Update on the SEC's MCDC Initiative

Many issuers and other obligors of tax-exempt bonds (Issuers) have asked about the status of the Municipalities Continuing Disclosure Cooperation initiative (MCDC).

Much attention has been directed to the February 2, 2016 announcement from the Securities and Exchange Commission (SEC) that it has completed review and charges against underwriters that self-reported under MCDC. In all, there were settlements with 72 municipal bond underwriters. The SEC reported that the 72 firms comprise about 96 percent of the market share for municipal bond underwritings.

MCDC. MCDC, originally announced in March 2014, offered "favorable" standardized settlement terms to municipal bond underwriters and Issuers that self-reported material misstatements and/or omissions in their municipal bond offering documents regarding prior compliance by the Issuers with their Continuing Disclosure Agreements (CDAs) under SEC Rule 15c2-12.

The underwriters had until September 1, 2014 to self-report; the Issuers had until December 1, 2014 to self-report. MCDC allowed underwriters and Issuers to receive lenient settlement terms if they voluntarily self-reported any instances during the previous five years in which the Issuers had misstated in a bond offering document that they were in compliance with their CDAs and such misstatements were material.

Underwriter settlements. In the MCDC settlements, as provided in the MCDC announcement, the underwriters neither admitted nor denied the findings but agreed to cease and desist from further violations, pay fines, retain independent consultants to review their policies and procedures on due diligence for municipal securities underwriting, cooperate with the SEC if there is any future investigation regarding the misstatements, including the role of individuals and other parties, and provide the SEC with a compliance certificate in one year.

The violations cited in the settlements included not disclosing an Issuer's: (i) failure to file annual audited statements; (iii) late filing of financial information (ii) late filing of annual reports; (iii) failure to file material event notices; and (iv) incomplete filings.

Anticipated Issuer Settlements. Now that the final wave of underwriter settlements with the SEC under the MCDC initiative is over, the SEC has announced that it will start its review of self-reports submitted by Issuers. As stated in the MCDC announcement, settlements with Issuers are expected to include neither admitting nor denying the findings but agreeing to: (i) cease and desist from future violations; (ii) establish policies, procedures and training, regarding continuing disclosure obligations; (iii) comply with existing CDAs; (iv) bring all prior filings up to date; (v) cooperate with SEC if there is any future investigation regarding the misstatements, including the role of individuals and other parties; (vi) disclose the settlement in any final disclosure document for any offering in the next five years; and (vii) provide the SEC with a compliance certificate in one year. No monetary penalties will be imposed on Issuers.

Individual Liability. Self-reporting by an underwriter or Issuer did not protect any individual associated with these entities, such as employees of underwriters or Issuers. The SEC expressly stated that it may seek enforcement against any of these individuals and may seek remedies beyond those available through the MCDC settlement.

Non Self-Reporting Entities. If an underwriter or Issuer did not self-report under MCDC (and should have), the SEC may seek enforcement for violations and is not limited to the remedies and settlement terms provided for those entities that did self-report. For Issuers, the SEC has stated that remedies and settlement terms will likely include financial sanctions.

Response to Contact from SEC. It has been reported that the SEC has begun to reach out to Issuers that have self-reported under MCDC. If a representative from the SEC contacts an Issuer concerning its response to MCDC, or for any other reason, it is very important to consult with counsel or bond counsel before responding. In the meantime, it is important for Issuers to continue to carefully monitor compliance with CDAs. When in the bond market, it is also important that Issuers carefully review the Official Statement to confirm that it is accurate with respect to their continuing disclosure undertakings and otherwise.