SEC Rolls Out First Wave of MCDC Settlements with Underwriters

Last Thursday, the SEC announced it reached settlement agreements with 36 municipal securities underwriting firms pursuant to its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  These settlements mark the first enforcement actions against underwriters of municipal securities under the MCDC Initiative.

The MCDC Initiative was launched in March 2014, and as explained in detail by the Division of Enforcement, is intended to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with statements made in bond offering documents about prior compliance with continuing disclosure obligations.  The initiative offered favorable settlement terms to municipal securities underwriters and issuers who self-reported possible securities law violations.

Issuers and underwriters who chose to participate in self-reporting were asked to fill out a questionnaire prior to December 1, 2014 and September 10, 2014, respectively, after which dates the SEC warned that entities would be taking their chances, potentially facing increased sanctions for violations that the SEC found on its own.

In this round of SEC actions, the SEC alleged that the 36 firms violated securities laws between 2010 and 2014 by using offering statements containing materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations.  Continuing disclosures provide investors with information, including annual financial reports, on an ongoing basis, allowing investors to access current information about their bond holdings.  The SEC also alleged that these firms failed to conduct adequate due diligence in identifying said misstatements and omissions prior to offering and selling the bonds.  As part of the settlements, the firms neither admitted nor denied the findings, but agreed to cease and desist from such violations in the future.  Because the MCDC Initiative sets a cap on the amount of civil penalties based on the number and size of the offerings identified, with a maximum penalty of $500,000, the firms’ penalties ranged from $40,000 to the maximum $500,000.  Each firm also agreed to retain an independent consultant to review its due diligence policies and procedures with regard to municipal securities underwriting.

These settlements demonstrate an ongoing commitment on the part of the SEC to focus on the municipal securities industry.  According to the SEC, the MCDC Initiative has already resulted in improvements in the industry.  The initiative is continuing, and there will be additional waves of settlements with underwriters as well as with issuers.  It remains to be seen whether the SEC will in fact pursue enforcement actions against entities that did not self-report violations under the initiative.