On June 18, 2015, the Securities and Exchange Commission ("SEC") announced the first enforcement actions brought under the Municipalities Continuing Disclosure Cooperative ("MCDC") Initiative. The actions involved 36 underwriting firms, each of which self-reported under the MCDC Initiative. The enforcement actions allege that the firms violated federal securities laws by (1) selling municipal bonds using offering documents that contained materially false statements or omissions about the issuers' prior compliance with continuing disclosure obligations and (2) failing to conduct adequate due diligence to identify the misstatements and omissions. Under the SEC Orders, the firms must pay penalties ranging from $40,000 to $500,000 and abide by certain other conditions set forth in the MCDC Initiative. The SEC's press release regarding the orders can be found at: https://www.sec.gov/news/pressrelease/2015-125.html. For more information on the MCDC Initiative, please click here.
The SEC's orders regarding each firm contain representative examples of the statements or omissions in the offering documents that the SEC determined to be materially false or misleading. As such, the orders provide some guidance to issuers of municipal bonds regarding the types of statements and omissions that the SEC may consider material when it commences enforcement actions against municipal issuers, which actions are expected later this year. A summary of the representative examples, compiled from all 36 orders, is set forth below. In reviewing the examples, municipal issuers should remember that the predicate for the MCDC Initiative and the SEC's related enforcement actions is not the failure to file or the late filing in itself, but rather the failure to disclose the missed or late filing(s) in subsequent offering document(s).
Summary of Representative Examples:
- Over a dozen examples are based on failures to disclose both late filings and missed filings. One of these examples includes an annual financial statement that was filed as little as 14 days late; however, the SEC found that this same offering also failed to disclose a missed annual financial statement and two others that were up to 94 days late. Thus, it is unclear whether the SEC would have considered a filing that was late by 14 days, without additional failures, to have been material.
- Approximately 35 examples are based on a failure to disclose late filings. The late filings range from as little as 34 days to as much as 1,517 days late, and include audited financial statements, annual reports, quarterly reports and other financial and operating data.
- Approximately 40 examples are based on a failure to disclose missed filings. The missed filings range from one missed annual financial report in the prior year to five years of missed reports. The types of missed filings include failures to file annual reports, audited financial statements and other operating and financial data, as well as instances of partial filings, such as where an issuer filed audited financial statements but did not file other required annual information.
- Several examples demonstrate that filings that are not made on EMMA, as required, or that are made in one place on EMMA but not cross-referenced for bondholders of other issues, will not be considered sufficient disclosure:
- In one instance, an obligor disclosed that it had previously failed to consistently comply with prior undertakings and stated that the prior failures had been remedied, but failed to disclose that the purported remedial filings, which had been made shortly before the offering, were filed with a former nationally recognized municipal securities information repository, not on EMMA as required.
- In several other instances, missed or late information was noted to have been included in other official statements. However, because those official statements had not been cross-referenced within EMMA for existing bondholders of other issues, the SEC found that the missed or late filings should have been disclosed.
- The examples make clear that a statement of current compliance, when prior compliance failures existed within the last five years, is not sufficient, regardless of whether the prior compliance failures have been corrected. For instance, in three offerings, an issuer stated that it was in compliance with existing continuing disclosure undertakings but failed to disclose that, shortly before the first of the three offerings, it had filed three annual financial reports between one and three years late.
- The examples include disclosure failures not only by issuers but also by other obligated persons. Therefore, it is important for issuers to consider the prior compliance history of all parties undertaking continuing disclosure obligations when making compliance statements in a current offering.
- In each example, in addition to the underlying late or missed filings, the SEC cited the issuer's or other obligated person's failure to file a late notice for such filings as a continuing disclosure compliance failure that should have been disclosed in subsequent offering statements.
- All of the examples contained in the SEC's orders are based on information that underwriters self-reported under the MCDC Initiative. Issuers should not view these examples as a comprehensive list of disclosure failures that the SEC could consider material.
Any municipal issuers or other obligated persons contacted by the SEC in connection with the MCDC Initiative or in any other matter should contact competent legal counsel before entering into discussions with the SEC. Any municipal issuers that prepare an offering prospectus in connection with a debt offering should undertake due diligence in reviewing their continuing disclosure compliance and disclose any instances in the previous five years in which the issuer (and any other obligated persons) materially failed to comply with its continuing disclosure obligations regardless of whether such failures were subsequently remedied or previously disclosed elsewhere.