PHOENIX – Though the Municipalities Continuing Disclosure Cooperation Initiative has been praised by regulators for bringing increased attention to continuing disclosure, it also has raised questions and led to inconsistent disclosure language by state and local governments, lawyers during a webinar said on Wednesday.

The webinar on SEC enforcement hosted by The Bond Buyer.

The initiative, launched in March 2014, promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years when issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. It led to SEC settlements with 72 underwriters representing 96% of the underwriting market and 72 issuers It also brought intense scrutiny over what issuers were saying in offering documents about their past compliance with their disclosure obligations.

SEC's LeeAnn Gaunt
SEC's LeeAnn Gaunt

The SEC said late last year it didn’t expect to bring any more actions under the initiative.

But the MCDC has also raised numerous questions from market participants and led to some potentially confusing behavioral changes.

Alison Radecki, a partner in Orrick, Herrington & Sutcliffe’s public finance group who participated in the webinar, said that offering documents in the aftermath of the MCDC have sometimes lacked consistent standards and, at times, clarity. While some issuers are taking a minimalist approach to avoid the pitfall of making a misstatement, others are exhaustively disclosing failures that investors might not consider material.

“We’ve seen folks just take the laundry list approach,” Radecki said. She added that she thought there had been a positive result from the MCDC as well.

Market participants have repeatedly asked the SEC to be more specific about what disclosure failures it considers material, or serious enough to warrant an enforcement action. But the SEC has repeatedly declined to do so, preferring instead to use enforcement actions to provide guidance.

When asked by webinar participants to comment on the issues raised by Radecki, SEC muni enforcement chief LeeAnn Gaunt responded that the commission lacks authority to standardize issuer offering documents, and so uses enforcement cases to try to prevent investors from being misled or under-informed.

“If investors aren’t getting what they’re promised, we consider that a problem,” said Gaunt, chief of the SEC enforcement division's municipal securities and public pensions unit.

Gaunt again declined to tackle the materiality issue, saying the enforcement actions speak for themselves. The SEC has historically refrained from doing so, instead relying on a Supreme Court decision in TSC Industries, Inc. v. Northway, Inc. that a fact is material if there is a substantial likelihood that a reasonable investor would consider it important.

“I think it is very fair to say that enforcement actions do provide guidance on materiality,” she said, adding that muni enforcement cases going forward will likely carry noticeably stricter settlements than the MCDC cases so that the market can see that there was a benefit to participation. Her unit will remain focused on offering and disclosure fraud, she said.

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