WASHINGTON — Bond lawyers and issuers are frustrated that the Securities and Exchange Commission did not specify the disclosure failures that led to its settlement with a California school district on Tuesday. They said it leaves them with no helpful guidance on what kinds of disclosures the SEC is focusing on in its Municipalities Continuing Disclosure Cooperation voluntary enforcement initiative.
The SEC found that the Kings Canyon Joint Unified School District, which serves students in Fresno and Tulare Counties, told investors in the official statement for bonds sold in November 2010 that it had complied with its prior continuing disclosure obligations. But that statement was false because, between at least between 2008 and 2010, the school district had failed to submit some disclosures, the SEC said in the settlement order. The SEC did not specify what the disclosure failures were.
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 meet their continuing disclosure agreements set up under the SEC's Rule 15c2-12.
Lawyers, issuers, and underwriters have all said it would be helpful to know what level of disclosure failure and subsequent omission would be of interest to the SEC. But the commission has been tight-lipped on that front and SEC officials have suggested that guidance of that sort would not serve the purposes of the MCDC.
"Maybe that's the SEC's intent," said a lawyer who preferred not to be identified. "Maybe they want everyone to be afraid."
"I get no benefit from this enforcement proceeding," said Ben Watkins, chairman of the Government Finance Officers Association's debt committee and Florida's bond finance director. Watkins has been an outspoken critic of the SEC's approach, and GFOA has joined with other market groups to suggest changes to the program, including extending it beyond the Sept. 10. Some groups also asked the program be restricted to deals that occurred after EMMA became the sole repository for continuing disclosures in 2009.
Watkins said the SEC should be letting issuers focus on whatever the commission truly deems important, rather than letting public officials search through difficult-to-navigate pre-EMMA data looking for the smallest disclosure failures.
"Their focus is on punishing people," he said.
GFOA recently posted guidance for its members considering participating in the MCDC, noting that the SEC has refused to provide general guidance on what information it would consider "material" for investors under the MCDC. Courts have previously held that materiality means information that a reasonable investor would want to know.
An EMMA search shows that Kings Canyon, in an OS for a 2006 bond offering, committed to providing annual financial and operating data no later than 270 days after the end of each fiscal year in addition to providing notices of material events. However, the district filed several years of those annual documents late and also filed notice of a bond insurer downgrade more than three months after it happened. For example, financial data for the year ending June 30, 2010 was filed in July 2011.
Paul Maco, a partner at Bracewell & Giuliani LLP, said the SEC passed on providing the specificity sought by Watkins and other market participants.
"The SEC clearly had an opportunity in this settled proceeding to address the scope of responses expected with respect to MCDC reporting, and chose not to send any signal or other indication beyond what they've already provided," Maco said.
John McNally, a partner at Hawkins Delafield & Wood LLP, said the SEC's decision to leave the specific disclosure failures unspecified will not aid market participants working against the clock to participate in the MCDC.
"As noted in the GFOA's recent alert, the SEC enforcement division has been unwilling to provide any general guidance regarding what is not material for purposes of the MCDC initiative," McNally said. "Without regard to the merit of that position, this order was an opportunity to provide some specific guidance and the SEC chose not do so, stating only that 'the issuer failed to submit some of the disclosures required.' It is difficult to understand the SEC's rationale, and as issuers and underwriters work to meet the tight deadline of two months from today this order provides no help."
