Securities and Exchange Commission Issues First Cease and Desist Order Under the Municipalities Continuing Disclosure Cooperation Initiative
On July 8, 2014, the Securities and Exchange Commission (“SEC”) announced its first cease and desist order (the “CD Order”) under the Municipalities Continuing Disclosure Cooperation Initiative (the “MCDCI”). The order was issued against the Kings Canyon Joint Unified School District of California (the “School District”). The CD Order itself and the factual background to the CD Order present more questions than answers for market participants.
As described in our recent Client Alert, Securities and Exchange Commission Announces Municipalities Continuing Disclosure Cooperative Initiative – Issuer Considerations, dated June 13, 2014, the SEC established the MCDCI to encourage the voluntary self-reporting of potential securities laws violations by issuers and underwriters of municipal securities.
The School District took advantage of the MCDCI because of its failure to comply with its continuing disclosure obligations relating to three series of bonds issued during 2006 and 2007. The School District failed to comply with those continuing disclosure obligations between 2008 and 2010. The School District issued a fourth series of bonds in November 2010. Notwithstanding such failure to comply, in the Official Statement for those bonds, the School District affirmatively stated that it had not failed to comply in all material respects with any prior continuing disclosure obligation over the last five years.
The CD Order is problematic for municipal market participants first because the SEC avoided all discussion about what constituted the failure to comply by the School District. The SEC did not attempt to define “materiality” in the MCDCI but has historically provided guidance to the municipal market in its orders, no-action letters and other pronouncements. The municipal market was hopeful that the SEC would provide guidance as to which failures to comply would be material and which would not. The SEC did not take this opportunity to provide such guidance. Likely, everyone agrees that the failure to file an annual report is material. But what of a filing that contained all applicable operating information, but failed to note that a significant change was expected to occur in the following year? The CD Order may be read as the SEC simply accepting the School District’s characterization of materiality because the School District is in the best position to determine what is material and the School District’s taking advantage of the MCDCI itself is a determination of that materiality.
The CD Order is also problematic because of the time period involved. Continuing disclosure previously had to be made by way of NRMSIRs (National Recognized Municipal Securities Information Repositories). The number of NRMSIRs changed over time, originally eight then down to four, and an issuer had to file its continuing disclosure with each NRMSIRs. Later, a central post office was established and filing there fulfilled the filing obligations with the NRMSIRs. It was not until July 1, 2009 that filings were to be made directly with the Municipal Securities Rulemaking Board on the Electronic Municipal Market Access (“EMMA”) system. Since July 1, 2009, all annual filings and material events filings must be made on EMMA.
The School District’s failure to comply was from 2008 through 2010. As a result, a failure at issue may have been simply a failure to file at one of the then four existing NRMSIRs. Unfortunately, the CD Order does not contain any discussion of how the School District violated its disclosure obligation and therefore provides very little guidance. Municipal market participants are hopeful that a failure to file at one NRMSIR alone would not be material but the question remains.
For More Information
For more information about an issuer or obligated person’s continuing disclosure obligations in connection with the issuance of municipal bonds, please contact Ramiro M. Carbonell at 610.478.2275, Peter T. Edelman at 610.478.2168, Brian P. Koscelansky at 570.969.5364.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.