SEC’s First Action Under the Municipalities Continuing Disclosure Cooperation Initiative

by Dorsey & Whitney LLP
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The SEC settled its first action under the Municipalities Continuing Disclosure Cooperation Initiative, launched on March 10, 2014. Under the Initiative the Enforcement Division agreed to recommend settlement on favorable, standardized terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The initiative is due to expire on September 10, 2014.

The settled proceeding involved the Kings Canyon Joint Unified School District in Fresno and Tulane Counties, California. In the Matter of Kings Canyon Joint Unified School District, Adm. Proc. File No. 3-15966 (July 8, 2014).

In 2006 and 2007 the District made two securities offerings. The first was in December 2006, involving $19 million of municipal bonds. The second was in December of the next year when the District issued $6.7 million of certificates of participation.

Under Rule 15c2-12 the District executed Continuing Disclosure Certificates. Those obligated the District to annually submit reports containing certain financial information and operating data to the appropriate national and state repositories. They also require timely notices of certain events and include an obligation to provide notice in the event the information is not furnished. The District also reviewed the Official Statements for the Municipal Offerings which includes a summary description of the provisions of the Continuing Disclosure Certificates.

Between 2008 and 2010 the District failed to submit some of the disclosures required by the Continuing Disclosure Certificates. Subsequently, in November 2010 the District issued $6.8 million in municipal bonds. The Official Statement for the 2010 Offering, reviewed by the District, represented that over the last five years it had complied in all material respects with its continuing disclosure obligations. In fact it had not.

The Order alleges violations of Securities Act Section 17(a)(2). In addition, Rule 15c2-12, adopted in an effort to improve disclosures for municipal securities investors, requires an underwriter to obtain a written agreement in which the issuer undertakes to annually submit certain financial information.

Here the District agreed to settle the proceeding. In entering into the settlement the District agreed to certain undertakings. Those include an obligation to establish appropriate written policies and procedures and provide periodic training regarding the Rule 15c2-12 disclosures. The District also agreed to update any delinquent filings and certify compliance with these terms.

The District also consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2). It was also ordered to comply with its undertakings.

 

 

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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