SEC municipal securities self-reporting initiative

Transcription

1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare SEC municipal securities self-reporting initiative Issuers, borrowers, and underwriters are affected Whitepaper Issued June 2014 Updated August 2014 More than 50 locations, including Houston, New York, London, Los Angeles, Toronto, Hong Kong, Singapore, Sydney, Johannesburg, Dubai. Attorney advertising Municipal securities issuers, borrowers, and underwriters face possible prisoner s dilemma for past misstatements of compliance with continuing disclosure undertakings On March 10, 2014, the Division of Enforcement (the Enforcement Division ) of the US Securities and Exchange Commission (the SEC ) announced a new Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative ). 1 Under the MCDC Initiative, the Enforcement Division offers to recommend favorable settlements of administrative actions that it may bring against issuers (including conduit borrowers) and underwriters of municipal securities for failing to disclose material violations of past continuing disclosure undertakings in offering documents, if they self-report the violations before September 10, 2014 in the case of underwriters, on or before December 1, 2014, in the case of issuers. Enforcement Division staff has threatened much harsher penalties for unreported violations. Because either an issuer or an underwriter may self-report a possible violation, and the other will not qualify for lenient settlement terms unless it also self-reports the violation, the MCDC Initiative has been referred to as a prisoner s dilemma. To avoid or manage the dilemma, issuers (including conduit borrowers) and underwriters should take precautions described within, among other possible action. 1 Municipalities Continuing Disclosure Cooperation Initiative, announced March 10, 2014, enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml, and modified July 31, 2014, gov/news/pressrelease/detail/pressrelease/ According to the SEC, the MCDC Initiative is a regulatory response to potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents.

2 SEC municipal securities self-reporting initiative - Issuers, borrowers, and underwriters are affected Summary Under the MCDC Initiative, the Enforcement Division has invited issuers (including conduit borrowers) and underwriters to self-report their possible violations of the federal securities laws by having made (or passed on without appropriate diligence) misstatements in a final official statement regarding prior compliance with continuing disclosure undertakings. The MCDC Initiative is not open to other possible violations. 2 After reviewing self-reported possible violations, the Enforcement Division will determine whether the violations warrant enforcement action. If they do, it will seek to bring an administrative action against the self-reporting entity and recommend that the action be settled on standardized, pre-set favorable terms (described below) for entities that self-report before September 10, 2014, in the case of underwriters, or December 1, 2014, in the case of issuers. 3 (As used herein, references to issuers will include references to conduit borrowers.) To self-report, an issuer or underwriter must acknowledge its intent to accept the settlement terms, if the Enforcement Division chooses to bring an action. Issuer settlement terms. The settlement terms offered to issuers (in the event that an enforcement action is initiated) include a cease-and-desist order based on negligence, without admitting a violation or paying any penalty, and an agreement by the issuer (a) to establish policies and procedures (and training) for continuing disclosure, (b) to comply with its continuing disclosure undertakings in the future, (c) to cooperate with any subsequent investigation by the SEC, (d) to disclose the settlement terms in future official statements, and (e) to certify compliance with its agreement after one year. 2 While the MCDC Initiative announcement states that it is only applicable to inaccurate statements concerning compliance with continuing disclosure obligations as described in Rule 15c2-12, it is likely that the MCDC Initiative is also open to issuers that offered municipal securities with new continuing disclosure undertakings and (a) failed to make any statement about past compliance when they, in fact, had materially breached prior undertakings or (b) as stated by an Enforcement Division staff member, failed to disclose material breaches of continuing disclosure obligations (e.g., quarterly reporting commitments) that are not required by Rule 15c2-12. Given the ambiguity of the announcement on these points, however, issuers and underwriters should confirm the scope of the MCDC Initiative with the Enforcement Division before self-reporting possible violations involving omissions or involving misstatements about compliance with undertakings that are not required by Rule 15c In administrative proceedings settled in 2013, the SEC entered into a settlement with a school district on terms similar to those offered to issuers under the MCDC Initiative, a settlement with an underwriter that imposed $580,000 in disgorgement, interest, and civil penalties against the underwriter, and a settlement with an individual banker that barred him from certain activities in the securities market. Underwriter settlement terms. The