CONTINUING FOCUS ON CONTINUING DISCLOSURE – The SEC’s Municipalities Continuing Disclosure Cooperation Initiative

by Christopher B. Langhart on April 10, 2014

Recently the Securities and Exchange Commission (SEC) announced the implementation of the Municipalities Continuing Disclosure Cooperation Initiative (MCDCI), a program enacted to “address potentially widespread violations of the federal securities laws by municipal issuers and underwriters”—specifically, the continuing disclosure requirements required of them by SEC Rule 15c2-12.

The MCDCI allows both municipal issuers and underwriters to self-report possible violations involving materially inaccurate statements in an Official Statement that had addressed prior compliance with an issuer’s continuing disclosure requirements.  Issuers and underwriters who wish to participate must self-report by September 10 of this year.  Self-reporting is done by completing the SEC questionnaire and emailing it to [email protected], or by faxing or mailing the questionnaire to the SEC.

New Jersey issuers, as part of their continuing disclosure requirements, typically contract to provide annual financial information consisting of audits, adopted budgets, and certain economic, demographic, and statistical information within 180 to 270 days after the end of an issuer’s fiscal year.  Underwriters are under an obligation to reasonably determine that an issuer has been in compliance with its prior continuing disclosure requirements for the past five years.  The advent of the Electronic Municipal Marketplace Access website (EMMA) has made it easier for investors, issuers, underwriters, and regulators to review and verify the materials submitted by an issuer as part of its continuing disclosure requirements—and has made it easier to identify omissions and misstatements relating to an issuer’s continuing disclosure requirements.

So, if an issuer has stated in a final Official Statement that it has been in compliance with all required disclosure undertakings for the past five years, when in fact the issuer is not in compliance, the issuer must now seriously weigh self-reporting this non-compliance to the SEC against known, standardized settlement terms for such violation.  The issuer must also consider that if it does not self-report such violation, the underwriter might.  Therefore, communication between issuers and underwriters would be desirable to avoid one party’s self-reporting a violation and the other party’s not doing so.  In such an instance, the non-reporting party runs a significant risk of incurring more severe penalties for failing to report the disclosure violation, which is now presumably known to the SEC.

Issuers who participate are subject to non-monetary penalties and will be obligated to implement policies and procedures to ensure compliance with current and future continuing disclosure requirements.  Underwriters are subject to financial penalties and implementation of similar policies and procedures, as set forth in the SEC press release.  However, self-reporting continuing disclosure violations through the MCDCI is intended to provide more favorable settlement terms to issuers and underwriters than if such violations were to be discovered independently by the SEC.  The SEC has also indicated that it will seek increased penalties and sanctions against issuers and underwriters who do not participate in the MCDCI and are found to be non-compliant with continuing disclosure requirements.

The MCDCI is the latest in an ever increasing list of actions taken by the SEC to more stringently enforce the continuing disclosure requirements of municipal issuers and underwriters.  Such actions include assessing penalties against municipal issuers, imposing fines against underwriters, and requiring the implementation of policies and procedures by issuers to ensure compliance with current and future continuing disclosure requirements.

The municipal community is still analyzing the import of the MCDCI and its implications.  However, it is clear that municipal issuers and underwriters need to closely examine their own municipal issuances to determine what, if any, action needs to be taken to comply with both past statements and current practices relating to their individual continuing disclose requirements, and to determine whether any violations of continuing disclosure requirements exist and should be reported to the SEC.

In upcoming posts, we’ll look at the cases that have led the SEC to implement the MCDCI and the practices that an issuer can implement to ensure continuing disclosure compliance.

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