You know how every few years libraries will offer an amnesty program and give delinquent borrowers a chance to bring in their old books without prohibitive late fines? The SEC is sort of trying out that approach with its new Municipalities Continuing Disclosure Cooperation (MCDC) Initiative™.
Rule 15c2-12
Some brief background here: Rule 15c2-12 generally prohibits any underwriter from buying or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data. The rule also generally requires that any final official statement prepared in connection with a primary offering of municipal securities contain a description of any instances in the previous five years in which the issuer failed to comply with any previous commitment to provide that continuing disclosure.
The Program
Here’s how the program will work: If municipal bond issuers and underwriters who may have made materially inaccurate statements self-report possible violations involving materially inaccurate statements under Rule 15c2-12, the SEC’s Enforcement Division will recommend favorable settlement terms for those violations. Well, how favorable? They’ll be able to agree to violations of Section 17(a)(2) of the Securities Act, a negligence-based charge. Issuers will also have to agree to a number of undertakings, including:
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establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 days of the institution of the proceedings; and
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comply with existing continuing disclosure undertakings, including updating past delinquent filings within 180 days of the institution of the proceedings.
Underwriters will have to retain an independent consultant to conduct a compliance review and, within 180 days of the institution of proceedings, provide recommendations to the underwriter regarding the underwriter’s municipal underwriting due diligence process and procedures.
Issuers would not have to pay a civil penalty. Underwriters would pay based on how large the offering is, but in no case would they pay more than $500,000. The MCDC Initiative offers no assurances to individuals.
Finally, this offer will not last long! Issuers and underwriters have until midnight on September 9, 2014, to take advantage of this program.
My Take
If issuers or underwriters are sitting on what they know is a huge disclosure issue that they’ve been scared to report – and they’re willing to throw their individual officers to the wolves – the MCDC Initiative could be a great solution. Issuers will escape with a negligence-based charge and no penalty. Underwriters will get the same and only a $500,000 maximum penalty. True, paying for an independent monitor is no fun, but for real problems it could get much worse than that. But if the disclosure issues are negligible or debatable, I’m not sure this program is a magical solution. One would be signing on for sanctions when sanctions might not be appropriate. Of course, you have to consider the possibility that a whistleblower will beat you to the SEC’s door in any event. Ominously, the SEC notes in Section II.E. that it offers “no assurances for entities that do not take advantage of [the] MCDC Initiative.”
Pick your poison.
