WASHINGTON — An issuer has publicly disclosed its agreement to participate in the Municipalities Continuing Disclosure Cooperation initiative, a decision several bond lawyers said could be a major misstep.
The Berwick Area School District, located near Wilkes-Barre, Pa., posted its completed MCDC questionnaire on EMMA Monday. The questionnaire is the document issuers and underwriters use to self-report to the Securities and Exchange Commission instances in which they sold or underwrote bonds during the past five years with offering documents that were not truthful about the history of the issuer's continuing disclosure compliance.
The program offers lenient settlement terms to entities that self-report rather than allowing SEC investigators to find misconduct themselves.
The deadline for underwriters to self-report incidences of noncompliance passed in September, and the SEC has said many firms participated. The deadline for issuers is Dec. 1, and SEC officials have said that the commission will then have to comb through the submissions and decide which might warrant a cease and desist settlement order and which might not be as serious.
The document posted by the school district this week detailed a deficient official statement for two series of 2010 general obligation bonds totaling more than $10.3 million.
The SEC's Rule 15c2-12 requires an underwriter to contract to receive a final official statement, which is defined to include a description of any instances in the previous five years in which the issuer or borrower failed to meet their self-imposed deadlines for filings annual financial information and also notices of material events. Issuers typically include language in the OS stating either that they have been in compliance, or listing instances of late or missing filings. Falsely claiming to be in compliance or saying nothing when there have been failures can land both the issuer and the underwriter in hot water with the SEC and bondholders.
The OS "did not include a statement concerning the school district's compliance with previous continuing disclosure obligations," the district said in the questionnaire posted to EMMA. "Upon review, the school district failed to file timely its annual financial statements and failed to file its operating data information required by its continuing disclosure undertakings with EMMA and the predecessor repositories in a timely manner."
The district also failed to disclose rating changes on previous bond issuances. It has now tried to remedy the situation by making numerous disclosures this month. District business administrator Christina Bason, who signed the questionnaire, said the district was alerted by the underwriter for the bonds, PNC Capital Markets, which said it might report that issuance on its own MCDC submission. Bason said the district touched base with its bond counsel, Brian Koscelansky of Stevens & Lee in Wilkes-Barre, and decided to make its MCDC questionnaire public in the interest of full disclosure. She said she knew she had a Dec. 1 deadline and wanted to act promptly.
"We believed that this was in the best interest of the district," she said.
Koscelansky said he has been in contact with the district about the MCDC, but denied ever advising them to post that document to EMMA and said it was not something he would have counseled them to do. Bason then said she accidently filed the questionnaire with EMMA.
"It's bizarre," said one securities lawyer who preferred not to be named. "I think it's an indication there may be some confusion." The lawyer said that unlike a typical SEC settlement in which the issuer does not admit to the SEC's findings, this document could be evidence in a civil suit if investors choose to sue the district.
A different bond lawyer said the district should probably have just submitted the questionnaire without fanfare and posted a normal EMMA notice indicating that it had not been up to date on its disclosures.
MCDC settlements will be made public, but the SEC has said it will likely not disclose parties who have merely indicated a willingness to participate.
PNC did not respond to a request for comment.
