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Feb. 18 — The Securities and Exchange Commission has sent its first settlement offers to municipal securities issuers that if accepted would resolve allegations of faulty disclosures, people with knowledge of the agreements told Bloomberg BNA.
A lawyer who has seen the “offer of settlement” sent to a client by the SEC told Bloomberg BNA the document includes a set of facts describing the alleged deficiencies, a list of remedies the issuer must undertake as part of the settlement and a certification affirming that the person signing the settlement has the authority to act at the issuer's behest.
The settlement offers are the second phase of the SEC's Municipalities Continuing Disclosure Cooperation Initiative, or MCDC, and follow a series of enforcement cases involving municipal securities underwriters. Still to come: the initiative's enforcement cases against individuals found liable for the deficiencies and cases against underwriters and issuers electing not to participate in MCDC by self reporting past deficiencies.
Practitioners said the enforcement initiative, announced in March 2014, has focused the municipal securities industry's attention on deficient disclosure practices involving municipal securities, including heightening an awareness of the consequences of noncompliance with associated securities laws . Many SEC officials, including former Chairman Elisse Walter, have for years voiced concerns about municipal bond disclosures and the relatively opaque nature of municipal securities transactions.
SEC spokeswoman Judith Burns didn't respond immediately to a request for comment regarding the latest MCDC enforcement cases.
The cases against issuers follow the completion of MCDC cases against underwriters. On Feb. 2 the SEC announced the completion of cases against underwriters that self reported their own deficiencies under the initiative—a total of 72 underwriters representing 96 percent of the market share for municipal underwritings ).
As the SEC begins rolling out cases against issuers, practitioners wondered just which issuers will be targeted, and how many. Many practitioners said the SEC is likely to follow its own practice established in dealing with underwriters: grouping cases into bunches and then announcing bunches of enforcement actions at separate times.
Overarching elements the SEC will have to consider when contemplating which cases to bring are fairness and materiality, practitioners said. The SEC has said it is looking to detect material deficiencies, but just how the agency will decide what is material is largely unknown. It's possible the SEC will elect not to proceed with an enforcement action against issuers that decided to self report, for instance. It's also possible issuers participating in a particular transaction aren't targeted by an enforcement action while underwriters involved in that same transaction were the subject of an enforcement case.
“I think that the SEC will likely take into consideration the concept of fairness with regard to determining which issuers will be the subjects of enforcement actions,” Orrick Herrington & Sutcliffe LLP's Elaine Greenberg, a former SEC municipal securities enforcement official, told Bloomberg BNA. “If the SEC decided a violation involving an underwriter, in connection with a specific offering, reached a materiality threshold resulting in an enforcement action, the SEC may believe it would be appropriate to also bring an enforcement action against an issuer involved in that same transaction,” she said.
“The materiality inquiry has been front and center throughout this entire MCDC initiative. And that really has been the heart of, in my view, the decisionmaking as to whether or not the self reporter warrants an enforcement action,” Greenberg said.
In recent weeks, SEC enforcement officials placed telephone calls to issuers notifying them that the settlement documents were in the mail, sources said. Dustin McDonald, Government Finance Officers Association director, told Bloomberg BNA that issuers should be ready to review the settlement documents quickly and respond to the settlement offers expeditiously.
He added, however, that GFOA was told by SEC officials that issuers will likely receive additional time to review the settlement documents if requested—partly because some issuers such as municipal entities don't meet weekly or even monthly. “If issuers ask for more time, they will get more time,” McDonald said.
A person reviewing the settlement terms said issuers have one week to suggest corrections to the allegations and another three weeks to accept the settlement. That person said the settlement terms were substantially similar to those outlined by the SEC when it announced the MCDC initiative. Those issuers accepting the settlement must:
LeeAnn Gaunt, the current chief of the SEC's municipal securities and public pensions enforcement specialized unit, will likely review any enforcement recommendation before SEC commissioners decide whether to agree to offer any settlement to an issuer.
Under terms outlined by the SEC, issuers will neither admit nor deny the SEC's findings. And, unlike cases brought against underwriters, no payment of a civil penalty will be required.
The initiative encouraged municipal securities underwriters and issuers to report prior violations of federal securities laws no later than Dec. 1, 2014. In exchange, participants in the initiative could expect to receive less severe, more uniform sanctions in subsequent enforcement actions.
Industry observers concede that underwriters and issuers often didn't fully comply with SEC rules regarding the accuracy of disclosures intended to enhance investor protections for years, and the initiative seeks to address that deficiency.
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