WASHINGTON — City attorneys should be aware of possible conflicts between the issuer they represent and its employees, financial advisors and counsel about whether to self-report that bond documents failed to disclose violations of a continuing disclosure agreement, regulators and lawyers warned Thursday.
The potential conflicts were discussed at the International Municipal Lawyers Association's webinar on the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative, which allows issuers, other borrowers and underwriters to get lenient settlement terms if they voluntarily self-report such disclosure failures to the SEC by Sept. 10.
Market participants have so far mostly focused on conflicts between issuers and underwriters, saying the MCDC creates a "modified prisoner's dilemma" by allowing issuers and underwriters to effectively turn one another in.
Though Peter Chan, an assistant regional director in the SEC's Chicago regional office, said he thinks concerns about such conflicts are overstated. There is only a conflict if the issuer or underwriter is trying to avoid detection of disclosure failures, he said.
But panelists at the webinar said there are also potential conflicts between the issuer or borrower entity and other individuals involved in their muni transactions who are not eligible for the MCDC. The employees of issuers or other borrowers, as well as the financial advisors, bond counsel and other lawyers are not eligible for the MCDC.
Mark Zehner, deputy director of the SEC enforcement division's municipal securities and public pensions unit, told those listening during the webinar that the SEC will deal with individuals involved in disclosure failures after Sept. 10.
As a result, issuer officials, the FA, or counsel partly responsible for the disclosure failures may not want the issuer to self-disclose under the MCDC because, while the issuer will get lenient treatment, these other parties will not. Also,SEC commissioners have warned that, in the enforcement arena in general, they want more individuals held accountable for securities fraud, not just entities.
During the webinar, panelists urged IMLA members to remember that they represent municipal entities, not the officials of those entities. A city attorney may have to urge the municipality to enter into the MCDC program, over the objections of the city finance director who signed a faulty official statement or the FA who wrote it, they said.
The application form that must be filed out for the MCDC asks for the names of primary individual contacts at the self-reporting entity, senior managing underwriter, financial advisor, bond counsel, underwriter's counsel and disclosure counsel.
But Chan cautioned those who played a role in writing or reviewing an official statement that was false or misleading about disclosure failures and are urging issuers to not self-report. One thing the SEC will be looking at with regard to individuals, he said, is their state of mind. He asked: Do you want to be an individual who cooperates and goes along with self-reporting or one who doesn't cooperate and tries to block self-reporting? The SEC will deal harshly with the latter, he suggested.
Both Zehner and Chan urged issuers and underwriters to avoid waiting until the deadline to self-report and Chan said there will be no extension of it, which is really Sept. 9 rather than Sept. 10.
The deadline is 12:01 a.m. Eastern Standard Time on Sept. 10, so issuers actually have to file on Sept. 9.
There are so many things that can go wrong, including computer glitches and the possibility that the SEC could get so many filings, its site would crash, sources pointed out.
Some panelists asked whether issuers or underwriters should be forced to check official statements filed before 2009, when EMMA began accepting them. Some issuers may have a 10-year look-back period for official statements. The SEC's Rule 15c2-12 says issuers' official statements must disclose any failures to comply with the continuing disclosure agreement obligations to file annual financial and operating information by self-imposed deadlines during the past five years.
Zehner and Chan said they hope issuers and underwriters have copies of official statements, but that they can also check DisclosureUSA, the central post office facility that collected OS' before EMMA, or the nationally recognized municipal securities information repositories that also collected them.
Some of the panelists pointed out that issuers only voluntarily filed OS' to DisclosureUSA, which was operated by the Municipal Advisory Council, and that the NRMSIRS were not reliable and sometimes misfiled these documents.
One panelist suggested that if issuers go back through five years of OS' and find no disclosure failures in them, they should not to worry about having to go back further. Chan said that is one approach.
But Zehner and Chan said that if issuers or underwriters can show that they tried to find OS' but were not successful, that would go a long way with the SEC.