What GFOA Members Need to Know About MCDC Settlement Process

WASHINGTON — The Government Finance Officers Association has issued an alert urging members to be ready for conversations with their counsel and quick turnarounds of settlements under the Securities and Exchange Commission's program to voluntarily self-report continuing disclosure violations.

"The SEC is requesting an extraordinarily short turn-around for the settlement (5-10 days) but have indicated they will extend the settlement offer [timeline] if the issuer requests" it, the group said in the alert.

The SEC's Municipalities Continuing Disclosure Cooperation (MCDC) initiative, first announced in March 2014, allows underwriters and issuers to receive lenient settlement terms if they self-report any instances during the past five years that issuers falsely claimed in official statements that they were in compliance with their self-imposed continuing disclosure agreements.

The SEC completed three rounds of settlements with a total of 72 underwriters that make up 96% of the market share for muni underwritings. They paid a total of $18 million for selling muni bonds using offering documents that stated issuers had filed timely disclosure in compliance with their continuing disclosure obligations, when they had not.

It is still unclear when the SEC will release settlements with issuers, and whether those settlements will come out in several batches, similar to the underwriter settlements.

GFOA made clear that its alert is only meant as an educational document and should not be taken as legal advice.

"GFOA recommends state and local governments participating in the MCDC initiative become familiar with the standard terms that are expected to be in the offered settlements [as well as] … seek legal advice prior to finalizing or signing the proposed SEC settlement agreement and fully understand the consequences of the proposed settlement."

Issuers will not have to pay penalties, but they can expect settlement agreements to require, among other things, that issuers: establish appropriate policies and procedures and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings; and disclose their settlement terms in a clear way in any final official statement for an offering within five years of the settlement, according to GFOA.

The issuer group also told its members to carefully review and verify all of the facts that the SEC is alleging in the settlement documents. Additionally, it reminded issuers that the settlement terms only apply to the issuer and not the issuer's staff or elected officials.

"Individuals involved in the alleged securities law violations may want to engage their own legal counsel to protect them individually," GFOA said in the alert.

The SEC has said it may pursue individuals after it has concluded the MCDC process.

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