The Municipalities Continuing Disclosure Cooperation (MCDC) Initiative offers municipal issuers and bond underwriters the promise of favorable settlement terms in exchange for self-reporting continuing disclosure violations by yesterday’s deadline.
For an overview of the Initiative and the violations targeted by regulators, read SEC Asks Hospitals to Confess.
The SEC is targeting official statements printed in the last five years that failed to report any non-compliance with continuing disclosure obligations.
The window for underwriters to self-report closed on Sep. 10. Underwriters who chose not to self-report and are later determined by the SEC to be in violation, could face fines up to $500,000.
It remains unclear as to what –if any—fines issuers who fail to self-report violations could face.
An informal survey of hospitals conducted by HFA Partners shows that the most common violations are relatively benign.
Failures to post bond insurer rating changes during the financial crisis top the list. Given that the downgrades were widely publicized, it's hard to imagine the SEC making a case for how investors were misled by issuers.
The next most common violation on the list is late posting of financial information, ranging from a few days to… never. The more egregious lapses will likely end up first in the SEC's review process; hospitals who missed deadlines by a few days don't have much to worry about and aren't inclined to self-report.
When they do report, issuers are frequently pointing fingers at Nationally Recognized Municipal Securities Information Repositories or “NRMSIRs” for failing to post information issuers say was sent to them on a timely basis.
Hospitals that decided to self-report are warned by some bond lawyers not to post MCDC questionnaires on EMMA. A couple of issuers did, probably thinking they were posting a notice of failure to file under Rule 15c2-12, and may have unwittingly forfeited protections afforded under the Initiative.
We expect that the SEC will focus its enforcement efforts on going after underwriters who did not self-report when their issuer clients did.
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