMA?

A: Basically, any statements made that are likely to reach investors must satisfy the 10b-5 standard. If an issuer makes a voluntary filing, it needs to exercise extreme care to make sure nothing is stated that is not true and that information is not omitted if it would cause the statement to be misleading.

Q: Is that any different from the standard that applies to my obligations to make filings as required by my CDA?

A: No, but with this additional consideration: If an issuer makes a voluntary filing, there is a risk of violating the antifraud rules if that statement doesn’t comply with the 10b-5 standard. Stated differently, a voluntary filing must receive the same thoughtful attention as any other filing required by a CDA.

Q: What about statements on my website or in a press release? Are those subject to the 10b-5 standard as well?

A: The SEC takes the position that any statement likely to reach the secondary market is subject to the antifraud provisions, because it can affect the total mix of information available to holders.  That can include website postings, press releases, reports and statements by public officials likely to reach the secondary market and be considered important to the total mix of information.  For that reason, we advise that issuers cautiously approach statements to the public through their websites, press releases, etc. In all cases, issuers should avoid “selective disclosures” where information is provided to a particular investor and not to all investors.

Q: If I do put something on my website, does that mean that it has to be disclosed on EMMA?

A: Not necessarily. While it’s not unreasonable to consider “telling the world” via a voluntary filing on EMMA, it’s not an automatic requirement.

Q: What if I don’t know how we’re going to be affected by the pandemic?

A: A statement that “we don’t know how we’re going to be affected by the pandemic” may comply with the antifraud provisions. However, it may be of questionable value unless the reasons for that uncertainty can also be stated, such as uncertainty regarding future tax collections because greater delinquencies may occur. A mere statement of uncertainty might not add to the mix of information and might, instead, suggest that some relevant information has been omitted and, thus, cause a violation of the antifraud rules. 

Q: What if the issuer needs to make some significant budget cuts or layoffs? Should a voluntary filing be made?

A: The key point is that any statements of that nature must comply with the antifraud provisions.  Certain large issuers whose securities are widely held or who are followed nationally may consider it a part of good investor relations to make a voluntary filing even though not required.  A smaller, infrequent issuer may determine that a press release on its website is sufficient.  Again, the question of whether to file is very fact specific. The one constant is that statements that are likely to find their way to the secondary market must comply with the antifraud rules.

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