The Division of Enforcement (the “Division of Enforcement”) of the United States Securities and Exchange Commission (the “SEC”) announced on March 10th its new Municipalities Continuing Disclosure Cooperation Initiative (the “Initiative”), aimed at addressing perceived widespread violations of federal securities laws by municipal issuers and underwriters of municipal securities in their bond offering documents. Specifically, the Initiative encourages issuers and underwriters to self-report inaccurate statements in final official statements regarding issuers' prior compliance with continuing disclosure obligations.
Under the Initiative, the Division of Enforcement will recommend favorable settlement terms to issuers and underwriters that self-report inaccurate statements in offering documents relating to prior compliance with the continuing disclosure requirements set forth in SEC Rule 15c2-12 (“Rule 15c2-12”).
To be eligible for the standardized settlement terms under the Initiative, issuers and underwriters must report the inaccurate statements by September 10, 2014. A summary of the SEC’s announcement (the “Announcement”) regarding the Initiative is set forth below.
- Continuing Disclosure - Background
Under Rule 15c2-12, underwriters are prohibited from purchasing or selling municipal securities unless the issuer of the securities covenants to provide continuing disclosure regarding the security and the issuer, including information about the issuer’s financial condition and operating data. In connection with this requirement, Rule 15c2-12 mandates that official statements describe these undertakings, along with any instances in the previous five years in which the issuer failed to comply in all material respects with any previous commitment to provide such continuing disclosure. The SEC has the authority to file enforcement actions against issuers for inaccurately stating in final official statements that they have complied with their prior continuing disclosure obligations.
The SEC has further stated that an underwriter’s obligation to have a reasonable basis to believe that the key representations in a final official statement are true and accurate extends to an issuer’s representations concerning past compliance with continuing disclosure obligations.
- The Initiative
Parties Eligible to Self-Report
The following parties to municipal bond offerings are eligible to self-report under the Initiative:
- Issuers who may have made materially inaccurate statements in a final official statement regarding their prior compliance with the continuing disclosure obligations of Rule 15c2-12;
- Underwriters of offerings in which the final official statement contains materially inaccurate statements regarding an issuer’s prior compliance with the continuing disclosure obligations of Rule 15c2-12; and
- Issuers or underwriters that have already been contacted by the SEC regarding possible inaccurate statements as to past compliance with continuing disclosure obligations, but against whom no enforcement action has yet been taken, may also be eligible.
What Must Issuers and Underwriters Self-Report?
To be eligible under the Initiative, an issuer or underwriter must complete a questionnaire (found here) by September 10, 2014. Information required by the questionnaire includes:
- Identification and contact information for the issuer or underwriter;
- Information regarding the municipal securities offerings containing potentially inaccurate statements regarding compliance with past continuing disclosure obligations;
- Identification and primary contact information for the lead underwriter, municipal advisor, bond counsel, underwriter’s counsel and disclosure counsel, if any;
- Any facts the issuer or underwriter would like to provide to assist the SEC staff in understanding the circumstances that may have led to the potentially inaccurate statement(s); and
- A statement that the issuer or underwriter intends to consent to the applicable settlement terms under the Initiative.
Standardized Settlement Terms to be Recommended
If an issuer or underwriter is eligible under the Initiative and the Division of Enforcement elects to recommend enforcement, the recommendation will feature the following terms:
- Cease and Desist Proceeding. For both eligible issuers and eligible underwriters, the Division of Enforcement will recommend that the SEC institute a cease and desist proceeding for violations under Section 17(a)(2) of the Securities Act of 1933. Under the settlement, the issuer or underwriter will neither admit nor deny the findings of the SEC.
- Compliance Undertakings. The settlement will require undertakings by the issuers or underwriters, the nuances of which are slightly different for each.
- Issuers must::
- Establish policies, procedures and training regarding continuing disclosure obligations within 180 days of the institution of the proceedings;
- Comply with existing continuing disclosure undertakings, including updating past inaccurate filings within 180 days of the institution of the proceedings;
- Cooperate with any subsequent SEC investigation regarding the false statements;
- Disclose clearly and conspicuously the settlement terms in final official statements for offerings made within five years of the date of institution of the proceedings; and
- Provide SEC staff with compliance certifications regarding the applicable undertakings of the issuer, one year after the institution of the proceedings
- Underwriters must:
- Retain an independent consultant to conduct a compliance review and provide recommendations to the underwriter regarding the underwriter’s municipal underwriting due diligence process within 180 days;
- Take reasonable steps within 90 days of the independent consultant’s recommendations to adopt such recommendations;
- Cooperate with any subsequent SEC investigation regarding the false statements; and
- Provide SEC staff with compliance certifications regarding the applicable undertakings of the underwriter, one year after the institution of the proceedings.
- Civil Penalties. The SEC will not recommend any civil financial penalties on eligible issuers in connection with the settlement. For eligible underwriters, the SEC will recommend a civil penalty as follows:
- For offerings of $30 million or less, the underwriter will pay a penalty of $20,000 per offering containing a materially false statement;
- For offerings of more than $30 million, the underwriter will pay a penalty of $60,000 per offering containing a materially false statement; and
- The limit on total penalties for an underwriter under the Initiative is $500,000.
- Individual Liability. The Initiative only covers eligible issuers and underwriters. The Announcement states that the Division of Enforcement provides no assurance that individuals associated with the self-reporting entity, such as municipal officials and employees of underwriting firms, will be offered similar terms, and further states that the Division of Enforcement may recommend enforcement action against such individuals and may seek remedies beyond those available through the Initiative. The Announcement states that a determination of potential individual liability involves a case-by-case assessment of the specific facts and circumstances, such as evidence regarding intent and the individual’s cooperation.
- Liability if No Self-Reporting. The Announcement cautions that the SEC could seek increased penalties for violations not self-reported under the Initiative. The Announcement states that for issuers, such penalties would likely include financial sanctions. For underwriters, such penalties would likely be in amounts greater than those available under the Initiative.
The Initiative is the latest example of the SEC’s increased focus on continuing disclosure compliance under Rule 15c2-12 for municipal issuers and underwriters. Issuers should assess their past compliance with continuing disclosure obligations and representations regarding continuing disclosure compliance in final official statements for prior offerings to determine if those final official statements accurately described the issuer’s previous compliance. Underwriters should undertake a similar review and also assess their underwriting due diligence process to ensure they can have a reasonable basis for relying on the accuracy and completeness of an issuer’s ongoing disclosure representations in bond offering documents. With the deadline for self-reporting under the Initiative approaching on September 10, 2014, issuers and underwriters should take care to perform these reviews swiftly. Issuers and underwriters who identify prior misstatements in final official statements should evaluate their options under the Initiative.