Articles and Alerts

Articles and Alerts

Apr 14, 2014

New SEC Initiative to Encourage Self-Reporting of Continuing Disclosure Violations

On March 10, 2014, the Securities and Exchange Commission (“SEC”) announced its new Municipalities Continuing Disclosure Cooperation Initiative (the “Initiative”) to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for a violation to be uncovered. 

SEC Rule 15c2-12 (the “Rule”) generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has promised to provide continuing disclosure regarding the bonds and the issuer’s financial condition and operating data. The Rule requires that offering documents for municipal securities describe any failure by an issuer to materially comply with a commitment to provide such continuing disclosure within the previous five years.  The SEC can bring enforcement actions against issuers who materially misstate their prior compliance in an offering document and against underwriters for not exercising sufficient diligence in reviewing statements in the offering document.

The SEC recently took action against the West Clark Community Schools[i] and the underwriter of its bonds, in connection with a representation in the official statement that the school district was in compliance with its continuing disclosure obligations even though the district had never filed an annual report or any notice of a failure to file an annual report. 

The Initiative sets standardized settlement terms for issuers who self-report that they have inaccurately claimed in their offering statements that they are in material compliance with the ongoing disclosure obligations of the Rule.  Issuers who self-report will not be subject to a monetary penalty, although they will be required to consent to a cease and desist order, to agree to cooperate in further investigations, including of individuals, and to establish policies and training programs, among other penalties.  The Initiative also sets standardized settlement terms for underwriters, in connection with offering documents that include materially inaccurate statements regarding the issuer’s continuing disclosure compliance.  Underwriters are subject to a monetary fine as well as other penalties. 

Issuers should pay particular attention to this new Initiative if:

1)      You previously agreed to provide continuing disclosure regarding your bonds,

2)      You subsequently issued bonds between 2009-2014,

3)      The offering documents for the bonds issued between 2009-2014 stated that you were in material compliance with your continuing disclosure obligations, but you had not materially complied, and

4)      You did not correct the error and disclose that you had corrected it.

For issuers wanting to self-report under the Initiative, the deadline to submit a report is September 10, 2014.  More information about the Initiative from the SEC, including the settlement terms, can be found here.  The form for submission of a self-report can be found here

If you have any questions about this Initiative, please contact us.




[i] In the Matter of West Clark Community Schools, AP File No. 3-15391 (July 29, 2013)