settlement terms offered to underwriters (in the event that an enforcement action is initiated) include a cease-and-desist order based on negligence, without admitting a violation, but requiring payment of civil penalties of $20,000 or $60,000 per offering (depending on size), not to exceed a per underwriter cap, and an agreement by the underwriter (a) to retain an independent consultant acceptable to SEC staff to conduct a review of the underwriter s municipal securities underwriting due diligence process and procedures, (b) to take reasonable steps to enact the consultant s recommendations, unless unduly burdensome, (c) to cooperate with any subsequent investigation by the SEC, and (d) to certify compliance with its agreement after one year. The caps are as follows, based on the underwriter s total 2013 revenue: 2013 Revenue Cap More than $100 million $500,000 $20 million-$100 million 250,000 Less than $20 million 100,000 Relevant time periods. The Enforcement Division may bring administrative actions for violations of the federal securities laws that occurred within five years before the action commences. 4 Accordingly, by self-reporting a possible violation, an issuer or underwriter would effectively limit remedies that SEC staff could recommend in enforcement actions for possible disclosure violations that occurred on or after September 10, 2009, in the case of underwriters, or December 1, 2009, in the case of issuers. To enable underwriters to comply with Rule 15c2-12, issuers generally make statements regarding compliance with continuing disclosure obligations in the five years before the offering. Therefore, actionable violations could involve a failure to disclose, in an October 2009 offering, a material breach of a prior continuing disclosure obligation that occurred in October, Consequently, to determine whether violations not barred by the statute of limitations may have occurred, an issuer s filing history over the last 10 years may need to be reviewed U.S.C. 78t-1(b)(4). 02 Norton Rose Fulbright June 2014

3 Whitepaper Required review. While the MCDC Initiative invites selfreporting of possible violations, Enforcement Division staff has made clear that it expects at least some effort to identify and sort offerings with undisclosed prior noncompliance as a condition to self-reporting. In any event, since a condition of settlement is to agree to cooperate with the SEC, it is likely that a self-reporting entity will be required to do at least some type of audit of self-reported offerings sooner or later. If issuers and underwriters employ reasonable, good faith, and documented efforts to identify prior violations in an MCDC review of their offerings, the SEC has said it will take that into account in deciding whether to recommend or, if so, how to settle an enforcement action for subsequently identified violations. For reasons explained below, such efforts can involve a timeconsuming process. Possible personal liability. While the MCDC Initiative offers lenient settlement terms to entities, they have not been extended to individual issuer officials or bankers or to their counsel, financial advisors, or other consultants. By self-reporting an offering, an issuer or underwriter will call attention to possible violations by its officers and employees, who could be subject to administrative actions with harsher consequences. Given its limited resources, it is less likely that the SEC would discover and initiate an action with respect to a past offering, if it is not self-reported. Prisoner s dilemma. The MCDC Initiative has been described as creating a prisoner s dilemma, in which criminal defendants are offered lenient settlement terms to testify against co-defendants, but only if they accept the offer before another co-defendant does. While colorful, the analogy does not hold true: The MCDC Initiative does not create an actual dilemma, because issuers and underwriters are free to self-report even if the other does so first, and the SEC s offer of lenient settlement terms extends to each participant that selfreports, not merely the first to self-report. Recommended action Cooperation among issuers and bankers. If an issuer or an underwriter self-reports an offering and the other does not, the SEC will be alerted to a possible violation by the other, but the other will not benefit from the offer of lenient treatment. Similarly, if an underwriter of an offering self-reports a misstatement about continuing disclosure compliance that the SEC could believe was also material to a subsequent offering underwritten by another firm, the SEC will be more likely to discover a violation in the subsequent offering, but the underwriter of that offering will not benefit from the offer of lenient settlement. Consequently issuers and underwriters, and underwriters who have alternated lead roles for the same issuer over the last five years, should ask the other to inform it if the other elects to self-report an offering in which it was involved, and to do so well in advance of September 10, so that all affected parties will be able to self-report the same offerings by their respective deadlines. (As a result of the SEC s deferral of the deadline for issuers, it is less likely that underwriters will benefit from completed issuer reviews before the underwriter deadline.) In no event should issuers or underwriters discourage the other from self-reporting, however. 