On Sept. 30 the SEC announced settlements under the Municipalities Continuing Disclosure Cooperation initiative (MCDC) with 22 municipal securities underwriters, following settlements with 36 underwriters in June, 2015. Overall the second wave of settlements was similar to the first wave, but with some new details on issuers' failures to comply with prior continuing disclosure undertakings (CDUs). Unlike the first wave, which was weighted toward large national firms, firms in the second wave were mostly small and medium-sized regional firms. Only one firm was fined the maximum $500,000 penalty amount compared to 10 firms in the first wave
Similarities with the first wave of settlements are as follows:
- For each underwriter, the SEC gave between one and three anonymous examples of official statements (OSs) which contained misleading statements about an issuer or obligor's prior compliance with its CDUs. In this wave, there were over 60 OSs cited in the examples.
- As in the first wave, the underlying OSs cited were issued between 2010 and 2014.
- The examples included both negotiated and competitive deals, and cited both affirmative misstatements and omissions by the issuers or obligors regarding prior CDU compliance.
- Over half of the examples involved failures by the issuer or obligor to file required audited financial statements, annual financial reports or operating data. The remaining examples were for late filings, ranging from one month to four years. The shortest example of a single instance of lateness by an issuer was 33 days, compared to 45 days in the first wave.
- There were no examples of failures to disclose noncompliance with the filing of material event notices (other than failure to file a notice of noncompliance with the timely filing of annual reports).
A few of the examples of noncompliance in this second wave were noteworthy, as they described some different circumstances not previously presented:
- One example cited late filings by a "guarantor," as compared to an "issuer" or "obligor."
- Another example stated the issuer had included the required annual financial report in an official statement prior to the deadline, but had failed to provide within EMMA a cross-reference to that OS. This situation was similar to one in the first wave where the issuer failed to provide a cross-reference in EMMA, but in that example the required annual financial information had been included in an OS dated 44 days after the deadline.
- Also, one example cited to an issuer that filed a required report four months late, but the SEC stated that this disclosure failure was not subsequently cured by the issuer filing a supplement to the OS four months after the offering that disclosed the late filing.
- In addition, there were a few examples that cited situations where the issuer filed late annual reports just prior to issuing an OS, but had stated in its OS that it had not failed to materially comply with its CDUs during the previous five years.
SEC officials have spoken at several recent conferences about the MCDC settlements. They have indicated that the examples in the settled orders are intended to provide broad guidance regarding the SEC's views on materiality, rather than set forth any bright line test. Also, they have stated if there are multiple failures mentioned within one bullet point example, one should view the aggregate failures as material rather than each individual failure. In addition, the absence of any specific references to failures to file material event notices in the two settlement waves does not mean that there won't be such cites in future orders.
SEC officials have also confirmed that there will be a third wave of settlements with underwriters. Although it is unclear whether the SEC will bring all of its settled actions against underwriters prior to bringing the first wave of issuer settlements, it is likely that issuers will start to receive calls in the next few months from the SEC staff regarding their MCDC voluntary self-reports. Once an issuer gets this initial call, the SEC staff has indicated that it expects to move these settlements along expeditiously and issuers should be prepared to obtain governing body approval for the settlements in a timely manner. In addition, the SEC does not plan to negotiate the settlement terms, given they are set forth already in the MCDC program, but would be willing to address factual errors, if any. It remains to be seen whether the SEC will use parameters for the issuer settlements that are similar to those it has been using for the underwriter settlements or whether they will vary.
Elaine Greenberg is a partner and Robert Feyer senior counsel at Orrick, Herrington & Sutcliffe LLP
