On June 18, the U.S. Securities and Exchange Commission (SEC) announced enforcement actions against 36 municipal bond underwriters, the first enforcement actions against underwriters brought by the SEC under the Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative), which was announced in March 2014. The SEC brought the enforcement actions based on the underwriters self-reporting potential continuing disclosure-related violations of federal securities law. The MCDC Initiative offers standardized settlement terms to underwriters and issuers who self-report potential securities law violations. The underwriters’ deadline to self-report was September 10, 2014, three months ahead of the issuers’ December 1 deadline.

In each of the administrative orders bringing the enforcement actions, the SEC found that the underwriter had “willfully violated” Section 17(a)(2) of the Securities Act of 1933, a non-scienter-based violation for which negligence is sufficient. Each of the actions focused on two alleged violations: (i) that the offering documents used by the underwriter to sell certain municipal bonds contained materially misleading statements or omissions regarding the bond issuer’s compliance with its continuing disclosure obligations, and (ii) the underwriter failed to conduct adequate due diligence in order to identify such misstatements or omissions.

Whether or not an underwriter performed adequate diligence to identify instances of issuer non-compliance is a relatively straightforward question and is unique to underwriters because issuers are not subject to the same requirement under Rule 15c2-12. The more difficult question, which has led to some criticism of the MCDC Initiative, is whether the misstatements or omissions included in the self-report and settled by the enforcement actions would have been found to be material had the issue been litigated.

In each of the administrative orders, the SEC cited one to three instances of issuer non-compliance that the underwriter had failed to identify and disclose. Although a relatively small sample size, the examples the SEC chose to include:

• Were from offering statements used in offerings from 2010 to 2014;
• Included negotiated and competitive bond offerings where the named underwriter acted as senior or sole underwriter;
• Primarily focused on the failure to file annual financial and operating information without the requisite late notice filings;
• Generally involved multiple late filings or a total failure to file; and
• Included a handful of examples that found a single late filing sufficient for inclusion and, although many of the instances were substantially longer, one was as few as 45 days late.

Notably, the SEC did not cite any examples of a failure to file notices of the listed events required by Rule 15c2-12.

The SEC’s announcement continues its recent efforts to improve the quality of disclosure in the municipal bond market which has been a focal point since the SEC highlighted perceived deficiencies in its 2012 Municipal Market Report. Although a number of municipal bond industry participants have criticized the MCDC Initiative, it has undoubtedly increased attention to compliance with continuing disclosure obligations. The SEC is expected to announce additional enforcement actions in connection with the MCDC Initiative which may be against additional underwriters, issuers or individuals.

For the SEC’s press release which includes a listing of the underwriters and their respective fines and a link to the SEC’s orders, see http://www.sec.gov/news/pressrelease/2015-125.html.