The SEC announced today enforcement actions against 71 municipal issuers of bonds in connection with the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. The enforcement actions follow previous announcements from the agency, charging 72 municipal underwriting firms with similar violations discovered through voluntary reporting under MCDC.
The MCDC Initiative was announced by the SEC in 2014 and offered municipal issuers and underwriters the opportunity to receive favorable settlement terms if they voluntarily self-reported that they had made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.
Municipalities swept up in the enforcement action represented 45 states, with four Pennsylvania municipal entities agreeing to settlement orders. Violations reported for which settlement orders were entered include material misstatement of prior compliance with continuing disclosure responsibilities, as well as the failure to disclose prior instances of noncompliance.
The municipal settlements agreed to by the SEC did not include monetary penalties, in contrast to the settlements entered in connection with the charges brought against municipal underwriting firms. Underwriters were required to pay fines, which varied based on the volume of underwriting conducted by the firm and the bond size of the offering, to settle their cases.
The municipal settlements instead focused on ensuring future compliance with municipalities’ continuing disclosure obligations. Per the announcement:
The parties settled the actions without admitting or denying the findings and agreed to cease and desist from future violations. Pursuant to the terms of the initiative, 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.
The SEC noted that, in agreeing to the settlements, it gave credit to the municipalities for their participation in the MCDC Initiative – suggesting that municipalities that did not participate in the MCDC Initiative may not be afforded the same leeway.
While these settlements must be disclosed in the affected issuers’ future offering documents, it seems unlikely that the settlements will have an impact on credit ratings. S&P recently released a report in which it indicated that its expectation was that the settlements would have very limited credit impact. However, S&P did state that the existence of the settlement will be considered in its analysis, as an issuer’s disclosure practices are an important aspect of its ratings methodology.
The SEC did not clarify whether it will pursue enforcement actions against other municipal issuers that participated in MCDC, or whether it is finally ready to close the book on the MCDC Initiative.