SEC Enforcement Division Encourages Self-Reporting by Municipal Securities Issuers and Underwriters

Yesterday, the Securities and Exchange Commission’s (SEC) Enforcement Division introduced an initiative to encourage self-reporting by municipal securities issuers and underwriters of possible securities law violations related to misrepresentations in offering documents concerning an issuer’s prior compliance with its continuing disclosure obligations.

Under the Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative), the Enforcement Division will recommend “favorable settlement terms” upon self-reporting of such possible violations. The clock for this voluntary self-reporting started yesterday and ends at midnight EST on September 10, 2014.

Before 2013, despite reports of widespread issuer noncompliance with at least some continuing disclosure obligations, the SEC had not brought a related enforcement action against an issuer or emphasized SEC Rule 15c2-12 in its enforcement actions against underwriters. In July 2013, the SEC set a groundbreaking precedent by undertaking enforcement actions against Indiana’s West Clark Community Schools and the school district's underwriter. These actions were based on statements in offering documents that the school district was compliant with its previous continuing disclosure agreement.

The school district had, in fact, not submitted any of the required annual financials or event notices. The SEC alleged that the underwriter’s due diligence efforts were inadequate as it failed to discover that the school district was not compliant with its prior continuing disclosure obligations. Neither the school district nor its underwriter challenged the SEC’s findings, and the actions were settled through cease-and-desist orders.

The MCDC Initiative encourages issuers that may have made materially inaccurate statements in offering documents regarding their prior continuing disclosure compliance, and the underwriters of such offerings, to self-report 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.

For eligible self-reporters, the Enforcement Division will recommend settlement through cease-and-desist proceedings that do not require an admission of liability. The Enforcement Division will recommend not levying a financial penalty against issuers. 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

The Enforcement Division will recommend tiered financial penalties against underwriters, however. These 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

Individuals may not self-report through the MCDC Initiative. The SEC’s Enforcement Division will determine whether municipal officials and underwriting firm employees should be the subject of an SEC enforcement action on a case-by-case basis, considering such factors as the individual’s level of intent and cooperation with the SEC.

The Enforcement Division indicates that the remedies it seeks will be more severe for eligible issuers and underwriters who fail to self-report through the MCDC Initiative. The Division states that it will likely recommend financial penalties for such non-reporting issuers and financial penalties higher than those set forth in the MCDC Initiative for such non-reporting underwriters.

Issuers and/or underwriters who believe that their primary market disclosure regarding past continuing disclosure compliance may be inaccurate should consider seeking counsel to consider taking advantage of the new MCDC Initiative.

Topics:  Municipal Securities Market, Municipalities, SEC, Self-Reporting

Published In: Administrative Agency Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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