WASHINGTON – The Securities and Exchange Commission's settlements with issuers under its continuing disclosure enforcement initiative will not impact specific rating determinations but will be an important component of analyzing an issuer's credit fundamentals, analysts from S&P Global Ratings said in a report on Monday.
The SEC first started contacting issuers who self-reported under the commission's Municipalities Continuing Disclosure Cooperation earlier this year but the commission hasn't released any settlements with them.
The MCDC initiative promised underwriters and issuers lenient settlement terms if they self-reported instances where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.
Altogether, 72 underwriters representing 96% of the underwriting market by volume, paid $18 million to settle violations with the SEC under the initiative. The underwriter settlements were released in three groups, the last one in early February. In addition to forthcoming settlements with issuers, the SEC has said it intends to pursue actions against those issuers or underwriters who had unreported violations as well as potentially individuals.
Geoffrey Buswick, a managing director with S&P and the report's primary author, said the idea for the report began after the Government Finance Officers Association's annual meeting in May where issuers expressed concern about how MCDC might affect their ratings. Jane Ridley, a senior director at S&P, also worked on the report.
"As people are asking us and GFOA is getting concerned [about whether MCDC is] an immediate negative, we just want to say no," Buswick said. He added in the report that S&P doesn't expect the settlements themselves to translate into rating downgrades if the issuers respond to them with proactive approaches to address the disclosure deficiencies.
Additionally, he said that S&P would be viewing the results of the settlements as an anecdotal reference to issuers' management practices.
"There could be some [settlements] that could tell some anecdotal stories that have us reassess our gauge to management, [but] really if that occurs, we will go through the criteria, and the criteria of how we weight management is pretty explicit in regard to local governments," Buswick said.
Unlike underwriters, the SEC's settlements with issuers will not include civil penalty fines. Instead, the focus will be on establishing issuer management practices to guarantee that past violations are remediated and future violations are prevented.
That focus is expected to improve overall disclosure practices and enhance quality and quantity of information available to the market, Buswick and Ridley said in the report. Management's plan to remediate the violations and improve disclosure will be an important component to S&P analysis of an issuer's management team, they added.
