MINNEAPOLIS — Securities and Exchange Commission attorney Peter Chan defended the commission's Municipalities Continuing Disclosure Cooperation initiative on Wednesday, telling issuer officials not to succumb to fear or confusion about the MCDC one day after the leader of a dealer group blasted the program.
Chan, an assistant regional director at the SEC's Chicago regional office, appeared at the Government Finance Officers Association's annual conference here to speak to an issuer community that has been largely nervous about the MCDC since it was announced in March.
Chan pushed back directly against recent criticisms the program has received from the issuer and dealer communities, but also moved to dash the hopes of market participants who want it changed.t. Chan's appearance followed a scathing criticism of the initiative dished out to GFOA members on Tuesday by Securities Industry and Financial Markets Association president and chief executive officer Kenneth Bentsen.
"There's been a lot of confusion," Chan said of the program, which was the subject of intensely anxious discussions at the GFOA's debt committee meeting before the conference officially began. The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report, by Sept. 10, any time they offered bonds without disclosing failures to either file annual and operating information or otherwise comply with their continuing disclosure obligations. Under a provision of the SEC's Rule 15c2-12 on disclosure, an official statement must disclose anytime within the last five years that the issuer failed to meet its self-imposed annual financial and operating information filing requirement.
"What we're really serious about is stopping people from lying," Chan said, clarifying for issuers that the program only applies to false certifications in bond offering documents and not for any failure to disclose in the absence of offering bonds. "We're not doing that," Chan said. "We're not bringing cases if you miss a filing. We're bringing cases against people who are lying."
DC Water & Sewer Authority chief financial officer Mark Kim, a member of the debt committee who moderated the panel Chan appeared on, took issue with Chan's choice of words.
"Lying is kind of a loaded term," he said. "It suggests intentionality."
Chan said he has heard a range of defenses from attorneys representing issuers, saying that they simply were not aware of what they were certifying when they signed off on an official statement. There has been some discussion among market participants that smaller issuers are especially prone to such problems. But Chan said he rejects the idea that infrequent or small issuers are incapable of complying with federal securities laws. He suggested issuers think about how such statements might be received by investors.
"Tell the investing public, 'By the way, when we certify the accuracy of the OS, we actually have no idea what's in it,'" Chan said.
The SEC is not likely to either extend the life of the program or issue guidance on what the commission would consider a "material" misstatement for the purpose of the MCDC, Chan said. Both GFOA and SIFMA have suggested the deadline for the initiative be extended, but Chan said he has received word that will not happen. Daniel Deaton, a partner in Nixon Peabody's Los Angeles office, pointed out that the deadline is effectively Sept. 9 because it is midnight eastern standard time Sept. 10.
Chan said the MCDC was never meant to regulate through "fear and anxiety," the term used by debt committee chairman and Florida bond finance director Ben Watkins a few days earlier. It was meant to be a reasonable way to address a real problem, and participants can expect fairness if they come forward, he said. GFOA has issued guidance urging issuers to consider participating if they feel they have a real potential material failure, but not to over report every deal they've done.
"We want to be fair," Chan said. "We want to be reasonable. Don't expect us to be kind or gentle."
The session was the last of the GFOA conference. The group's next annual meeting will be next year in Philadelphia.
