GFOA Alert: MCDC Initiative Settlement Terms for Issuers

Wednesday, June 8, 2016

The information contained in this document was developed to educate members about the SEC MCDC Initiative and should not be construed as legal advice.

As the SEC moves forward to address cases where issuers self-reported under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, issuers can expect to receive settlement offers containing standard provisions to which they must consent. The SEC is requesting an extraordinarily short turn-around for the settlement (5-10 days) but have indicated they will extend the settlement offer if the issuer requests. To assist in a quick but thorough review, GFOA recommends state and local governments participating in the MCDC initiative become familiar with the standard terms that are expected to be in the offered settlements. This alert addresses expected settlements for issuers that self-reported under the MCDC initiative and is not intended to be legal advice. Issuers should seek legal advice prior to finalizing or signing the proposed SEC settlement agreement and fully understand the consequences of the proposed settlement.

As noted in the appendix to GFOA’s first alert about the MCDC initiative, the following are standardized undertakings that are expected to be required of any issuer under a settlement agreement:

  • Establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 day. 
  • Comply with the existing continuing disclosure undertakings, including updating past delinquent filings within 180 days. 
  • Cooperate with any subsequent investigation by the SEC regarding the false statement(s), including the roles of individuals and/or other parties involved. 
  • Disclose in a clear and conspicuous fashion the settlement terms in any final official statement for an offering by the issuer within five years. 
  • Provide the commission staff with a compliance certification regarding the applicable undertakings by the issuer on the one year anniversary of the date of the settlement.

In addition, the settlement agreement is expected to include the following terms:

  • Admitting the jurisdiction of the SEC and consent to the institution of cease and desist proceedings. 
  • Consenting to the settlement order. 
  • Agreeing to cease and desist from committing any further violations of the Securities Act. 
  • Waiving various legal and administrative procedures. 
  • Agreeing not to deny the findings in the settlement order (but maintaining the ability to “neither admit nor deny”). 
  • Agreeing not to seek attorney’s fees or other fees, expenses or costs.

The proposed settlement agreements will describe the circumstances surrounding the issuers’ failure to comply with its continuing disclosure agreement(s) and the SEC’s legal analysis of the securities law violation(s). Issuers should be prepared to consult counsel and carefully review and verify all facts being alleged as the basis of the securities law violation. In most cases, the discovery done during self-examination and self-reporting will provide the information needed to verify the accuracy of the factual statements.

Participating issuers should also remember that the MCDC settlements apply only to the issuer and not to the issuer’s staff or elected officials and will not release them from personal liability for federal securities law violations. Depending on the facts and circumstances, individuals involved in the alleged securities law violations may want to engage their own legal counsel to protect them individually.

Lastly, the settlement terms for all issuers, including those issuers that self-reported under MCDC out of an abundance of caution, call for a statement by the SEC that the issuer’s conduct was negligent, which constitutes a type of securities fraud. Issuers should consult council regarding how to best respond to the SEC’s proposed settlement offer.

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