Many of you have asked for an update on the SEC's 2014 Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The MCDC is a self-reporting initiative for underwriters and state and local governmental bond issuers, such as school corporations, targeting misstatements in Official Statements regarding prior compliance with Continuing Disclosure Undertaking Agreements under SEC Rule 15c2-12.
Orders Regarding Underwriters
On September 30, 2015, the SEC announced a second round of
settlements with underwriters of municipal bonds under the
SEC's MCDC Initiative. In this round of settlements, the
SEC announced cease and desist orders for 22 municipal bond
underwriting firms, finding violations of federal securities laws
resulting from material misstatements and omissions in Official
Statements and failures by underwriters to conduct adequate due
diligence regarding past continuing disclosure compliance.
The SEC's press release announcing the enforcement
actions is available here.
The first round of MCDC settlements, involving 36 municipal
underwriters, was announced in June, 2015. The SEC's press
release announcing these enforcement actions is available
here. Another round of
settlements with underwriters is expected, perhaps later in 2015.
The underwriting firms neither admitted nor denied the
findings but agreed to cease and desist from further
violations. Settlements included payment of civil
penalties to the SEC, and the promise to retain independent
consultants to review policies and procedures on due
diligence. It is important to note that these fines and the
resulting settlement orders were exactly what was communicated in
the original announcement of the MCDC.
Anticipated Orders Regarding Issuers
It is expected that further SEC announcements concerning
settlements with self-reporting bond issuers will follow after the
last wave of Underwriter orders. Originally, the SEC believed
that all orders relating to MCDC would be complete by the end of
2015. However, it now appears more likely that they will
continue into 2016. SEC representatives have also indicated
that every issuer who self-reported will, at some point, receive
correspondence from the SEC even if it is just to notify the issuer
that the SEC has decided to take no action.
Representatives from the SEC have indicated that just because an
underwriter has entered into a settlement order for a misstatement
regarding a particular bond issue, it does not necessarily mean
that the SEC will be asking for a settlement from that
issuer. It is believed that many issuers self-reported under
the MCDC in an abundance of caution not necessarily because they
believe misstatements were material. If a school
corporation is contacted by the SEC, remember it is important to
consult with school counsel or bond counsel before
responding.
Of the over 200 bond lawyers who were surveyed by the National
Association of Bond Lawyers, 73% responded that all, most or some
of their issuer and borrower clients self-reported under the
MCDC. Some of the most surprising responses were related to
questions regarding materiality. Roughly 93% of the lawyers
that responded said their clients self-reported some or many
misrepresentations about compliance with continuing disclosure
obligations that were unlikely to be considered material.
According to case law, information is material if an investor
would want to know it before buying or selling securities.
The settlements cover Official Statements for Bonds issued between
2010 and 2014. The SEC's stated goals with MCDC include
the improvement in quality and timeliness of continuing disclosure
filings on EMMA (which stands for Electronic Municipal Market
Access; click here for link) and improvement in
underwriter review of disclosures in Official Statements regarding
prior compliance.
When a School Corporation issues bonds, it is important to
carefully review the Official Statement to make sure that it is
accurate and does not omit any information which would be material
to an investor. Even though the School Corporation may hire
another party, such as a financial advisor, to assemble this
information, the School Corporation is legally responsible for the
content of the Official Statement. In addition, an issuer of
municipal bonds should consider adopting post issuance procedures,
and once adopted, the issuer must make sure that the procedures are
followed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.