5 Review of offerings. Issuers should review the adequacy of disclosure about their compliance with prior undertakings in each of their public offerings from December To do so, they should review their record of compliance throughout the five-year period before the offering and, if they find any noncompliance that the SEC could consider material, they should determine whether the noncompliance was disclosed in the official statement. If it was not, they should consider selfreporting the transaction and consult their counsel for advice. Underwriters should similarly review the adequacy of such disclosure in offerings where they served as the sole underwriter or left-lead senior manager, including competitive offerings, since September 2009 to determine whether any such offerings involved an undisclosed failure to comply with prior continuing disclosure obligations that the SEC could consider material and discoverable by underwriters with reasonable diligence. Independent review. Since issuer officials and bankers who were involved in offerings that could be self-reported will be exposed to a higher risk of personal liability if an offering is self-reported, issuers and underwriters should seek independent recommendations as to whether to self-report, from either other officials who are well briefed or independent outside counsel. Policies and procedures. Issuers should adopt (or, if adopted, should reconsider) policies and procedures for making disclosure to investors, including continuing disclosure, ideally before they self-report any offerings under the MCDC Initiative, and they should review the policies and procedures with legal 5 Concerted action to cover up a prior breach of federal securities laws could compound the legal exposure of issuers and underwriters. 03 Norton Rose Fulbright June 2014

4 SEC municipal securities self-reporting initiative - Issuers, borrowers, and underwriters are affected counsel. The SEC is less likely to bring an enforcement action for self-reported undisclosed past noncompliance, if an issuer has subsequently adopted policies and procedures that the SEC believes to be adequate. Communication with SEC. If issuers or underwriters have questions about what categories of possible violations are eligible for settlement under the MCDC Initiative, they should seek clarification from SEC staff (on a blind basis through counsel) before self-reporting. By self-reporting they would give the SEC a roadmap to a possible violation that the SEC might not otherwise find, which they should do only if assured of favorable settlement terms. 6 Background Required undertakings and disclosure of material noncompliance. Since 1995, Rule 15c2-12 has required underwriters of offerings that are not exempt from the Rule (1) to reasonably determine that the issuer or an obligated person has entered into an agreement (generally referred to as a continuing disclosure undertaking or undertaking ) to provide to one or more third parties described below: (a) updated financial and operating data of the same general type as included in the official statement for the offering, (b) their audited financial statements, if obtained, and (c) timely notice of certain events and (2) to receive and review an official statement that contains, among other matters, a description of any instance in which the issuer or an obligated person failed, in the five years preceding the offering, to comply in any material respect with a prior continuing disclosure undertaking. To enable underwriters to comply with Rule 15c2-12, continuing disclosure undertakings are required to specify the financial and operating data to be provided and the date by which they are to be provided. The undertakings must specify data of the same general type as the financial and operating data about the issuer or obligated person that is disclosed in the official statement for the offering. As initially promulgated, Rule 15c2-12 also required undertakings to provide notice on a timely basis of any of 11 events, if material to the securities being offered. Subsequently, effective December 1, 2010, Rule 15c2-12 was amended (i) to include three additional events for which notice must be committed, (ii) to require notices of certain events whether or not material, and (iii) to require that notices be committed to be provided within 10 business days of the event. Places for filings. Until July 1, 2009, continuing disclosure undertakings required issuers to commit to provide annual information and event notices to Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) privately owned information systems approved by the SEC for that purpose and, in states that had them, State Information Depositories (SIDs) approved by the SEC. The NRMSIRs made the information available only to those who paid for it. The number of approved NRMSIRs varied from time to time but totaled four both when the SEC withdrew their status, as described below, and during relevant prior periods: (1) Bloomberg Municipal Repository, (2) DPC DATA, (3) Interactive Data Pricing and Reference Data, Inc., and (4) Standard & Poor s Securities Evaluations, Inc. some of which are no longer in operation. The MSRB subsequently established the Electronic Municipal Market Access (EMMA) System to receive and make publicly available, without cost, the continuing disclosure information previously provided to NRMSIRs, and