July 30, 2014

On March 10, 2014, the Securities and Exchange Commission (SEC) introduced the Municipalities Continuing Disclosure Cooperation Initiative (the "Initiative") to encourage self-reporting of possible securities law violations related to misrepresentations in offering documents concerning an issuer's prior compliance with its continuing disclosure obligations. In the press release announcing the Initiative, the SEC referenced a recent enforcement action (In re West Clark Comm. Sch., SEC Rel. Nos. 33-9435 and 34-70057 (July 29, 2013)) dealing with a School District that included a statement in an Official Statement for a 2007 offering to the effect that it had not failed, in the previous five years, to comply in all material respects with any prior disclosure undertakings. However, through the 2007 issuance date the District had not provided any disclosure required under the continuing disclosure agreement for its prior 2005 issue (making the statement in the 2007 Official Statement false). The SEC found the District (and the underwriter) had violated applicable disclosure regulations.
The Initiative is an effort to draw attention to on-going disclosure requirements and bolster a pattern of improved compliance. Accordingly, the SEC will recommend "favorable settlement terms" (see below) upon self-reporting of possible past violations. However, the time period for this voluntary self-reporting is short -- it expires on September 10, 2014(UPDATE:  On July 31, 2014, the SEC extended the filing deadline for Issuers to December 1, 2014.)
Issuers that may have made materially inaccurate statements regarding the status of their compliance with prior continuing disclosure obligations, and the underwriters of such offerings, are offered an opportunity to identify such through the submission of a questionnaire. The questionnaire requires the submitter to identify transaction participants-including the issuer, the underwriter, the municipal advisor, bond counsel, underwriter's counsel, and disclosure counsel, if any. A link to the self-reporting questionnaire can be found at:  http://www.sec.gov/divisions/enforce/mcdc-initiative-questionnaire.pdf.
Disclosure Requirements Analysis:

  • If the Issuer has been in compliance with all its continuing disclosure agreements in all material respects, there would have been nothing to say in an Official Statement regarding non-compliance, and there is no need to report anything under the Initiative;
  • If the Issuer was not in compliance with its disclosure agreements and accurately disclosed such failures in its Official Statement(s), the Issuer would not need to report anything under the Initiative, but it should correct or supplement its filings to come into compliance with the prior Certificates (if not done already);
  • If the Issuer stated in its Official Statement(s) that it had been in compliance, when in fact it had not, this could result in a securities law liability if the misstatement were material to investors. Careful consideration of whether to "self-report" in this situation is advised;
  • If the Issuer was not in compliance with its disclosure obligations, but the Official Statement included no disclosure regarding compliance or non-compliance, the final Official Statement did not meet the standards required by 15c2-12 and the Underwriter may need to "self-report" this instance. The Issuer may need to determine whether the omission of this information was material to investors, and should consider whether to report the matter under the Initiative.

We suggest Issuers who have issued municipal debt in the past five years:

  1. Review Continuing Disclosure Certificates for debt issuances during the last five years;
  2. Determine whether annual filings and Material Event Notices, if any, have been made in compliance with such Certificates;
    a.  Consultation with your Dissemination Agent, if any, is advised in this regard. Filings should be reported/trackable on EMMA (emma.msrb.org) since July 1, 2009.  (UPDATE:  The SEC has acknowledged the difficulty in researching pre-EMMA filing data. Documented, reasonable good-faith efforts to review pre-EMMA information will be taken into consideration by the Agency in the event older violations are discovered);
  3. Review Final Official Statements to determine whether statements therein are accurate regarding the Issuer's compliance with outstanding Certificates' obligations.

Settlement Terms for "Self-Reporters" under the Initiative

For eligible Issuer self-reporters, the SEC will recommend settlement through cease-and-desist proceedings that do not require an admission of liability or payment of any financial penalty. Issuers will be required to take remedial actions including:

  • Establishing compliance policies and procedures
  • Complying with prior and existing continuing disclosure obligations
  • Cooperating with subsequent SEC investigations
  • Disclosing the terms of the settlement in its official statement for five years
  • Providing a compliance certificate to the SEC regarding the above actions one year from the date on which the cease-and-desist proceeding is instituted

However, the SEC will recommend tiered financial penalties against underwriter self-reporters. Penalties will range from $20,000 to $500,000, depending on the size and number of offerings reported. Underwriters will be required to take remedial actions including:

  • Retaining an independent consultant to undertake a compliance review and provide recommendations regarding the underwriter's due diligence process and procedures
  • Taking steps to implement the consultant's recommendations
  • Cooperating with subsequent SEC investigations
  • Providing a compliance certificate to the SEC regarding the above actions one year from the date on which the cease-and-desist proceeding is instituted

The SEC has indicated that the remedies it will seek in any future enforcement proceeding will be more severe for eligible issuers and underwriters who fail to self-report through the Initiative.

At this time, we suggest that you review your past disclosures with your EMMA filing agent. If any filings have not been made timely or have not been filed at all, and Official Statements for offerings during the last five years do not accurately reflect these failures, you may want to consider self-reporting under the Initiative to avoid any increased penalties. Another good resource is the July 7, 2014 Alert from the Government Finance Officers Association (GFOA) on the MCDC Initiative, which can be found at: http://www.gfoa.org/gfoa-alert-sec-mcdc-initiative-and-issuers.


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