The Securities and Exchange Commission recently announced a self-reporting initiative available to issuers, obligated persons and underwriters involved in the sale of municipal securities. Under what is being called the Municipalities Continuing Disclosure Cooperation Initiative (Self-Reporting Initiative), issuers, obligated persons and underwriters have until September 10, 2014,to self-report any instances in which a final official statement (final OS) contained material inaccuracies regarding the prior compliance of the issuer or obligated person with any continuing disclosure undertakings specified in Rule 15c2-12 of the Securities Exchange Act of 1934 (Exchange Act).
The SEC’s Enforcement Division created the Self-Reporting Initiative as part of the SEC’s increasing focus on disclosure within the municipal securities markets. The SEC may file enforcement actions under the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 or Section 10(b) of the Exchange Act for both inaccurate statements by issuers in the final OS regarding prior continuing disclosure obligations and failures by underwriters to exercise adequate due diligence in determining issuer compliance.
For example, in July 2013, the SEC charged an Indiana school district and its underwriter in connection with false statements in the final OS of a $31 million bond issue. (In the Matter of West Clark Community Schools, AP File No. 3-15391 (July 29, 2013); In the Matter of City Securities Corporation and Randy G. Ruhl, AP File No. 3-15390 (July 29, 2013).) The SEC brought the charges because the school district had not filed its annual financial information related to prior bond issues, yet the final OS included a statement that the school district had complied with all of its prior continuing disclosure undertakings. Under the terms of their respective settlements, the school district and the underwriter each entered into a cease-and-desist order and the underwriters paid disgorgement, prejudgment interest and penalties of approximately $600,000.
The Enforcement Division will recommend the following standardized settlement terms to the SEC for anyone that meets the requirements of the Self-Reporting Initiative:
- Eligible issuers and obligated persons enter into a cease-and-desist order, with no admission of guilt and no monetary penalty.
- Eligible underwriters enter into a cease-and-desist order, with no admission of guilt and payment of a penalty of (i) $20,000 per offering of up to $30 million; and (ii) $60,000 per offering of more than $30 million (but no underwriter will be required to pay more than $500,000 in total civil penalties).
- Eligible issuers must undertake certain remedial actions, including (i) establishing appropriate compliance policies and procedures regarding continuing disclosure obligations; (ii) updating past delinquent filings; (iii) cooperating with any subsequent investigation by the Enforcement Division regarding false statements, including the roles of individuals and/or other parties involved; and (iv) disclosing the settlement in future official statements for five years.
- Eligible underwriters must undertake certain remedial actions, including (i) obtaining an independent consultant acceptable to the SEC staff to conduct a compliance review and provide recommendations concerning an underwriter’s due diligence process; (ii) taking reasonable steps to enact the recommendations of the consultant; (iii) cooperating with any subsequent investigation by the Enforcement Division regarding false statements, including the roles of individuals and/or other parties involved; and (iv) providing compliance certifications to the SEC staff.
It is important to note that the Self-Reporting Initiative does not apply to individuals, such as municipal officials and employees of underwriting firms, if they have been personally involved in federal securities law violations. Whether the SEC staff will recommend enforcement action against individuals will be determined on a case-by-case basis, and will include an assessment regarding the level of intent and other factors such as cooperation.
To make a report, an issuer, obligated person or underwriter must complete the questionnaire prepared by the SEC before September 10, 2014. The SEC staff has indicated that, if it undertakes an enforcement action on the staff’s own initiative without any self-reporting, the standard settlement terms may not be available to that party and the SEC staff may seek remedies beyond those available under the Self-Reporting Initiative.