The SEC municipalities continuing disclosure cooperation initiative: guidance on participation and implications.

• Author: McDonald, Dustin
• Position: Federal Focus - Securities and Exchange Commission

The information contained in this article was developed by the GFOA to educate members about the SEC's Municipalities Continuing Disclosure Cooperation Initiative and should not be construed as legal advice.

On March 10, 2014,the Securities and Exchange Commission's Enforcement Division announced its Municipalities Continuing Disclosure Cooperation Initiative, which will give issuers and underwriters the opportunity to self-report instances of material misstatements in bond offering documents regarding the issuer's prior compliance with its continuing disclosure obligations. The deadline for self-reporting is September 10, 2014. While the SEC is encouraging issuers and underwriters to participate by offering predetermined and more lenient settlement terms, the GFOA is urging members to exercise caution and familiarize themselves with the details of the initiative before participating in this program. For example, though the terms of the initiative preclude the SEC from imposing monetary fines on participating issuers, the SEC reserves the right to pursue separate enforcements against individuals within a government if it decides they are culpable for the misstatements. Additional information on individual liability and standardized settlement terms under the initiative are discussed later in this article.

BACKGROUND

SEC Rule 15c2-12 prohibits an underwriter from purchasing or selling municipal securities unless an issuer has committed to annually providing financial information and operating data specified in a written continuing disclosure agreement. The rule also requires underwriters to obtain and review a "final official statement" that discloses whenever the issuer has failed to file information required by the continuing disclosure agreement during the past five years. While the rule only applies to underwriters, and the 1975 Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC from directly regulating issuers, the SEC has demonstrated through recent enforcement actions that making false statements about compliance with continuing disclosure obligations in official statements will be construed as securities law violations under Section 17(a) of the Securities Act of 1933 and/ or Section 10(b) of the Exchange Act. Because of the typical five-year statute of limitations for securities law violations, the Municipalities Continuing Disclosure Cooperation Initiative covers bond transactions dating back to September 2009. However, since final official statements must disclose compliance failures for the previous five years, the scope of the initiative actually looks back to 2004.

In response to the initiative, the underwriter community is actively conducting internal compliance investigations by reviewing the official statements for all bonds underwritten over the last five years, along with the associated continuing disclosure filing data, to confirm whether the official statements for this period accurately described the issuer's prior compliance with continuing disclosure undertakings. The initiative provides incentives for underwriters to participate by capping all instances of material misstatements contained in an underwriters Municipalities Continuing Disclosure Cooperation report at $500,000. As a result, many underwriters have indicated that they intend to participate in the initiative in...