Lessons from the SEC's First Wave of MCDC Settlements

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On June 18, 2015, the SEC announced settlements with 36 municipal securities underwriters that had voluntarily self-reported potential securities law violations pursuant to the Municipalities Continuing Disclosure Cooperation initiative (MCDC).  The 36 underwriters represented a cross-section of the industry, although weighted toward the largest firms. Each settled order cited between one and three anonymous examples of improper disclosure by an issuer or obligor.  Most examples covered the failure by one issuer in one official statement (OS) to properly disclose its failure to comply with a prior continuing disclosure undertaking (CDU), but some cited more than one OS per issuer. Thus, the "universe" of examples totaled over 100 prior transactions.

Over 90% of the transactions were negotiated, and the remaining ones were competitive.  In all cases, the underwriter was the sole or senior manager of the transaction. All of the underlying OS's cited were issued between 2010 and 2014.

In most examples, the SEC indicated that the OS's contained false or misleading statements about prior compliance.  However, about 10% of the examples involved only omissions in which there were no statements in the OS's regarding prior compliance.   

Almost every example of a misstatement or omission in an OS involved a case where the issuer or obligor had either failed entirely, or been late, in filing required annual (or in a few cases, quarterly) financial reports, audited financial statements, operating data, or other required financial information.

  • Approximately half of the examples involved failures to make a required filing, in many cases for multiple years.
  • Lateness of filings cited in the examples ran the gamut from a few weeks to more than a year. There were approximately 16 instances of filings made 30-90 days late; 16 filings 91-180 days late; 9 filings 181-270 days late; 11 filings 270-365 days late; and 19 filings more than one year late. (There were many cases with both late and missing filings.)
  • Only two cases cited filings less than 30 days late — once 14 days and once 16 days — but each of these issuers also had in other years made much later filings or completely failed to make filings. The shortest example with a one-time lateness was 45 days.   Most examples cited multiple instances of late or failed filings.

One order included an example in which an obligor stated that its prior failures had been remedied, but failed to disclose that the remedial filings were made in 2011 on a former NRMSIR rather than on EMMA. 

Significantly, none of the orders included any specific references to failures by issuers to disclose noncompliance with the filing of material event notices.

Going forward, there will be at least one more wave of settlements with underwriters.  Then the SEC. will seek MCDC settlements with issuers. It remains to be seen whether the SEC will use parameters for the issuer settlements that are similar to those it appears to be using for the underwriter settlements or whether they will vary. We will also have to see when or if the SEC will bring actions against any individuals and what it may do with respect to underwriters or issuers that did not self-report under MCDC.

Despite indicating sympathy with the problem, the SEC did not give a "pass" to underwriters based on the difficulty of finding out data from the old NRMSIRs.   There were 31 underlying examples involving OSs from 2010 or 2011, which would have had to rely on NRMSIR data for most of the 5-year lookback. Also, there were many examples from 2013 and 2014, after the SEC had issued its 2012 risk alert

We don't have any firm notion of what the SEC feels the "de minimis" period of lateness can be without having to make a disclosure in a future OS. The number of "data points" for short lateness periods was too few to be taken as real guidance. Future cases may provide more "data points" on this question.

We also did not learn how much the SEC may give any more favorable consideration to a one-time failure of compliance (these were very rare in the examples), or if it took place closer to four or five years before the new transaction.  Another open MCDC issue is whether any cases will be brought based on failures relating to the filing of material event notices. 

Finally, because of the anonymity of the examples, we do not know if there are patterns to the noncompliance, such as by region or state, or type or size of issuer. What percent of the whole market was represented by noncompliant issuers?  Given the tens of thousands of governmental issuers and obligors who access the municipal market, even a very small percentage will translate to a large actual number, which now shows up through MCDC.

Elaine Greenberg is a partner and Robert Feyer senior counsel at Orrick, Herrington & Sutcliffe LLP

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