While the SEC’s MCDC initiative concluded in 2016, its shadow continues to lurk over the municipal bond market. For those issuers that have come to market since the SEC issued Cease and Desist Orders (“Orders”), you undoubtedly have experienced increased scrutiny of your material event and continuing disclosure filings. The Orders and MCDC have caused many issuers to reassess their policies, procedures and controls around filing obligations, filing history and disclosure management prospectively. This article will highlight some of what the market has learned from, and since, the MCDC initiative and how issuers have responded.
Background: MCDC Outcomes and Recent SEC Enforcement Actions
As stated by the SEC, the MCDC initiative was “intended to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents.” It resulted in Orders against 72 underwriters (comprising 96% of the market share for underwriting) and 71 issuers that represent a wide variety of types of issuers.
For issuers that settled, they did so without admitting or denying the findings and agreed to cease and desist from future violations. They also agreed to:
“undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC.”
Since then, as evidenced by its Beaumont, California Order, the SEC made good on its promise to focus on market participants that had not voluntarily self-reported under the MCDC initiative. In Beaumont, as the SEC highlighted in its press release, the City of Beaumont, its then-executive director and the underwriting firm behind certain offerings settled charges that Beaumont had made false statements about compliance with continuing disclosure obligations and the underwriter failed to conduct reasonable diligence.
Beaumont contains another factor worth mentioning. Beaumont, like many municipal issuers, used the services of a dissemination agent. The Order highlighted missed and late filings and the failure of the district to properly disclose the same as the basis for the conclusion that the district made “false statements about compliance.” The Executive Director was responsible for reviewing and approving the content of the OS and the accountable parties were Beaumont, its then Executive Director and the underwriter – not the dissemination agent.
While some dissemination agents do a fine job filing on behalf of their clients, the mere fact that a dissemination agent is used does not absolve the issuer from having policies, procedures and practices to ensure obligations are met and, when not met, are properly disclosed. Inasmuch as the dissemination agent is not accountable – at least in the eyes of the SEC -- over-reliance on a dissemination agent, without some level of validation, can be fraught with risk.
For issuers and their officials, the Beaumont Order also introduced new requirements and punishments beyond what was seen in the MCDC Orders for those that voluntarily submitted including:
- Imposition of undertakings that require, amongst other things, the retention of an independent consultant and to follow the recommendations of the consultant.
- An individual being held accountable -- $37,500 fine and barred from participating in any future muni bond offerings (as cited in the SEC Press Release).
Takeaways and Disclosure Management “Best Practices”
As you contemplate your approach to disclosure management, the MCDC Orders and the GFOA’s August 2016 Alert (“GFOA Alert”) provide excellent guidance to consider. Disclosure management policies and procedures should ideally be implemented “yesterday” – in other words, avoid waiting until just before your next deal comes to market.
From the Orders and GFOA:
- Establish policies and procedures and periodic training regarding continuing disclosure obligations (MCDC Orders).
- Know what the issuer/obligated party has promised to do in its continuing disclosure agreement. (GFOA Alert)
- Comply with existing continuing disclosure undertakings, including updating past delinquent filings (MCDC Orders).
- Be aware of what has been posted on EMMA and knowing who is filing what, when and where. (GFOA Alert)
- Recognize that each official statement must include a statement about whether the issuer failed to materially comply with previous commitments within the past five years. (GFOA Alert)
Another consideration that, while not contemplated by the Orders or GFOA Alert, is the use of an independent party to provide an assessment of past and prospective filing obligations. Considering the SEC Beaumont Order, where a filing agent was used, the importance of this practice cannot be overstated. If your filing agent is your check and balance that is akin to the fox guarding the henhouse.
The independent party should:
- Be outside your organization and not part of the firm responsible for filing your material event and continuing disclosure obligations with the MSRB.
- Understand and catalogue all disclosure obligations and the timing associated with each.
- Review your filing history to provide an honest, black and white assessment of those filings against the obligations and the analysis should be done to the issue and individual CUSIP level.
- Focused on providing the results, whatever they may be, and not determining materiality. That determination resides with you and, perhaps, counsel.
This independent party should also be able to partner with you on an ongoing basis to ensure, as both the Orders and the GFOA note, you fully understand your filing obligations, can deliver alerts for when filings are due and, at least annually, provide you that reality check – “did the current year filings comprehensively address my obligations?”
Employing sound and efficient disclosure management policies, procedures and processes will help ensure you are meeting your obligations and make the process of issuing debt going forward simpler. It can also help minimize the risk of an SEC enforcement action. Understanding what is required to be disclosed and having a process to manage those obligations provides market participants comfort that you understand your obligations, understand where you have been and will provide comfort that you have a process in place to manage your disclosure obligations prospectively.