United States: The MCDC Initiative: Window Closes On September 10, 2014

As highlighted in the SEC's 2012 Municipal Market Report, the SEC has expressed significant concern that many issuers have not been complying with their obligation to file continuing disclosure documents and that federal securities law violations involving false statements concerning such compliance may be widespread. Increasingly, the SEC also has been taking enforcement actions under either Section 17(a) of the Securities Act of 1933 (the "Securities Act"), and/or Section 10(b) of the Exchange Act against issuers for inaccurately stating in final official statements that they have substantially complied with their prior continuing disclosure obligations.

The SEC's Municipalities Continuing Disclosure Cooperation Initiative (the "MCDC Initiative") is intended to address potentially widespread violations of the federal securities laws by issuers and obligated persons involved in the offer or sale of municipal securities (collectively, "issuers") and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. This Alert is primarily directed at the MCDC Initiative as it pertains to issuers only, but the MCDC Initiative also applies to underwriters.

Under the SEC's Rule 15c2-12, underwriters of municipal securities must obtain an undertaking from an issuer or obligor of the securities that such issuer or obligor will provide certain financial and other information at least annually, as well as notice of certain events promptly after they occur. This information must be filed with the Municipal Securities Rulemaking Board's EMMA website, though prior to 2010 the filings had to be made to four private Nationally Recognized Municipal Securities Information Repositories or NRMSIRs. Each of these continuing disclosure undertakings ("CDUs") contains similar requirements, but practices vary by sector (for example, health care providers often agree to provide unaudited quarterly financial information) and by whether bonds had been issued before or after amendments to Rule 15c2-12 adopted in 2010.

Pursuant to the MCDC Initiative, the SEC's Division of Enforcement (the "Division") may recommend favorable settlement terms to issuers and underwriters of such offerings if they self-report to the Division possible violations involving materially inaccurate statements relating to prior compliance with the continuing disclosure obligations specified in Rule 15c2-12. The window for self-reporting for both issuers and underwriters ends at 12:00 a.m. EST on September 10, 2014.

One aspect of the MCDC Initiative is what the SEC has called a "modified prisoner's dilemma". Although both underwriters and issuers/obligors are subject to this program and to regulation under the securities laws, the MCDC Initiative only caps the monetary penalties that may be assessed to an underwriter. Thus, underwriters may have an incentive to report every potentially material misstatement to forestall any potential action by the SEC. In that case, the SEC may take action against the issuer after the program ends, based upon the underwriter's filing. Although underwriters that self-report under the initiative may reach out to potentially affected issuer clients before filing with the SEC, there is no assurance that they will do so.

For a variety of reasons, including the SEC's often stated views on the manner in which underwriters may comply with Rule 15c2-12, we anticipate that underwriters will take advantage of this self-reporting program and scrutinize an issuer's prior disclosures and possible failures to comply.


Who Should Consider Self-Reporting to the Division?

Issuers that may have made materially inaccurate statements in a final official statement regarding their prior compliance with their CDUs as described in Rule 15c2-12 should consider self-reporting.

Initial Steps to Take to Determine Whether to Self-Report

We recommend that issuers take the following steps to determine whether to opt into the MCDC program:

  • Issuers should first review their Official Statements for the past 10 years to determine what was said about continuing disclosure. Issuers also should note the underwriters of each series of bonds.
  • Issuers next should review their undertakings to determine the scope of their continuing disclosure responsibilities.
  • Issuers then should review the filings actually made. This review should cover both the (1) timely filing of reports and (2) the substance of the reports (making sure the information furnished is that required to be filed); but also (3) the filing of material event notices.
  • If an issuer determines that there is a potentially material misstatement in an Official Statement (for example, the issuer has not described any failure to comply with a continuing disclosure undertaking), then they should consult with counsel to determine, first, if such misstatement was material, and if so, whether to file under the MCDC.

