In June, we distributed a summary of the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation Initiative (the "MCDC Initiative"). The MCDC Initiative provides issuers and underwriters the opportunity to self-report instances of material misstatements or omissions in bond offering documents regarding the issuer's prior compliance with its continuing disclosure obligations. The deadline for self-reporting under the MCDC Initiative is midnight September 9, 2014. A good description of the MCDC Initiative and guidance for local governments can be found in a GFOA Alert posted on July 7.
What Should Local Governments Do?
- Identify each official statement for bonds or notes sold since September 10, 2009.
- Detail the local government's compliance with its continuing disclosure obligations (annual reports and material event notices) during the five years preceding each official statement.
- Determine whether each official statement accurately describes any continuing disclosure lapses in the five-year period preceding that official statement.
- Determine whether any inaccurate or omitted descriptions are "material."
- Determine whether the underwriter of the bonds plans to report any inaccuracies to the SEC.
- Consider whether to report any inaccuracies to the SEC, either because they are material or because the underwriter intends to report them.
Importance of Understanding What Your Underwriters Plan to Do
Underwriters are undertaking this same analysis for each of their underwritten bond issues for both competitive and negotiated sales. Under the terms of the MCDC Initiative, underwriters will incur fines of $20,000 to $60,000 per occurrence, with a total fine cap of $500,000. We understand that many larger underwriters anticipate paying the maximum fine of $500,000. If they do, these underwriters will then be incentivized to report any official statement that contains any misstatement at all – regardless of materiality.
In short – your underwriter may be planning to report one or more of your official statements for misstatements or omissions, regardless of materiality. If your underwriter is planning to report one of your official statements, you should seriously evaluate the risks of not self-reporting the official statement. In light of the foregoing, we strongly recommend that you contact the underwriters of your bond issues from the last five years and determine whether any of them intend to report any of those bond issues under the MCDC Initiative.
Consider Obtaining Approval of Your Governing Body
As described in the GFOA Alert, participating in the MCDC Initiative is a significant decision that likely should be approved by your Governing Body. In order to be prepared to self-report a bond issue under the MCDC Initiative, if necessary, we recommend that your Governing Body adopt a resolution authorizing participation in the MCDC Initiative well before the reporting deadline. We have attached a sample explanation and resolution that you can present to your Governing Body. The resolution does not require self-reporting but authorizes your local government to self-report if local government officials conclude that it is the right course of action.