The Municipal Securities Rulemaking Board recently issued a Market Advisory on selective disclosure in the municipal market that merits attention.

MSRB is a self-regulatory organization established by Congress to regulate the activities of broker-dealers and banks that buy, sell and underwrite municipal securities.

Selective disclosure occurs when material, nonpublic information is made available only to certain bondholders and not to others. This can occur in any number of otherwise innocent ways, such as responding to a phone inquiry or email from a bondholder or holding a conference call with one or more institutional investors.  Even roadshows that are held by some large issuers prior to a public offering can be problematic since the questions are likely to be different at each venue, risking selective disclosure to one group of investors and not others.

Consider this increasing likely scenario involving bank bonds:

A local nonprofit institution, with both publicly held bonds and directly placed bank bonds was recently informed that it is the subject of a federal investigation with potentially wide-ranging consequences. The existence and details of the investigation have not been made public. Under the bank bond documents, the institution must provide notice to the bank of the initiation of any investigation, which it does. However, this information is not provided to its other bondholders or the market more broadly.

If a publicly traded company discloses material, nonpublic information to certain persons, it must disclose such information to the entire market pursuant to Regulation Fair Disclosure (Regulation FD). While Regulation FD is not applicable to the municipal market, the MSRB clearly believes municipal issuers should be guided by the same principles. Further, the MSRB noted that selective disclosure could result in liability to municipal issuers under the general antifraud provisions of the securities laws, especially during a public offering.

The MSRB encourages issuers to establish practices and procedures to ensure that all investors have access to the same information on a timely basis. The good news is that disclosure to the municipal market now simply involves posting the information on the MSRB’s electronic repository (EMMA) – something the institution in the above example could easily have done. As long as issuers have a way of controlling the flow of nonpublic information, selective disclosure can be managed.

For most issuers, establishing a simple policy to address selective disclosure should not be burdensome. The first step would be to identify those individuals who could possibly have access to nonpublic information, normally senior people in accounting, finance, legal, etc. The second step is to educate those individuals on the importance of keeping all such information confidential and instructing them to direct any inquiries to a person designated as responsible for handling all investor inquiries. This could be the same person designated to handle periodic reports under the issuer’s continuing disclosure agreements. 

If an inquiry is directed to the designated person, he or she can decide, with the help of management and counsel, whether responding involves the release of material, nonpublic information. If it does, management must decide whether the information should be disclosed. Under normal circumstances, there is no absolute duty to make any disclosure. However, if the information constitutes a “reportable event” under one of the issuer’s continuing disclosure agreements, or if the issuer is the process of selling bonds, disclosure is required. Also, if the issuer is making a regularly scheduled disclosure to the market (e.g., posting its annual report), disclosure of the new item is likely required because, without it, the scheduled disclosure may be misleading.

To heed the MSRB’s prudent advice on selective disclosure, issuers should prepare simple procedures aimed at alerting appropriate personnel to the need to keep material information confidential and establishing a protocol to handle and evaluate any inquiry from third parties.