effective July 1, 2009, the SEC designated the MSRB as a NRMSIR, retracted its approval of all previously approved private NRMSIRs, and permitted subsequent undertakings to commit to provide all information and notices to EMMA only. Effective December 1, 2010, Rule 15c2-12 was amended to require that subsequent undertakings commit to provide annual information and event notices to the MSRB in such format and with such accompanying data as the MSRB requires from time to time. In view of this evolution of the continuing disclosure requirement, to determine whether required filings and notices were provided to all recipients required by the undertakings, it could be necessary to confirm receipt by all NRMSIRs of filings made before July 1, 2009 (for offerings that took or take place before July 1 of this year), and receipt by the applicable SID, if any, before the date of the offering, of information and notices filed pursuant to undertakings entered into before December 1, See note 2 above. SEC staff will not give guidance as to whether a misstatement is material. 04 Norton Rose Fulbright June 2014

5 Whitepaper Exemptions. As initially adopted, Rule 15c2-12 exempted offerings of municipal securities in minimum authorized denominations of $100,000 or more that (1) are sold to no more than 35 sophisticated purchasers buying for their own account, (2) mature within nine months, or (3) must be purchased on demand at least once every nine months. Effective December 1, 2010, the exemption from continuing disclosure requirements for demand securities was repealed. Consequently, new issues of demand securities (and remarketings that are primary offerings) after that date must be accompanied by a continuing disclosure undertaking to be lawfully underwritten. Possible material misstatements and omissions. Although Rule 15c2-12 does not require official statements to affirmatively disclose compliance with prior undertakings (as opposed to disclosing material noncompliance), market practice has generally been to include a statement in official statements to the effect that there has been no material noncompliance in the past five years, with exceptions noted, if known. If an official statement stated incorrectly that the issuer had complied in all material respects with its continuing disclosure undertakings in the prior five years, or simply failed to disclose material noncompliance without making an affirmative statement of compliance, in the SEC s view (1) the underwriter may have violated Section 15 of the Securities Exchange Act of 1934 by failing to observe its obligation under Rule 15c2-12 to receive and review a qualifying official statement and (2) both the issuer and the underwriter may have violated Section 17 of the Securities Act of 1933 (by having negligently offered and sold securities by means of an untrue statement of material fact or a misleading omission of a material fact) and Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 (by doing the same recklessly or intentionally). Whether a violation has occurred will depend on whether the misstated or omitted fact was material. In general, a fact is material if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision. 7 Prior to May 2010, most market participants believed that non-compliance with prior continuing disclosure undertakings was not material to offerings, and that representations in an official statement concerning compliance were not key representations that the SEC had said underwriters were required to investigate independently. Most issuers with prior undertakings were also subject to state law versions of the federal Freedom of Information Act, so investors could obtain financial statements (and most other data required to be updated annually) by requesting the information from issuers, if such information was not filed with the NRMSIRs or EMMA. Accordingly, a misrepresentation about past compliance with continuing disclosure undertakings at most incorrectly implied that it would be convenient for investors to obtain ongoing disclosure information (through NRMIRS, SIDs, or EMMA) when in fact it might be less convenient to obtain it (through the issuer). 8 Consequently, most underwriters obtained and relied upon a certification from the issuer to the effect that it had not failed to comply with its undertakings in any material respect in the preceding five years, without independently checking for compliance. However, in a May 2010 release amending Rule 15c2-12, the SEC stated that it was doubtful that an underwriter could form a reasonable belief that the issuer would comply with its continuing disclosure undertaking unless the underwriter affirmatively inquired into prior compliance and reached an independent judgment that was not based solely on representations of the issuer. In addition, in March 2012, the SEC s Office of Compliance, Investigations and Examinations (OCIE) issued a national risk alert to brokerdealers, stating that it would focus examinations on whether they had formed their own independent judgment concerning issuers disclosure compliance by employing sufficient due diligence. Whether or not misstatements and omissions about compliance with prior continuing disclosure undertakings are, in fact, material, the 2010 release and 2012 OCIE alert strongly indicate that the SEC believes that they may be. Consequently, since the 2010 release, and especially since the 2012 OCIE alert, underwriters generally have performed 7 Basic Inc. v. Levinson, 485 U.S. 224, (1988) and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The TSC Industries court found that [a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote, and went on to note that there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Enforcement Division staff has said at a conference that the same definition should be used for purposes of Rule 15c2-12, although there is no clear Commission guidance on that issue. 