This post was also written by S. William Richter.

The SEC has been increasingly active in its enforcement efforts in the municipal securities market.  Such efforts are being conducted through its Municipal Securities and Public Pensions unit, which was one of the five specialized enforcement units the SEC first created in 2010.

In 2014, the SEC boldly acted in this area by offering a deal to underwriters and issuers of municipal securities, incentivizing them to self-report potential securities laws violations.  The program, the Municipalities Continuing Disclosure Cooperation (“MCDC”) initiative, offered underwriters and issuers the opportunity to self-report possible disclosure violations based on the requirements of Rule 15c2-12 of the Securities Exchange Act.  Generally, Rule 15c2-12 prohibits underwriters from selling municipal securities unless the issuers have agreed to make certain continuing disclosures regarding certain financial information, operating data, and material events affecting the municipal securities.  The MCDC initiative invited underwriters and issuers of municipal securities to self-report potential securities fraud violations, asking underwriters and issuers to identify those transactions within the prior five years whose offering documents contained potentially inaccurate statements regarding prior compliance by the issuer with 15c2-12 continuing disclosure obligations.

In exchange for the self-reports, and in cases where it deems the conduct enforceable under the anti-fraud statutes, the Enforcement Division would recommend settled enforcement actions to the SEC under standard terms governing the type of proceeding, possible financial penalties, and remedial efforts.  Specifically, the standard terms include, for both underwriters and issuers, the institution of administrative cease-and-desist proceedings for violations of section 17(a)(2) of the Securities Act, an anti-fraud statute, without having to admit or deny the Commission’s findings.  As to financial penalties, for municipal issuers the standard terms include no financial penalty, while for underwriters they include penalties that are calculated based on the dollar amounts of the offerings in which they were involved, subject to a stated maximum.  The terms also required undertakings relating to policies and procedures about these disclosures, and disclosures in future municipal securities offerings over the five years following any settlement with the SEC.

Underwriters had a September 1, 2014, deadline to self-report, and municipal issuers had a December 1, 2014, deadline.

At this time, the SEC is currently evaluating the reports it received, and will undoubtedly be contacting many of the underwriters and issuers who self-reported and bringing many enforcement actions against the underwriters and issuers.  Both self-reporting entities, and those who may have elected not to, may find themselves being contacted by the SEC Enforcement Division.

Critically, unsettled issues remain.  First, the MCDC initiative explicitly stated that it did not provide any assurances that individuals associated with the municipal securities offerings – such as municipal officials and employees of the underwriting firms – would be offered similar terms if they had been involved in conduct that violated the securities laws.  As a result, even for those entities who self-reported, it is likely that they may be getting inquiries related to the conduct of individuals who were involved, and it is possible that the Enforcement Division will still seek to investigate, and hold responsible, those individuals.  Second, many self-reports apparently were made in which the participants have identified fact patterns that they believed demonstrate material compliance with, and not violations of, the securities laws.  In these cases, underwriters and issuers may decide to fight the SEC on any SEC views that certain conduct supports the institution of an enforcement action.  Third, the MCDC initiative expressly did not include other potential violations that the SEC may discover in connection with the reported municipal securities offerings.

For any questions relating to the MCDC, please contact Lisa Blackburn, counsel in the Global Regulatory Enforcement Group at 215 851 8212, or Bill Richter, head of the public finance practice in Philadelphia at 215 851 8174.