On March 10, 2014, the Securities and Exchange Commission’s (SEC) Enforcement Division (the “Enforcement Division”) introduced a new Municipalities Continuing Disclosure Cooperation Initiative (“MCDC Initiative”) to encourage issuers and obligated persons (collectively, “issuers”) and underwriters of municipal securities to self-report possible violations of federal securities law. Specifically, the MCDC Initiative offers favorable, standardized settlement terms for those issuers and underwriters who self-report possible violations involving inaccurate statements in bond offering documents about an issuer’s prior compliance with its continuing disclosure obligations under SEC Rule 15c2-12. To be eligible for the settlement terms under the MCDC Initiative, issuers and underwriters must report the inaccurate statements by submission of a questionnaire no later than midnight September 10, 2014. An issuer or underwriter considering the MCDC Initiative should consult with their counsel and evaluate the potential risks and benefits associated with the program, including potential collateral consequences, before submitting the self-reporting questionnaire by the September 10, 2014 deadline.

SEC Rule 15c2-12 prohibits an underwriter from purchasing or selling municipal securities unless the issuer has agreed to provide continuing disclosure in the form of annual financial information and operating data and filing notice of certain events. A final official statement prepared in connection with a primary security offering must also identify any failure by the issuer to comply in all material respects with its prior continuing disclosure undertakings in the previous five years. Both the issuer and the underwriter may be liable under the antifraud provisions of federal securities law for any misrepresentations in the official statement about the issuer’s past compliance with its continuing disclosure obligations.

In recent years the SEC has increased its focus on continuing disclosure compliance in the belief that federal securities law violations involving the failure to file continuing disclosure documents and false statements concerning such compliance are widespread. Reflecting this increased focus, in 2013, the SEC for the first time brought an enforcement action against an issuer (Indiana’s West Clark Community Schools) for falsely certifying in its official statement that it was in compliance with its prior continuing disclosure obligations when, in fact, the issuer had not submitted any of the required annual financial statements or event notices.

The MCDC Initiative offers issuers who have made similar materially inaccurate statements in a final official statement (and underwriters of such offerings) an opportunity to self-report these potential violations in exchange for favorable settlement terms in any resulting enforcement action. Under the MCDC Initiative, the Enforcement Division will recommend a settlement in which the issuer or underwriter consents to a cease and desist proceeding while neither admitting nor denying any wrongdoing. Issuers will not be subject to any civil penalties, while underwriters will be subject to reduced penalties ($20,000 per offering of $30,000,000 or less and $60,000 per offering of more than $30,000,000, with a total cap of $500,000 in penalties)

The settlement terms also require certain undertakings. Issuers must (i) adopt policies and procedures to address continuing disclosure obligations, (ii) update past delinquent filings, (iii) cooperate with the Enforcement Division in subsequent investigations regarding the false statements, (iv) disclose the settlement in any securities offering within the next five years, and (v) provide the SEC with a compliance certification on the one year anniversary of the institution of the proceedings.

Underwriters will be required to (i) retain an independent consultant to conduct a compliance review within 180 days of the institution of the proceedings, (ii) take reasonable steps to enact the consultant’s recommendations within 90 days of receipt of such recommendations, (iii) cooperate with the Enforcement Division in subsequent investigations regarding the false statements, and (iv) provide the SEC with a compliance certification on the one year anniversary of the institution of the proceedings.

The Enforcement Division has cautioned that issuers and underwriters who are eligible but do not self-report under the MCDC Initiative can expect increased sanctions if violations are later discovered, including monetary sanctions for issuers and greater monetary sanctions for underwriters. As a result, the MCDC Initiative potentially creates tension between issuers and underwriters since self-reporting by one party will likely implicate the other. The SEC may use an issuer’s self-reported violations as the basis to investigate and bring an enforcement action with harsher penalties against an underwriter in the same transaction if that underwriter has failed to self-report under the MCDC Initiative, or vice versa.

The Enforcement Division has also cautioned that the MCDC Initiative covers only eligible issuers and underwriters and not associated individuals, so there is no guarantee that officers or employees of an issuer or underwriting firm will be eligible for favorable settlement terms. The Enforcement Division has indicated it will determine whether municipal officials and underwriting firm employees should be subject to an independent SEC enforcement action on a case-by-case basis, depending on factors such as the individual’s level of intent and cooperation with the SEC. Thus, self-reporting under the MCDC Initiative may have negative consequences for individual officers and employees of the issuer or underwriting firm.

Finally, the MCDC Initiative and the standardized settlement terms are not applicable to other material misstatements in final official statements or other misconduct. The MCDC Initiative covers only inaccurate statements in bond offering documents about an issuer’s prior compliance with its continuing disclosure obligations under SEC Rule 15c2-12.

Issuers and underwriters should carefully review the accuracy of primary market disclosures regarding past compliance with continuing disclosure obligations to determine their eligibility for the MCDC Initiative. As noted above, an issuer or underwriter considering the MCDC Initiative should consult with their counsel and evaluate the potential risks and benefits associated with the program, including potential collateral consequences, before submitting the self-reporting questionnaire by the September 10, 2014 deadline.