LOS ANGELES — The Securities and Exchange Commission's voluntary self-disclosure initiative continues to spark questions.
Questions of how the Municipalities Continuing Disclosure Cooperation Initiative will be interpreted and applied abounded during a California Debt and Investment Advisory Commission webinar Monday.
The SEC is offering amnesty to issuers and underwriters of municipal bonds that voluntarily disclose potential disclosure filing missteps by Sept. 10 of continuing disclosure obligations under rule 15c2-12.
The SEC's initiative is targeting disclosure filings going back five years, but there is some confusion, according to webinar presenters, about which five years should be reviewed.
"Many questions have arisen for issuers as to how far to go back in determining whether self-reporting to the SEC is even needed," according to Scott Ferguson, a shareholder with Jones Hall.
"It is a judgment call as to whether it is a five-year look back from today, or September," Ferguson said. "Then you have to look at disclosures reported five years prior to offering documents - so it's really a 10-year look back on compliance."
Some issuers have been in front of the curve, so those on top of disclosure filings maybe don't need to go into the forensic reviews that have been common lately, said Kevin Civale, a shareholder with Stradling Yocca Carlson & Rath.
Infrequent issuers have a simpler process in evaluating than an issuer who is in the market all the time, Ferguson said.
"I think what everyone needs to keep in mind is that the focus should not be on whether an issuer has been compliant, but whether a materially inaccurate statement has been made in disclosure filings over the past five years," Ferguson said.
The SEC does not have direct jurisdiction over municipalities, the MCDC Initiative is rooted in general anti-fraud statutes that govern what is in a preliminary offering statement and what is in an offering statement, he said.
"Clearly, if no bonds have been issued in the last five years, you would not have to do anything," said Elaine Greenberg, a partner with Orrick, Herrington & Sutcliffe.
The SEC’s focus would be to look at material misstatements contained in official statements, said Greenberg, who, formerly worked as head of the SEC enforcement division’s municipal securities and public pensions unit.
"If you didn't issue bonds, there would not be any relevant documents the SEC would be looking at," Greenberg said.
In any case, Greenberg said, now is "a good time to look back and see if you have been meeting your disclosure obligations and whether you should consider correcting [your disclosure methods], even if the SEC would not have an issue against you because you haven't been issuing bonds over the past five years."
Speakers also discussed what constitutes a "material misstatement."
Ferguson defined materiality as anything that might discourage an investor from investing; or any information they would need to make a decision about whether to invest or not.
Greenberg advised creating a ladder of what would be considered the most serious material lapses, to lapses that would not be considered to be as significant.
For instance, failing to file an annual report would be considered a serious lapse while missing a few CUSIPs during the height of the financial crisis would be of lesser significance.
"You can come up with logical buckets of materiality by going around the spectrum and seeing what you are left with," she said.
At that point, she said, market participants would have a better idea of whether they have something they should self-report or not.
A big issue for issuers and underwriters is that the initiative has put the two in a bit of an adversary situation.
While an underwriter that has worked on thousands of issues might decide to just go ahead and self-report on every issue they have worked on it might not necessarily be advantageous to an issuer to do so, according to speakers.
"Both the issuer and the underwriter have potential liability," Greenberg said. "And, you can obtain settlement agreements if both self-report within the deadline."
The underwriter has "more incentive to be inclusive, because the penalty amount has been capped at $500,000," Greenberg said. "Once you reach the cap, it doesn't matter how many additional deals you include in the self-report because you have already reached the maximum penalty."
She advised issuers and underwriters to communicate with each other as soon as possible. But speakers advised issuers that they should first consult their disclosure counsel about doing a risk assessment before they speak to the underwriter.
Although it isn't specifically laid out, there also could be liability for individuals who hold positions at municipalities who could be liable for a determination of reckless or intentional misstatement are found by the SEC. Speakers advised that issuers might want to consider in such situations if the individual should hire a separate attorney to represent themselves.
CDIAC plans to make a transcript of the comprehensive webinar, and the earlier one held on April 28, available on its website.
