On March 10, the Securities and Exchange Commission’s (SEC) Division of Enforcement announced its Municipal Continuing Disclosure Cooperation Initiative. The Initiative offers issuers and underwriters an opportunity to voluntarily self-report any potential material misstatements or omissions related to past compliance with continuing disclosure obligations in exchange for standardized settlement terms which are expected to be more favorable than settlement terms for violations that are not self-reported. The SEC recently extended until December 1, 2014, the deadline for self-reporting by issuers. For underwriters, the self-reporting deadline remains September 10, 2014. As the underwriters’ deadline approaches, you may be contacted by an underwriter communicating a preliminary decision on whether or not to include your offerings in its self-report.
Although municipal securities are exempt from the registration requirements of federal securities laws, offerings of municipal securities are subject to the antifraud provisions of federal securities laws. In its announcement of the Initiative, the SEC refers to enforcement actions under Section 17(a)(2) of the Securities Act of 1933. To maintain an enforcement action under Section 17(a)(2), the SEC must establish that the misrepresentations or omissions were material and were negligently made. A finding of fraudulent intent or recklessness is not required.
The SEC’s statements and positions taken in the enforcement actions reported to date indicate that the SEC believes that statements regarding continuing disclosure compliance are material. In the first settlement agreement under the Initiative, the SEC asserted that “[t]here is a substantial likelihood that a reasonable investor determining whether to purchase the Issuer’s municipal securities would attach importance to the Issuer’s failure to comply with its prior continuing disclosure undertakings.”
If an issuer decides to self-report under the Initiative, it must agree to the following settlement terms:
- Consent to a cease and desist proceeding under Section 8A of the Securities Act for violations of Section 17(a)(2) of the Securities Act (the issuer will neither admit nor deny wrongdoing);
- Undertake to:
- Establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 days;
- Comply with existing continuing disclosure undertakings within 180 days;
- Cooperate with any subsequent investigation by the SEC regarding the false statement(s), including roles of individuals and/or other parties involved (notably the settlement only applies to the issuer, and the SEC may still bring actions against individuals);
- Disclose settlement terms in any offering statement for the next five years; and
- Certify compliance with the settlement undertakings one year from the date of settlement;
- No payment of any civil penalty.
The Initiative is a new program. It is uncertain how broad the SEC’s enforcement actions will be and which issuers, obligors or underwriters it may bring actions against that do not self-report. Some considerations that may affect the SEC’s decision to bring an enforcement action against a particular issuer include: (i) whether there was a significant pattern of non-compliance, (ii) the importance of the information to be provided, (iii) the extent to which the information was otherwise publicly available, (iv) the reason for any non-compliance, (v) the length of any delayed filing, (vi) when the non-compliance occurred and whether the issuer been fully compliant in more recent years, and (vii) whether the issuer has policies and procedures in place to prevent future non-compliance.
Even if you are not contacted by an underwriter regarding a decision to include your filings in any self-report, the recent attention to this issue makes this a good time to conduct a self-audit of past filings to determine whether there are any violations to consider reporting. The deadline extension for issuers is an opportunity to self-report now if you have not already considered it. Going forward, all issuers should have written policies and procedures in place to ensure strict compliance with continuing disclosure obligations.
The SEC’s release is available at http://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.