The Securities and Exchange Commission (SEC) this week announced enforcement actions under its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, targeting 22 municipal bond underwriting firms for alleged due diligence failures in connection with municipal bond offerings. The firms settled with the SEC for a total of $4.12 million, with one firm paying the maximum civil penalty of $500,000. 

The enforcement actions announced on September 30 are the second wave brought by the SEC against underwriters under the MCDC Initiative, which the SEC introduced in March 2014. The initiative encouraged municipal securities issuers, borrowers, and underwriters to self-report possible securities law violations related to inaccurate representations in offering documents concerning an issuer’s prior compliance with continuing disclosure obligations.  A summary of the MCDC Initiative can be found here. The first wave of MCDC Initiative enforcement actions against underwriters were brought in June 2015 against 36 municipal underwriting firms.

In its latest set of MCDC cease-and-desist orders, the SEC continued to focus on failures to file required financial information and operating data, as well as late filings of such information. The SEC is expected to announce additional actions against underwriters, which may include examples of delinquent or non-filed material event notices. 

The SEC provided an identical federal securities law analysis in each of its 58 MCDC actions against underwriting firms. Rule 15c2-12(f)(3) imposes a requirement on underwriters “that a final official statement set forth any instances in the previous five years in which an issuer of municipal securities, or obligated person, failed to comply in all material respects with any previous continuing disclosure undertakings.” According to the SEC, the underwriters participated in municipal bond offerings in which statements or omissions regarding an issuer’s or obligated person’s compliance with its prior continuing disclosure undertakings were materially false or misleading, and failed to discover such material misrepresentations and omissions through adequate due diligence.

The SEC highlighted the importance of an underwriter’s position in a securities offering. The SEC quotes Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 641 (D.C. Cir. 2008) which held that, “By participating in an offering, an underwriter makes an implied recommendation about the securities [that it] . . . has a reasonable basis for belief in the truthfulness and completeness of the key representations made in any disclosure documents used in the offerings.” Additionally, the SEC stated that “underwriters have a ‘heightened obligation’ to take steps to ensure adequate disclosure.”

In each MCDC cease-and-desist order, the SEC provided at least one example of a failure by an issuer or obligated person to comply with its prior continuing disclosure agreements that was not reflected in subsequent offering documents. Approximately half of the examples provided were failures to file required financial information and operating data, while the other half were late filings. One notable example was of an issuer’s annual report filed eight months late. Although the report was timely included in an official statement, the SEC found that the lack of a cross-reference to that official statement on the issuer’s Electronic Municipal Market Access (EMMA) continuing disclosure pages was a sufficient factual basis for a fraud action.

The smallest fine issued in the latest round was $20,000. In addition to issuing monetary fines, the SEC required the 22 underwriting firms to retain an independent consultant to review the firms’ due diligence policies and procedures in municipal securities deals. The underwriters are required to incorporate the recommendations made by the consultant within 90 days of the report. The SEC ordered all underwriters to cease and desist from committing any further violations of federal securities law.

SEC enforcement staff has indicated that it plans to follow up with all MCDC self-reporters, including entities that will not face a cease-and-desist order. The SEC is likely to follow up soon with issuers and other obligated persons who self-reported and/or who were reported by an underwriter. If you receive a call from the SEC, remember:

  • Extensive discussions may not serve your interests. You should politely listen, ask the SEC staff member for his or her contact information, and let the staff member know that your counsel will call him or her back.
  • Contact your counsel. The issuer or obligated person should contact its MCDC counsel as soon as possible. Keep in mind that the internal notes and e-mails of issuer and obligated person officers and employees are discoverable. By contrast, communications with your lawyer are protected by attorney-client privilege.
  • Retain records. Do not destroy any potentially relevant documents.

To help market participants understand the implications of the SEC’s MCDC enforcement actions, Ballard Spahr will host a webinar on Thursday, October 8, 2015, at 12:00 p.m. ET. Click here to register.

Ballard Spahr’s Municipal Securities Regulation and Enforcement Group helps municipal market participants navigate a rapidly evolving regulatory, investigative, and enforcement environment, enabling them to anticipate and address compliance issues and respond effectively to investigations when necessary. For more information, please contact M. Norman Goldberger at 215.864.8850 or, John C. Grugan at 215.864.8226 or, Teri M. Guarnaccia at 410.528.5526 or, or Tesia N. Stanley at 801.517.6825 or  

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

Related Practices

Municipal Securities Regulation and Enforcement
Securities Enforcement and Litigation
Public Finance