8 Anecdotally, when issuers failed to file annual reports pursuant to their prior undertakings repeatedly, that was typically due to their being unaware of their contractual undertaking coupled, importantly, with the failure of investors to request the information committed to be provided. In addition, when (even gross) failures to comply were disclosed in offerings, municipal securities appeared to sell at the same price as did those issued by comparably rated issuers who consistently complied with their undertakings. These facts cast substantial doubt that past compliance or noncompliance is material to an investor s decision to buy or hold municipal securities. 05 Norton Rose Fulbright June 2014

6 SEC municipal securities self-reporting initiative - Issuers, borrowers, and underwriters are affected some independent diligence to check for and require disclosure of material past noncompliance with undertakings, either directly or through underwriters counsel. Nevertheless, when questioned at a recent seminar on the MCDC Initiative, a member of the Enforcement Division s Municipal Securities and Public Pension Unit stated that offerings prior to these publications should also be reviewed for possible self-reporting. The Municipalities Continuing Disclosure Initiative General. Under the MCDC Initiative, if an issuer or underwriter self-reports an offering of municipal securities to the SEC as involving a possible violation of federal securities laws by misstating compliance with prior continuing disclosure undertakings, the Enforcement Division staff will recommend pre-announced settlement terms if it determines to bring an enforcement action. Because enforcement actions in general are barred by a five-year statute of limitations, the MCDC Initiative effectively extends to offerings underwritten by underwriters after September 9, 2009, or made by issuers after December 1, Because an offering on that date likely would have included a statement about compliance in the preceding five years, issuers and underwriters may be required to review annual and event filings since September or December 2004 to determine whether they have been involved in offerings that could or should be self-reported. Issuer settlement terms. Under the MCDC Initiative, if the Enforcement Division determines that possible violations self-reported by an issuer warrant an administrative action against the issuer, it will recommend that the action be settled by the issuer s acceptance of a cease-and-desist order based on negligent violation of Section 17(a)(2) of the Securities Act of 1933 (in which the issuer neither admits nor denies a violation), without the imposition of any monetary penalties, if the issuer agrees to the undertakings summarized below: Policies and procedures. To establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 days of the institution of the proceedings. Future compliance. To comply with existing continuing disclosure undertakings, including updating past delinquent filings within 180 days of the institution of the proceedings. Cooperation. To cooperate with any subsequent investigation by the SEC regarding the self-reported offerings, including the roles of individuals and/or other parties involved. Disclosure of settlement. To disclose in a clear and conspicuous fashion the settlement terms in any final official statement for an offering by the issuer within five years of the date of institution of the proceedings. Compliance certification. To certify to SEC staff that the issuer has complied with its undertakings as of one year after the proceedings were initiated. Underwriter settlement terms. Under the MCDC Initiative, if the Enforcement Division determines that possible violations self-reported by an underwriter warrant an administrative action against the underwriter, it will recommend that the action be settled by the underwriter s acceptance of a ceaseand-desist order based on negligent violation of Section 17(a) (2) of the Securities Act of 1933 (in which the underwriter may neither admit nor deny a violation), and payment of specified civil penalties, if the underwriter agrees to the undertakings summarized below. For offerings of $30 million or less, the underwriter will be required to pay $20,000 per offering. For offerings more than $30 million, the underwriter will be required to pay $60,000 per offering. However, in no case will any single underwriter be required to pay more than a capped amount of civil penalties under the MCDC Initiative, which will depend on its total 2013 revenue. (See the table under Summary Underwriter Settlement Terms above.) To obtain a settlement, an underwriter must agree to the following undertakings: Compliance review. To retain an independent consultant, not unacceptable to SEC staff, to conduct a compliance review and, within 180 days of the institution of proceedings, provide recommendations to the underwriter regarding the underwriter s municipal underwriting due diligence process and procedures. 06 Norton Rose Fulbright June 2014

