Continuing Disclosure Misstatements – A Window Of Opportunity Before The SEC Comes Knocking

by Varnum LLP

The Division of Enforcement (the “Division”) of the U.S. Securities and Exchange Commission recently announced the Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”). The MCDC Initiative provides favorable settlement terms for issuers and obligated persons (collectively, “issuers”) and underwriters that self-report violations of materially inaccurate statements in offering documents relating to an issuer’s compliance with continuing disclosure obligations under Rule 15c2-12 of the Securities Exchange Act of 1934.

Background: Continuing Disclosure Obligations
Rule 15c2-12 requires an underwriter to obtain the commitment of an issuer to provide continuing disclosure regarding the municipal security and the issuer. To satisfy Rule 15c2-12, the underwriter usually has the issuer execute a continuing disclosure agreement in which the issuer agrees to provide operating and financial information on an annual basis and notices of certain specified events within 10 business days of the occurrence of such events. Rule 15c2-12 also requires the final official statement for a primary offering of a municipal security to disclose any failure of an issuer to materially comply with its continuing disclosures obligations within the prior five years. 

What the MCDC Initiative Covers
The MCDC Initiative focuses on the disclosure of an issuer’s compliance with its continuing disclosures obligations and addresses the securities violations that arise from materially inaccurate statements in offering documents relating to such compliance. It does not resolve violations arising from the failure itself or other materially inaccurate statements in offering documents. For example, a school district with a fiscal year end of June (the “District”), executed a continuing disclosure agreement for bonds issued in May 2009. The District issued bonds again in 2011. In the final official statement for the 2011 bonds, the District stated that it had complied with all of its continuing disclosure obligations within the last five years and could increase its enrollment to 450 students. In truth, the District never filed the 2009 and 2010 annual reports and could only increase enrollment to 360 students. The MCDC Initiative will settle the securities violations arising from the false statement relating to its compliance with continuing disclosure obligations. It will not resolve violations arising from the District’s actual failure to file its annual report for 2009 and 2010. Nor will it resolve any securities violations arising from the false statement relating to enrollment.

Who Is Eligible?
The MCDC Initiative is limited to issuers and underwriters. It does not cover municipal officers or officers, directors or employees of underwriters who ultimately may be responsible for the material misstatements. The Division will evaluate each instance on a case-by-case basis in determining whether to recommend enforcement against the responsible individuals. Factors that the Division will consider are level of intent and cooperation of the individual.

The Process
An issuer or underwriter taking advantage of the MCDC Initiative will enter into a settlement agreement with the Division which will include certain undertakings by the issuer or underwriter and a cease and desist order. The undertakings will include obligations to 1) correct the underlying failures (in the example above, the District will need to file its 2009 and 2010 annual reports), 2) implement procedures and training to avoid future violations, 3) provide a compliance certificate on the one-year anniversary of the settlement, and 4) in the case of underwriters, to hire an independent consultant. The cease and desist order will be based on negligence and not on intentional fraud. The Division will in turn recommend no civil penalties for an issuer and reduced civil penalties for an underwriter, and the settlement agreement will include a provision citing no admission of liability.

Act Now! The Window Will Close
The MCDC Initiative runs through September 9, 2014. The Division has made it clear through publications and interviews that the settlement provided by the MCDC Initiative is the best offer issuers and underwriters that have made materially inaccurate statements regarding continuing disclosure will receive. The Division has also publicly announced that it will increase enforcement efforts after the MCDC Initiative concludes. If there is an issue, it is best to address it through the MCDC Initiative, but before doing so, make sure you consult with legal counsel who knows and understands these issues.


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.

© Varnum LLP | Attorney Advertising

Written by:

Varnum LLP

Varnum LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.