The Securities and Exchange Commission (“SEC”) earlier this year announced its Municipalities Continuing Disclosure Cooperation initiative (the “Initiative”) to encourage issuers, other obligated parties and underwriters of municipal securities to self-report materially inaccurate statements made in final offering documents regarding prior compliance with continuing disclosure obligations. The Initiative reflects a concern by the SEC that non-compliance with continuing disclosure obligations is widespread and many instances of misrepresentations regarding continuing disclosure compliance in official statements exist.
Facilities of many health care providers have been financed at least partially with bonds or other municipal securities. The Initiative gives a one-time opportunity to self-report certain securities laws violations with assurance, in most instances, of relatively modest negative consequences.
Securities laws generally require parties obligated on municipal securities to agree to a continuing disclosure undertaking pursuant to which they will periodically post updated financial and other information on a website maintained by the Municipal Securities Rulemaking Board. The official statement used to market municipal securities must disclose any instances in the previous five years in which each party to a continuing disclosure undertaking failed to comply, in all material respects, with previous disclosure undertakings. The Initiative deals with whether an issuer or obligated party has represented in a final official statement that it has complied with its existing continuing disclosure obligations when in fact it has not.
Eligibility To Participate
Generally, governmental entities and entities for whose benefit bonds have been issued by a governmental entity (e.g., a conduit borrower) may be eligible to participate under the Initiative, as well as the underwriters on those financings. The Initiative is not available to individuals associated with or employed by issuers or underwriters, and enforcement actions against those individuals will be considered by the Enforcement Division on a case-by-case basis.
Self-Reporting Process and Deadlines
Issuers and obligated parties who self-report under the Initiative must complete and submit the Initiative questionnaire to the Enforcement Division by December 1, 2014. Underwriters are required to submit the Initiative questionnaire before September 10, 2014.
The Initiative questionnaire requires information regarding the municipal securities offerings containing the potentially inaccurate statements; identification of the lead underwriter, municipal advisor, bond counsel, underwriter’s counsel and disclosure counsel; facts that the self-reporting entity would like to provide to assist the SEC in understanding the circumstances that may have led to potentially inaccurate statements; and a statement that the self-reporting entity intends to consent to the settlement terms under the Initiative. Official statements done in the last five years should be examined for misrepresentations.
Standardized Settlement Terms Under Initiative
If the Enforcement Division determines the self-reporting entity is eligible for participation in the Initiative and concludes that an enforcement action against the entity is warranted, the Enforcement Division will recommend a settlement to the SEC in line with the terms specified in the Initiative.
For issuers and obligated parties, the Enforcement Division will recommend a settlement that requires no payment of a civil penalty by the issuer or obligated party and in which the entity (i) consents to a cease and desist order for violations of certain securities laws and (ii) neither admits nor denies the findings of the SEC. The settlement will also require the entity to take certain actions to improve its continuing disclosure compliance, to cooperate with any subsequent SEC investigation regarding the reported false statements and to disclose the settlement terms in any final official statement for subsequent securities offerings for the next five years.
The standardized settlement terms for underwriters are comparable, for the most part, except that underwriters are subject to monetary penalties. However, the total amount of monetary penalties that will be imposed on an underwriter that self-reports under the Initiative is capped, with the maximum amount ranging from $500,000 to $100,000 depending on the size of the firm. The cap on penalties applies regardless of the number of potential violations and transactions that are reported and gives an underwriter a strong incentive to report any and all potential violations.
Considerations for Issuers and Obligated Parties
Healthcare providers to whom the Initiative may apply should consult with experienced bond counsel or SEC defense counsel in determining whether there is a potential securities law violation that is covered by the Initiative, whether to self-report and, if they decide to do so, in preparing the questionnaire for submission to the SEC.
An underwriter that has self-reported under the Initiative will likely notify each issuer and obligated party identified in the underwriter’s questionnaire as having potential securities law violations. The later self-reporting deadline for issuers and obligated parties allows an entity reported by an underwriter to make its own investigation of the merits of the underwriter’s report and to decide whether it wants to file its own report rather than risk the increased penalties to which it may be subject if the SEC determines that a securities law violation did occur that the entity itself did not self-report under the Initiative.
Kathleen A. Collier (kcollier@balch.com) and Kevin W. Beatty (kbeatty@balch.com) both practice with the Public Finance Group at Balch & Bingham LLP.