7 Whitepaper Revise policies and procedures. Within 90 days of the independent consultant s recommendations, to take reasonable steps to enact such recommendations, although an underwriter may seek approval from SEC staff not to adopt recommendations that the underwriter demonstrates to be unduly burdensome. Cooperation. To cooperate with any subsequent investigation by the Enforcement Division regarding the selfreported offerings, including the roles of individuals and/or other parties involved. Compliance certificate. To certify to SEC staff that the underwriter has complied with its undertakings as of one year after the proceedings were initiated. Underwriter roles. In the MCDC Initiative, underwriters who should consider self-reporting are stated to include the lead underwriters of underwriting syndicates, as well as sole underwriters, in both negotiated and competitive offerings. The notice announcing the initiative implies that senior managers may self-report for the syndicate. Process. In order to self-report an offering with a possible violation, an issuer or underwriter must complete and submit to the Enforcement Division, no later than December 1 or September 9, 2014, respectively, a questionnaire available from the SEC. 9 The questionnaire requires (i) contact information about the self-reporting entity, (ii) identification of the reported municipal securities offering, (iii) information relating to participants in the offering, including a list of the senior managing underwriter, financial advisor, bond counsel, underwriter s counsel, and disclosure counsel, and (iv) a statement that the self-reporting entity intends to consent to the applicable settlement terms under the MCDC Initiative. The questionnaire also includes a statement of the self-reporting entity s intent to consent to the MCDC Initiative s settlement terms. 10 In addition, a self-reporting entity may provide any facts that it believes will assist SEC staff in understanding the circumstances that may have led to the potentially 9 Questionnaires may be provided by the SEC to FINRA. 10 It is unclear whether a self-reporting entity may contest a determination by the Enforcement Division that a self-reported possible violation is in fact a violation warranting an administrative action. However, there would be little point in self-reporting an offering if an entity is not prepared to accept an action that is settled on the terms offered. inaccurate statement. Since the Enforcement Division must determine whether to institute an enforcement action against the self-reporting entity with respect to the offering, and may determine to bring an action against individuals employed by the entity, it would appear wise to include descriptions of both extenuating circumstances and subsequent changes in policies and procedures. Limitations on relief. While the MCDC Initiative does enable issuers and underwriters to limit remedial action available to the SEC for prior misstatements about compliance with continuing disclosure undertakings, it does leave them and their employees exposed to other actions. The MCDC Initiative technically does not foreclose administrative actions by other regulatory bodies (e.g., FINRA in the case of underwriters) based on the same actions and omissions. In addition, the MCDC Initiative only applies to entities and not to individuals (including employees and public officials) who may have been involved and themselves be culpable. Finally, self-reporting under the MCDC Initiative does not bar possible private rights of action against the self-reporting entity. By self-reporting an offering, an issuer or underwriter may establish a roadmap for future FINRA or private actions as well as for SEC enforcement actions against their employees and officers. As a result, a self-report may expose the individuals involved in the subject transactions to regulatory action from the SEC and other regulators. If the SEC determines to initiate an administrative action in respect of a self-reported offering, the settlement would commit the self-reporting entity to cooperate in any subsequent SEC investigation of others, e.g., bankers, issuers, issuer officials, financial advisors, and legal counsel, which could create disruption to the entity and, in the case of underwriters, potential challenges to relationships with issuers. Benefits of self-reporting. The terms offered by the SEC appear to be lenient compared to those otherwise available, especially for a large underwriter. 11 In the notice announcing the MCDC Initiative, the SEC staff stated that it likely would seek greater civil penalties in administrative actions for similar violations that are not self-reported. In a webinar held recently, Peter Chan, an Assistant Regional Director in the Enforcement 11 See note 3 above. 07 Norton Rose Fulbright June 2014

