The Securities and Exchange Commission recently brought its first case under the “Municipalities Continuing Disclosure Cooperation Initiative” (MCDC or MCDC Initiative). Kings Canyon Joint Unified School District (Kings Canyon), a California school district in the California counties of Fresno and Tulane, was the subject of the SEC’s initial MCDC case. Under the terms of the settlement, Kings County agreed to certain undertakings, including establishing appropriate written policies and procedures and providing periodic training regarding continuing disclosure obligations to ensure compliance with the applicable federal securities laws, fully complying with any existing disclosure obligations, and updating any past delinquent filings if the issuer is not in compliance with continuing disclosure obligations. (SEC Release)
SEC Rule 15c2-2, which was created to improve the quality and timeliness of disclosures in municipal securities, requires an underwriter to obtain a written agreement from the issuer to annually submit certain financial information. Moreover, to apprise investors of the scope of any ongoing disclosure obligations, Rule 15c2-2 requires that any undertakings pursuant to Rule 15c2-2 be described in the final Official Statement (OS).
Kings Canyon failed to comply with the requirements of SEC Rule 15c2-2, and thereby also violated Section 17(a) of the Securities Act in connection with a municipal securities offering in 2010. Kings County had previously conducted offerings in 2006 and 2007, pursuant to which it executed contractual agreements to make continuing disclosures (“Continuing Disclosure Certificates”), under Rule 15c2-2. The Continuing Disclosure Certificates required Kings Canyon to annually provide certain financial information, provide timely notice of certain specified events of the municipal securities at issue, and to submit notices in the event that it was unable to provide the contractually required annual reports. Kings Canyon failed to submit certain required financial data with respect to the 2006 and 2007 offerings.
In 2010, Kings Canyon conducted another offering. The OS for the 2010 offering inaccurately stated that Kings Canyon had “had no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation under [SEC Rule 15c2-2].” In fact, that representation was an untrue statement of material fact, because Kings Canyon had failed to provide all of the required information with respect to the 2006 and 2007 offerings.
As stated in the MCDC Initiative release, firms have until September 10, 2014 to avail themselves of any benefits from the Initiative. (MCDC release) We expect the SEC to continue to release settlements under the MCDC initiative through and including that date.
A prior Alert on the MCDC Initiative can be obtained here. (MCDC Initiative)