If your organization has participated in a municipal bond or other municipal security financing in the past five years, you should be aware of the Securities and Exchange Commission’s (“SEC”) Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”). The MCDC Initiative applies to underwriters, municipal security issuers and obligated persons benefitting from tax-exempt financings such as non-profit corporations (“Participants”). Participants in a public offering of municipal securities during the time period are strongly encouraged to review and understand the MCDC Initiative and investigate whether their circumstances warrant participation. The SEC has warned that a failure to self-report through the MCDC Initiative may result in increased sanctions for violations, including fraud charges and financial penalties levied against organizations and individuals.
In order to participate voluntarily in the MCDC Initiative, Participants must submit a brief questionnaire to the SEC by 12:00 a.m. EST, September 10, 2014 (i.e., on or before September 9).
MCDC Initiative Background
The MCDC Initiative, announced by the SEC on March 10, 2014, is an effort to increase enforcement of continuing disclosure obligations pursuant to contractual Continuing Disclosure Undertakings (“CDUs”) by issuers of municipal bonds or other municipal securities, or by obligated persons. The SEC encourages Participants to voluntarily report, through the MCDC Initiative, materially inaccurate statements made in offering documents (such as official statements) regarding prior compliance with continuing disclosure obligations, including timely filing requirements and other potential instances of non-compliance, for example, failure to file a material events notice reporting a rating change. In exchange for the self-reporting, the SEC’s Enforcement Division will recommend standard settlement terms, including a cease and desist proceeding described below in “Participation in the MCDC Initiative.” Participants typically find a copy of their respective CDUs in the transcript of proceedings prepared in connection with the issuance of the securities.
On July 8, 2014, the SEC announced its first settlement under the MCDC Initiative with a California school district charged with misleading investors about past continuing disclosure compliance. A 2010 official statement in connection with bonds issued by the Kings Canyon Joint Unified School District (the “District”) stated that the District had complied with past continuing disclosure obligations, when in fact the District had previously failed to submit some disclosures required by the District’s outstanding CDUs. The District settled the charges without admitting or denying the SEC’s findings. Additionally, the District agreed to cease and desist from committing future violations, remedy the instances of non-compliance, establish certain policies and procedures, cooperate with future investigations regarding false statements (including the roles of individuals and/or other parties involved), and disclose the terms of the settlement in future offering documents.
Recommended Steps for Participants
Participants who have issued, underwritten or benefited from publicly offered municipal bonds or other municipal securities since September 10, 2009, should consider taking the following steps:
Review offering documents and other relevant information on all municipal securities offerings within the last five years to determine whether one or more statements were included in official statements or other offering documents about the issuer’s past compliance with CDUs, or whether such statements were omitted.
If one or more such statements were made concerning compliance with relevant CDUs or if statements regarding compliance were omitted, investigate the accuracy of each such statement or omission by reviewing the relevant CDUs and all filings (annual filings and material event filings) made pursuant to those CDUs. It may be advisable to retain a third-party consultant to assist in this investigation, which could involve a review of all filings made under CDUs in the last 10 years.
If items of potential non-compliance are discovered, consult with counsel to assess materiality.
Determine whether to self-report under the MCDC Initiative on or before the effective September 9th deadline, and any steps needed to be taken before self-reporting (e.g., if applicable, obtaining governing body approval).
Additionally, it has been reported in The Bond Buyer that certain issuers intend to contact the underwriters which have underwritten bonds and other securities of the issuer in the last 10 years to inquire whether these underwriters have identified any potentially inaccurate statements or omissions in official statements or other offering documents about compliance with continuing disclosure obligations pursuant to CDUs.
Background on the Rule
SEC Rule 15c2-12 (the “Rule”), promulgated under the Securities Exchange Act of 1934, prohibits an underwriter from purchasing or selling municipal securities without first reasonably determining an issuer’s commitment to providing continuing disclosure materials regarding the municipal securities and the issuer, including annual financial information and material event notices. Additionally, the Rule requires that final official statements detail any material non-compliance with continuing disclosure obligations that has occurred in the five years prior to the offering.
The SEC has expressed interest in ramping up enforcement in response to a perception of “widespread” continuing disclosure violations in the marketplace. According to the SEC’s Report on the Municipal Securities Market dated July 31, 2012, market participants have expressed concern that many issuers fail to comply with continuing disclosure obligations, fail to do so in a timely manner, or provide inadequate or incomplete disclosures. As a result, the SEC hopes that the MCDC Initiative will increase information available to investors in the municipal securities secondary market.
Participation in the MCDC Initiative
In order to participate in the MCDC Initiative, issuers and underwriters must submit a brief Questionnaire for Self-Reporting Entities, via email, fax or mail, by 12:00 a.m. EST, September 10, 2014.
If the applicant makes a timely application and is eligible to participate in the MCDC Initiative, and the Enforcement Division decides to recommend action against the Participant, the Enforcement Division will recommend certain standard settlement terms to which the Participant must agree. These settlement terms include agreeing to the entry of a cease and desist order by the SEC against the Participant, as well as agreeing to certain undertakings in the future, including the adoption of continuing disclosure policies and compliance with existing continuing disclosure undertakings. Participants in the MCDC Initiative are not required to admit or deny violating federal securities laws, and the Enforcement Division of the SEC will recommend no civil penalties for issuers and reduced civil penalties for underwriters. The MCDC Initiative applies only to Participants, though, and does not apply to individuals or others that may be involved in municipal securities offerings. For an example of such a cease and desist order and settlement, see the SEC’s Order entered in the Kings Canyon Joint Unified School District matter described above.