MCDC Orders May Signal Issuers Coming Soon Under MCDC

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WASHINGTON –The Securities and Exchange Commission's release of a final round of 14 underwriter settlements under its self-reporting initiative on Tuesday included the first cited failure of an issuer to file a material event notice and means the SEC may soon begin with issuer settlements under the initiative, lawyers said.

The Municipalities Continuing Disclosure Cooperation initiative has so far involved 72 underwriting firms and resulted in total fines of about $18 million.

MCDC, first announced in March 2014, allows underwriters and issuers to receive lenient settlement terms if they voluntarily self-report any instances during the past five years in which the issuers falsely claimed in official statements that they were in compliance with their self-imposed continuing disclosure agreements and the underwriters were negligent in failing to discover the misstatements.

The SEC said in its release accompanying Tuesday's settlements that the initiative is continuing with a focus now on issuers that self-reported. While lawyers did not have a specific time frame for the issuer settlements to begin, several who declined to be named said the SEC has started reaching out to issuers that self-reported, signaling settlements could be coming soon.

Elaine Greenberg, a partner with Orrick, Herrington and Sutcliffe and former chief of the SEC enforcement division's municipal securities and public pensions unit, said it will be important to see if the SEC changes its parameters for determining violations under MCDC as it switches to issuers from underwriters.

While many of the underwriter settlements in Tuesday's final round showed similar characteristics to those in the previous two rounds, which the SEC made public in September and June, the one issuer's failure to file a material event notice and several other examples, like issuers who only partially filed required information, could better point toward what the SEC deems material, Greenberg said.

The mention of a failure to file a material event notice came in the SEC's settlement with Jefferies LLC, where the issuer's failure involved notices of the advance refunding and associated redemptions of certain bonds in a 2011 negotiated securities offering and a 2013 competitive securities offering.

However, the failure to file material event notices was lumped into the same bullet point in the order as other actionable items like the issuer's failure to file notices of late filings and the late disclosure of two audited financial reports associated with the same offerings. The SEC has made clear that only the sum of a bullet point should be considered material and not necessarily each individual violation mentioned.

"It is still not clear on a stand-alone basis whether the SEC would have pursued an enforcement action or would have listed [the failure] as an example if there weren't other failures by the particular issuer that were cited in that bullet point," Greenberg said.

In another change from past orders, the SEC's settlement with KeyBanc Capital Markets Inc. said that an issuer had disclosed certain "technical noncompliance," but had failed to file one audited financial report, filed another audited financial report late, and failed to file notices of those late filings.

Greenberg said the use of the term "technical noncompliance" may provide a clue about the SEC's view on materiality.

"I doubt that the SEC is going to elaborate further on what it means by technical non-compliance, but if it does, if it articulates what items it views to be technical in nature, then one may be able to draw the conclusion that technical equates to nonmaterial," she said.

The question of materiality has been an issue for many lawyers since MCDC was announced and the SEC has not given information about what it deems material aside from the examples it has listed in its settlements.

Glenn Weinstein, a partner at Pugh, Jones & Johnson in Chicago and vice-chair of the National Association of Bond Lawyers Securities Law and Disclosure Committee, said the SEC's vagueness on materiality could be "precisely because they are undecided themselves."

"I know they have gotten a wealth of material but even so, they may want to have a little more time to think about it and see in the context of the marketplace what sort of feedback they are getting as to what they really think is material," he said.

Firms that failed to discover the issuers' and obligors' misstatements were assessed civil penalties under MCDC according to the number and size of the issuers' problematic offerings that went unreported, up to a cap based on the firm's size. The maximum possible penalty under the MCDC initiative is $500,000, a fine five firms reached in Tuesday's round of settlements. One firm had fines of $500,000 in September's round of settlements and ten reached that number in the June round.

Tuesday's round also had one firm that was ordered to pay the smallest fine of $20,000, Mitsubishi UFJ Securities Inc., which underwrote bonds in a 2012 negotiated securities offering where an issuer failed to disclose it filed two years of audited financial statements between 50 and 80 days late.

Greenberg said the Mitsubishi settlement "demonstrated the SEC is quite aggressive" in pursuing the enforcement actions given the small violation when compared to the other firms cited in the round.

Bond Dealers of America chief executive officer Mike Nicholas said BDA is pleased the MCDC initiative, which "took almost $16 million out of the pockets of main street firms and merely $2.5 million out of the pockets of Wall Street banks," is over for reporting underwriters.

"The fact is that this initiative upended the municipal market for two years, causing both issuers and underwriters to spend countless hours complying with the initiative at a time of unprecedented regulatory challenges for smaller and medium sized broker-dealers," he said.

Leslie Norwood, a Securities Industry and Financial Markets Association managing director and co-head of munis for SIFMA, said regulators and industry members "can now focus on ways to improve the disclosure paradigm" and that SIFMA believes "that when nearly 100 percent of a regulated community self-reports and settles with the SEC with respect to a particular enforcement issue, the problem may be more with underlying rules and practices than with nearly every participating underwriter in the industry."

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