On August 24, 2016, the SEC announced enforcement actions against 71 issuers related to municipal bond offering documents. The actions were brought under the Municipalities Continuing Disclosure Cooperation Initiative (MCDC), a voluntary self-reporting program that targets material misstatements and omissions in such offerings. Under the initiative, favorable settlement terms are available to parties, such as issuers, underwriters, and other obligated persons, who self-report violations of the federal securities laws.
Practical Consideration: Information from the SEC on the latest charges under the MCMD initiative and links to the individual settlement orders are available by clicking here.
Who Were Charged?
The 71 entities charged sold municipal bonds between 2011 and 2014 using offering documents that included material false statements or omissions about compliance with continuing disclosure obligations. The group facing the SEC’s charges was diverse, including state and local governments, institutions of higher education, healthcare entities, school districts, and housing, water, waste, and transportation authorities. SEC officials noted that this diversity is an indicator of just how pervasive failures to comply with continuing disclosure obligations are and highlights the challenges investors face as a result. This is even more evident when taking into account that from June 2015 through February 2016, the SEC filed actions against 72 municipal underwriting firms, representing approximately 96% of the market share for such firms. The program’s first charges were brought against a school district in California in June 2014, and with these latest charges, a total of 143 actions have been brought against 144 respondents under the MCDC initiative.
Is the Program Working?
While the number of entities to face charges under the program may appear shocking, SEC officials noted that this actually means the MCDC initiative is working as intended. They note that the program has exposed failure to comply with continuing disclosure obligations as a serious concern and has improved overall compliance by municipal issuers and underwriters. Furthermore, because the settlement agreements credit the entities involved for self-reporting and cooperating with investigators and include terms designed to prevent future violations, the initiative benefits the entities’ investors now and in the future.
Each party named in the SEC enforcement actions agreed to a settlement wherein they neither admit nor deny the findings, while agreeing to cease and desist from any further violations. Under the settlement terms, the charged parties have agreed to establish appropriate policies and procedures and implement training programs regarding continuing disclosure obligations. They have also agreed to comply with existing requirements by updating past delinquent filings and disclosing their settlements in future filings. Finally, each party has agreed to cooperate with future SEC investigations as needed.
How Do I Stay in Compliance?
In response to the SEC’s announcement of these latest enforcement actions, the Government Finance Officers Association (GFOA) issued a reminder of several best practice documents they have published on disclosure responsibilities. Each document summarizes certain requirements for municipal securities issuers under SEC Rule 15c2-12 and offers recommendations and factors to consider with regard to policies and practices around continuing disclosure obligations.
Practical Consideration: Links to the GFOA documents “Understanding Your Continuing Disclosure Responsibilities” and “Using the Comprehensive Annual Financial Report to Meet SEC Requirements for Periodic Disclosure” are available for download, free of charge, by click here.