8 SEC municipal securities self-reporting initiative - Issuers, borrowers, and underwriters are affected Division who is assigned to the Municipal Securities and Public Pensions Unit, threatened that a ton of bricks would be dropped on violators who do not self-report, although it seems doubtful that the SEC has the resources to review continuing disclosure filings itself to uncover noncompliance. Of course, if another participant in an offering elects to self-report, an issuer or underwriter likely should itself do so in self-defense. Identifying possible violations In order to self-report possible violations, an issuer or underwriter would need to identify offerings in which the issuer failed to disclose material prior failures by the issuer to comply with its continuing disclosure undertakings, 12 either by reviewing past compliance or by learning that another entity will self-report an offering. Issuers could be charged with knowledge of failures to comply, so should review all offerings not barred by the statute of limitations, if they are unsure of their past compliance. Underwriters should look for undisclosed prior issuer noncompliance by developing and applying procedures that the SEC would recognize as due diligence, if they are unsure of the adequacy of their past compliance. A complete review of prior offerings for possible violations could include the following: Identify offerings. Identify the offerings since September 9 or December 1, 2009, in which the self-reporting entity participated. Identify applicable undertakings. For each identified offering, identify the issuer s continuing disclosure undertakings, if any, for securities that were outstanding at any time during the 5-year period before the identified offering. Determine required filings. Determine what financial and operating data are required by these undertakings to be provided and by when. Check time, place and content of periodic filings. Check to make sure that periodic filings were made at the locations (four NRMSIRs before July 3, 2009, and EMMA thereafter) and by the times, and included the data, required by the undertakings. (The SEC recognizes that parties may not be able to identify violations related to pre-july 3, 2009, filings due to the limitations of the pre-emma NRMSIR system and suggests that failure to disclose undiscovered failures will not result in an enforcement action if they are not uncovered by a good faith reasonable review. 13 ) Check for reportable events. Determine whether events occurred for which the issuer undertook to give notice and, if so, when they occurred. Check for notice filings. Check to make sure that notice of reportable events was filed at the places and by the times required by the undertakings. Check for CUSIP linkage. For filings (especially event filings) made under continuing disclosure undertakings that were entered into after December 1, 2010, check that the filings were linked to all relevant CUSIP numbers (by confirming that they appear under the relevant securities on EMMA). Check disclosure. Check to see whether each failure to comply with an undertaking was disclosed in official statements for offerings in the 5 years following the failure. Materiality. For each identified instance of undisclosed noncompliance, determine whether the resulting misstatement could be considered material by the SEC. 12 While the MCDC Initiative states that an issuer or underwriter may self-report any potentially inaccurate statements (and all official statements could include a material misstatement about prior compliance with undertakings), at a conference in Boston in late March, Mark Zehner, Deputy Director of the Municipal Securities and Public Pensions Unit of the SEC s Enforcement Division, said that issuers and underwriters may not simply self-report all of their offerings without identifying the offerings where they suspect misstatements were made about past compliance. Consequently, a prerequisite to self-reporting will be to undertake some level of review of past offerings that are not barred by the statute of limitations. In a recent webinar, another member of the Unit said that an entity might self-report transactions by segregating them into groups where misstatements were likely vs. possible. 13 Press Release , July 31, 2014, PressRelease/ Norton Rose Fulbright June 2014

9 nortonrosefulbright.com Norton Rose Fulbright MCDC team Norton Rose Fulbright has extensive experience in representing clients both (a) in disputes and investigations (including SEC investigations) arising out of alleged violations of federal securities laws and (b) in offerings of municipal securities, including the review of prior compliance with continuing disclosure undertakings. We have established a team of experienced lawyers to counsel clients in responding to the MCDC Initiative. Clients may contact their public finance or securities lawyers at our firm, or either co-author of this article, to seek advice. Contacts Fredric A. Weber Partner Fulbright & Jaworski LLP (Norton Rose Fulbright) Tel fredric.weber@nortonrosefulbright.com Emmanuel U. Obi Associate Fulbright & Jaworski LLP (Norton Rose Fulbright) Tel emmanuel.obi@nortonrosefulbright.com Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world s pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ( the Norton Rose Fulbright members ) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). The principal office of Fulbright & Jaworski LLP in Texas is in Houston. Save that exclusively for the purposes of compliance with US bar rules, where Richard S. Krumholz will be responsible for the content of this publication, no individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Fulbright & Jaworski LLP 06/14 (US/mo) Extracts may be copied provided their source is acknowledged.