Back in the 1970s, SEC Enforcement Director Stanley Sporkin had a problem. He had stumbled onto what looked like a vast number of illicit payments from public companies to people who shouldn’t have been receiving them, including political campaigns, foreign officials, even domestic officials. The SEC started suing these companies, but eventually the number got pretty high, high enough for SEC Chairman Ray Garrett to say, “Hey, could we maybe sue not as many of these companies?” So Sporkin came up with an idea for a voluntary disclosure program (link is external). The idea was the companies would come in and explain payments in these areas and make a disclosure in their public filings so investors would be aware of what they were up to. Doing that would foreclose painful enforcement action and they could go forward knowing that it would be a lot worse the next time it happened.

The SEC has recently tried out a similar, though not identical, approach in the municipal bond space. Here’s a summary (link is external) of how it works and here’s our coverage of the Municipal Continuing Disclosure Cooperation Initiative from 2014. The very brief summary of the summary is: municipal bond issuers can report problematic disclosure issues voluntarily and escape without a financial penalty. Underwriters don’t get quite the same favorable terms, but are capped at a $500,000 penalty.

On August 24th, the SEC sued 71 issuers under this program, ranging from the City of Devils Lake (link is external) in North Dakota to Ohio State University (link is external) to the North Carolina Eastern Municipal Power Agency (link is external), among many others. None of these issuers paid financial penalties. Hooray for them.

But this isn’t the last shoe to drop. Many observers these days don’t think (link is external) this is the last of the SEC’s enforcement activity in the municipal bond market. The window for voluntary disclosure under the MCDC, as they call it, is now closed. And as the SEC promised when it started the program in 2014:

For issuers and underwriters that would be eligible for the terms of the MCDC initiative but that do not self-report pursuant to the terms of the MCDC Initiative, the Division offers no assurances that it will recommend the above terms in any subsequent enforcement recommendation. . . . [E]ntities are cautioned that enforcement actions outside of the MCDC initiative could result in the Division or the Commission seeking remedies beyond those described in the initiative. For issuers, the Division will likely recommend and seek financial sanctions. For underwriters, the Division will likely recommend and seek financial sanctions in amounts greater than those available pursuant to the MCDC Initiative.

In April, the SEC sued (link is external) and the Justice Department indicted (link is external) officials in Ramapo, New York for allegedly hiding a deteriorating financial situation from municipal bond investors. It is not play time. Municipal bond issuers everywhere, and of every size, would do well to become acquainted with Rule 15c2-12 and the obligations it imposes. Because the SEC’s next actions in this area will not likely forego financial penalties. In the worst cases, Ramapo-style indictments could be on the horizon. Be careful out there.