The U.S. Securities and Exchange Commission (SEC or Commission) announced enforcement actions against 22 municipal underwriters on September 30, 2015,1 as part of its Municipalities Continuing Disclosure Cooperation Initiative (MCDC).2 This announcement follows on the heels of a similar announcement of enforcement actions against 36 municipal underwriters three months earlier.3

In the actions, the SEC alleged that the underwriting firms had: (i) violated federal securities laws by selling municipal bonds through the use of offering documents containing materially false statements or omissions about the bond issuers’ compliance with their continuing disclosure obligations; and (ii) failed to conduct adequate due diligence relating to the issuers’ compliance with their continuing disclosure obligations, before the underwriters offered the bonds. Respondents in SEC enforcement actions generally neither admit nor deny the SEC’s allegations.

Exchange Act Rule 15c2-12

As background, Section 15B(d)(1) of the Securities Exchange Act of 1934 (Exchange Act) – the so-called “Tower Amendment” – prohibits the SEC and the Municipal Securities Rulemaking Board (MSRB) from directly regulating municipal issuers.4 Rule 15c2-12 under the Exchange Act (Rule) was adopted by the SEC in 1989 as an effort by the SEC to assure that municipal underwriters engage in due diligence efforts with respect to offerings of securities, and that offering documents are made available to investors.5 The Rule has been controversial since its adoption and is widely seen as an indirect effort to avoid limitations of the Tower Amendment – by placing disclosure obligations on underwriters (acting as gatekeepers), rather than the issuers themselves.

The ultimate effect of the Rule, however, has been to foster the creation of a disclosure system for initial offering information about municipal issuers, which is similar to the prospectus delivery requirements of corporate issuers. Moreover, the Rule has been expanded over time to require that underwriters also assure that municipal issuers have committed to provide continuing disclosure information about their financial condition and operating data,6 as well as to generally require that bond offering documents disclose instances during the prior five years in which the issuer failed to comply with such commitment. The electronic repository for municipal disclosure documents is operated by the MSRB, and is an online portal available to the public.7

Further Obligations for Municipal Underwriters and Municipal Issuers

Apart from the Rule, in the proposing release for 15c2-12 the SEC indicated that “[b]y participating in an offering, an underwriter makes an implied recommendation about the securities [that it] ... has a reasonable basis for belief in the truthfulness and completeness of the key representations made in any disclosure documents used in the offerings.”8 The SEC has taken action against municipal underwriters under the antifraud sections of the Exchange Act, for failing to conduct adequate due diligence regarding issuer representations.9 Municipal issuers themselves also may be subject to SEC enforcement action, if they make false or misleading statements in their offering documents. In recent years, the SEC has taken action against issuers under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act, in instances where such issuers inaccurately represented that they had substantially complied with their prior continuing disclosure obligations.10



In an unusual step designed to focus underwriters’ attention on their obligation under the Rule and to assure that issuers met their commitment to provide information to the secondary market, the SEC announced the MCDC in March 2014. Pursuant to the MCDC, both municipal underwriters and issuers were encouraged to “self-report” violations of their due diligence requirements, or misrepresentations in their disclosure documents, respectively. The SEC published forms (Questionnaires) for self-reporting.11 The 58 enforcement actions announced to date, which include a broad cross section of the municipal underwriter community, are a result of this self-reporting initiative.12


For municipal underwriters, penalties were assessed on a per offering basis (minimum penalty of $20,000), based on the size of the offering. However, the maximum penalty (regardless of the size or number of offerings) was capped at $500,000. In addition, the SEC indicated that, among other things, municipal underwriters that settled with the SEC in connection with the MCDC would be required to retain an independent consultant to provide recommendations regarding the underwriter’s due diligence process and procedures.

The SEC indicated that municipal issuers settling in connection with the MCDC would be subject only to cease-and-desist orders, without economic penalties, and might be required to make certain undertakings.


The SEC’s enforcement actions in this area reflect the Commission’s continued focus on the municipal securities market – notwithstanding the Commission’s limited jurisdiction over issuers of municipal securities. In particular, the SEC has exercised its authority over broker-dealers as an indirect means of exerting pressure on municipal issuers to make available certain information to investors. This has come at a cost to the underwriters that have participated in the MCDC, beyond the applicable monetary penalties – these firms face the additional expense of hiring independent consultants, acceptable to the SEC, to review the underwriters’ procedures and assure that they are reasonably designed to comply with the Rule.