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SEC MDCD Initiative Creates Quandary for Municipal Issuers and Underwriters

Publications - Client Alert | June 6, 2014

On March 10, 2014, the Securities and Exchange Commission (the “SEC”) announced its Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC”).  The program is ostensibly designed to afford favorable treatment terms to municipal issuers and obligated parties (collectively “issuers”), as well as underwriters, who may have violated federal securities laws by misstating or omitting to state in an official statement any instances in the previous five years in which an issuer failed to comply, “in all material respects”, with its continuing disclosure undertakings under SEC Rule 15c2 12.  The SEC is convinced that compliance with these undertakings, and disclosure of such compliance – or the lack thereof, has been shoddy, and the SEC is determined to correct “sloppy” practices of issuers and underwriters.  To participate in the MCDC program, an issuer or underwriter must self report the material misstatement or omission no later than 11:59 p.m. (EDT), September 9, 2014.  The MCDC has created a bit of a firestorm—and a particular dilemma for issuers—exacerbated by the SEC’s unwillingness to provide guidance to issuers (or underwriters) as to when an issuer has failed to comply with its undertaking “in all material respects” and when a statement to the contrary is “material” and should be reported, and amplified by clear statements by SEC officials of the SEC’s intention to use the MCDC to pit underwriters against issuers.