Yesterday, the Securities and Exchange Commission (SEC) announced its first cease and desist order under its Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative). The MCDC Initiative was introduced on March 10, 2014, 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.
Without providing detailed analysis, the SEC found that the Kings Canyon Joint Unified School District of California (District) made a material misstatement in a 2010 official statement. The SEC alleged that the District represented that it had not failed to comply in all material respects with its continuing disclosure agreements in the previous five years. According to the SEC, the District failed to provide “some” of the disclosure between 2008 and 2009 required by continuing disclosure agreements. The SEC did not provide further detail about the nature of the District’s noncompliance, and largely appears to have assumed that the fact of the District's noncompliance was material to investors.
The SEC's action is significant in a second respect. It is widely known that, at the time of some of the District's noncompliance, investors had limited access to continuing disclosure before the SEC designated the Electronic Municipal Market Access (EMMA) system as the sole, official repository for continuing disclosure, effective July 1, 2009. In its adopting release approving EMMA, the SEC stated: “Specifically, we believe that municipal securities disclosure documents should be made more readily and more promptly available to the public and that all investors should have better access to important market information.” Although the expectations of a “reasonable” investor regarding continuing disclosure have changed substantially post-EMMA, the SEC’s order does not draw a pre- versus post-EMMA line to determine the materiality of a misstatement.
The deadline for MCDC self-reporting ends at midnight ET on September 10, 2014. Participants in the municipal market should review their compliance with secondary market disclosure undertakings over the past decade and ascertain if they accurately reported such compliance in all primary offerings in the past five years. If any noncompliance is found, issuers and underwriters should consult with counsel to determine the potential repercussions of self-reporting or not self-reporting.