SEC's MCDC Initiative - The Clock is Ticking

14 July 2014 Health Care Law Today Blog

Not-for-profit health care providers that have borrowed on a tax-exempt basis within the last five years should be aware of the Securities and Exchange Commission’s (SEC) Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative. The MCDC Initiative applies to municipal issuers and obligated persons, such as tax-exempt hospital borrowers, that provided materially misleading disclosure in Official Statements issued within the past five years regarding compliance with their continuing disclosure obligations under SEC Rule 15c2-12. The SEC is offering to enter into settlements pursuant to which such borrowers neither admit nor deny wrongdoing, but agree to a cease and desist order against future misleading disclosure and agree to certain undertakings, such as remedying all past disclosure failures, cooperating with subsequent SEC investigations, disclosing the settlement terms for five years in Official Statements, and establishing training programs regarding continuing disclosure obligations. However, the MCDC Initiative expires on September 10, 2014. After that date, the SEC has indicated that penalties for such misleading disclosure are likely to be more severe and may include fines.

Under Rule 15c2-12, the SEC requires underwriters of municipal bonds to obtain a continuing disclosure undertaking from the ultimate borrower of the bond proceeds. The borrower is required to file certain financial and operating information annually with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) website as well as post notices of certain events on EMMA. The disclosure document relating to each issue of bonds, the Official Statement, must contain a section describing the borrower’s compliance with its continuing disclosure undertaking over the prior five years. A failure to accurately and completely describe any failure to meet the requirements of the undertaking could be important to an investor and, therefore, constitute a material misstatement or omission.

One aspect of the MCDC Initiative that has attracted a good deal of attention is the “modified prisoner’s dilemma” the SEC has created. Both the underwriters of municipal bonds and the ultimate borrowers of such bonds are being asked to self-report any material misstatements or omissions separately and, while underwriters will be assessed financial penalties, those penalties are capped. Thus, many analysts have suggested that underwriters may be motivated to report all disclosure failures, whether or not they are material. The SEC has indicated that it will seek to match the borrowers’ and underwriters’ MCDC reports. A borrower that fails to self-report under the MCDC Initiative may find the SEC investigating based upon a report filed by its underwriter. Thus, it is likely prudent for all such tax-exempt borrowers to review promptly the statements in their Official Statements for the past five years regarding their compliance with the continuing disclosure undertakings.

The SEC’s announcement regarding the MCDC Initiative and the form of self-reporting questionnaire are available here.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services