SEC Initiative Encourages Continuing Disclosure Violation Self-Reporting by Issuers and Underwriters
HIGHLIGHTS:
- The Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative) begun by the SEC's Enforcement Division encourages issuers, borrowers or underwriters to self-disclose potential securities violations in exchange for favorable settlement terms.
- Those who wish to self-report must submit a completed SEC questionnaire by midnight on September 10, 2014.
On March 10, 2014, the U.S. Securities and Exchange Commission's Enforcement Division announced a new initiative to encourage municipal issuers or beneficiary parties (such as conduit borrowers) and underwriters to self-report potential securities law violations relating to misstatements or omissions in offering documents of an issuer's or borrower's past noncompliance with existing continuing disclosure obligations.
Under the Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative), issuers, borrowers or underwriters who self-disclose violations pursuant to the MCDC Initiative will receive favorable settlement terms from the SEC.
Background
With certain exceptions, SEC Rule 15c2-12 (the Rule) prohibits an underwriter from purchasing publicly offered tax-exempt obligations from issuers unless the issuer or other "obligated persons" (such as conduit borrowers) have agreed in writing to provide ongoing annual information relating to the issuer and the security for the related obligations, including annual financial information and the occurrence of certain listed events. As a result, unless an exemption applies, underwriters of tax-exempt obligations will require that an issuer or obligated person enter into a written agreement to provide such information on an annual basis, commonly referred to as a continuing disclosure agreement (a CDA). Under the Rule, an official statement used in connection with the marketing and sale of the obligations is not deemed final unless the issuer or other obligated person discloses whether or not the issuer or other obligated person has failed to materially comply with any of its CDAs in the previous five years.
The SEC created the MCDC Initiative after finding that many official statements erroneously have reported that the issuer or other obligated person has been in compliance with its obligations under CDAs during the past five years. According to the SEC, such an erroneous statement in an official statement may be a violation of the anti-fraud provisions of federal securities laws for the issuer or other obligated person, and a violation of the Rule for an underwriter that did not conduct adequate due diligence regarding compliance with CDAs.
MCDC Initiative Self-Reporting and Settlement Process
If an issuer, obligated person or underwriter determines that a materially inaccurate statement has been made in an offering document relating to compliance with a CDA, the issuer, obligated person or underwriter is encouraged to self-report the violation by completing and submitting a questionnaire prepared by the SEC no later than midnight on September 10, 2014. The SEC Enforcement Division stated in its release that it will recommend settlement through cease and desist proceedings that do not require an admission of liability. The SEC will not levy a financial penalty against any self-reporting issuers or obligated persons. Those entities and individuals will be required to take remedial actions, however, including:
- establishing compliance policies and procedures
- complying with prior and existing CDAs
- cooperating with any subsequent SEC investigations
- disclosing the terms of such settlement in any offering document for the next five years
- providing a compliance certificate to the SEC regarding the above actions one year from the date on which the cease and desist proceeding is instituted
The SEC questionnaire will require that an issuer disclose all professionals involved in the offering, including the underwriter, financial advisor, bond counsel, underwriter's counsel and disclosure counsel, if any. Underwriters who self-report will enter into a similar cease and desist proceeding that does not require an admission of liability but will be subject to financial penalties.
The SEC Enforcement Division will not provide assurances that issuers, obligated persons or underwriters who do not self-report through the MCDC Initiative by the September 10, 2014 deadline will receive similar settlement terms as described above. For issuers, the SEC says it will likely recommend financial penalties for certain violations that it discovers after the September 10, 2014 deadline. For underwriters, the SEC says such financial penalties will likely be increased.