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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions