The Securities and Exchange Commission released a statement on July 31, 2014, modifying certain aspects of its Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”). The MCDC Initiative provides an opportunity for municipal bond issuers, borrowers and underwriters to correct misstatements in offering documents regarding an issuer or borrower’s compliance with its continuing disclosure obligations. The SEC extended the reporting deadline for issuers and obligated persons to December 1, 2014. The SEC also indicated that it will consider good faith efforts to discover continuing disclosure violations that occurred prior to the time when the Electronic Municipal Market Access system was instituted in 2009 in any enforcement action instituted after the expiration of the MCDC Initiative. Finally, though the SEC kept the deadline for underwriters to self-report at September 10, 2014, the SEC did lower civil penalties applicable to certain underwriters using a scale based on the underwriter’s 2013 annual revenue.
In the first quarter of 2014, the Securities and Exchange Commission (“SEC”) announced a voluntary self-reporting program that permits municipal bond issuers, obligated persons (such as 501(c)(3) borrowers of municipal bonds) and underwriters to report to the SEC any instances in which misstatements have been made in final official statements regarding compliance with continuing disclosure obligations. The Municipalities Continuing Disclosure Initiative (the “MCDC Initiative”) allows issuers or obligated persons (referred to collectively hereinafter as “issuers”) who have made materially inaccurate statements in an official statement in the past five years regarding their prior compliance with their continuing disclosure obligations to enter into favorable settlement terms with the SEC. A summary of the MCDC Initiative can be found here.
In response to concerns raised by many industry groups, including the Government Finance Officers Association and the National Association of Bond Lawyers, the SEC has agreed to extend the self-reporting deadline for issuers to December 1, 2014. The deadline for underwriters to self-report under the MCDC Initiative remains at September 10, 2014. Additionally, market participants have expressed difficulties in confirming continuing disclosure filings prior to 2009 when the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”) became operational. Prior to EMMA, continuing disclosure filings were made with nationally recognized municipal securities information repositories, some of which are no longer operational. The SEC indicated that it recognizes that parties may not be able to identify certain violations in the pre-EMMA period despite their good faith efforts. The SEC stated that if violations are identified after the expiration of the MCDC Initiative, the SEC will consider reasonable, good faith and documented efforts to identify pre-EMMA violations in deciding whether to recommend enforcement actions and in determining relief.
Finally, though the SEC kept the self-reporting deadline for underwriters at September 10, 2014, the SEC implemented a tiered approach to civil penalties for underwriters that take part in the MCDC Initiative, based upon the reported total annual revenue of the underwriter in 2013.
If you have participated in a publicly offered municipal bond issuance in the past five years, you should review the official statement(s) for those issuances to determine if the description of your prior compliance with continuing disclosure undertakings was materially accurate. If not, you should consider, along with your counsel, whether participation in the MCDC Initiative presents your organization with an opportunity to settle the past securities law violation on favorable terms. Materially inaccurate statements in offering documents for bonds issued more than five years ago are outside the scope of the MCDC Initiative, as a five year statute of limitations applies to SEC enforcement actions seeking financial penalties, running from the time the alleged violation occurs.
Issuers and underwriters who do not self-report materially inaccurate statements face the risk of remedies beyond those described in the MCDC Initiative if faced with an SEC enforcement action. For issuers, the SEC had indicated it will likely recommend and seek financial penalties. For underwriters, the SEC has indicated it will likely recommend and seek financial sanctions in amounts greater than those available pursuant to the MCDC Initiative. While it is expected that an underwriter or issuer would contact its counterparty prior to reporting a violation involving the sale of the issuer’s securities, notification is not required, and there exists the possibility that only one party will participate in the MCDC Initiative, in the process alerting the SEC to a potential violation by the other party and exposing the other party to more significant penalties.