Although the penalties proposed by the SEC under the MCDC Initiative are generally favorable in comparison to the SEC's full range of punitive actions, by participating in the program, issuers must agree to accept a cease and desist order from the SEC and agree to implement certain undertakings. This is a not a matter to be undertaken lightly, but it may offer the best means of resolving a potentially material misstatement by an issuer. We note that issuers may want to coordinate their review with the underwriters of each series of bonds referenced in the first three bullets above. It is likely that the underwriter is reviewing the information noted above as well.

It is prudent for issuers to maintain files with the results of this process in case they are later challenged by the SEC.

When and What Must Issuers and Underwriters Self-Report?

To be eligible for the MCDC Initiative, an issuer or underwriter must self-report by accurately completing the attached questionnaire and submitting it within the six month period beginning March 10, 2014 and ending at 12:00 a.m. EST on September 10, 2014. Note that in many if not most cases, issuers will need to obtain their governing body's approval to participate in this program. Information required by the questionnaire includes:

  • identification and contact information of the self-reporting entity;
  • information regarding the municipal securities offerings containing the potentially inaccurate statements;
  • identities of the lead underwriter, municipal advisor, bond counsel, underwriter's counsel and disclosure counsel, if any, and the primary contact person at each entity, for each such offering;
  • any facts that the self-reporting entity would like to provide to assist the staff in understanding the circumstances that may have led to the potentially inaccurate statement(s); and
  • a statement that the self-reporting entity intends to consent to the applicable settlement terms under the MCDC Initiative.

Standardized Settlement With the SEC

To the extent an entity meets the requirements of the MCDC Initiative and the Division decides to recommend enforcement action against the entity ("eligible issuer" or "eligible underwriter"), the Division will recommend that the SEC accept a settlement, which includes the terms described below. It is important to note that the standardized settlement terms of the MCDC Initiative are only applicable to inaccurate statements concerning compliance with CDUs. The MCDC Initiative and the standardized settlement terms are not applicable to other material misstatements in final official statements or related communications or other misconduct. Any other potential misconduct is subject to investigation and separate enforcement action, if appropriate. If enforcement action is taken, entities may be subject to additional remedies for that misconduct, including additional financial sanctions.

Types of Proceedings and Nature of Charges

For eligible issuers, the Division will recommend that the SEC accept a settlement pursuant to which the issuer consents to the institution of a cease and desist proceeding under Section 8A of the Securities Act for violation(s) of Section 17(a)(2) of the Securities Act. (See http://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.) The Division will recommend a settlement in which the issuer neither admits nor denies the findings of the SEC.


For eligible issuers, the settlement to be recommended by the Division must include undertakings by the issuers. Specifically, as part of the settlement, the issuer must undertake to:

  • establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 days of the institution of the proceedings;
  • comply with existing CDUs, including updating past delinquent filings within 180 days of the institution of the proceedings;
  • cooperate with any subsequent investigation by the Division regarding the false statement(s), including the roles of individuals and/or other parties involved;
  • disclose in a clear and conspicuous fashion the settlement terms in any final official statement for an offering by the issuer within five years of the date of institution of the proceedings; and
  • provide the SEC staff with a compliance certification regarding the applicable undertakings by the issuer on the one year anniversary of the date of institution of the proceedings.

There are separate, additional undertakings for eligible underwriters.

Civil Penalties/Possible Individual Liability

For eligible issuers, the Division will recommend that the SEC accept a settlement in which there is no payment of any civil penalty by the issuer.

For eligible underwriters, the Division will recommend that the SEC accept a settlement in which the underwriter consents to an order requiring payment of a civil penalty. No underwriter will be required to pay more than $500,000 total in civil penalties under the MCDC Initiative.

The MCDC Initiative covers only eligible issuers and underwriters. The Division provides no assurance that individuals associated with those entities, such as municipal officials and employees of underwriting firms, will be offered similar terms if they have engaged in violations of the federal securities laws.


For issuers that would be eligible for the terms of the MCDC Initiative but that do not self-report pursuant to the terms of the MCDC Initiative, the Division offers no assurances that it will recommend the above terms in any subsequent enforcement recommendation. For issuers, the Division will likely recommend and seek financial sanctions and staff have indicated that the penalties assessed by the SEC following the closing of the initiative are likely to be considerably more severe than those offered under the initiative.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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