FC2014 MCDCPresentation - WASBO€¦ · 9/24/14 1 Chicago | Indianapolis | Madison | Milwaukee |...

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What is the MCDC Initiative? ! The MCDC Initiative is a program recently announced by the U.S. Securities & Exchange Commission that encourages issuers (cities, villages, towns, school districts, technical college districts, etc.) and underwriters to review and report OfLicial Statements that may contain potentially inaccurate statements regarding the issuer’s continuing disclosure compliance. !

What is the MCDC Initiative? ! The MCDC Initiative applies with respect to OfLicial Statements in the last 5 years. > If your municipality or school district has not issued bonds or notes in the last 5 years, you do not need to worry about the MCDC Initiative.

> Likewise, if the only bonds or notes you issued in the last 5 years were sold without an OfLicial Statement, you do not need to worry about the MCDC Initiative.

If you are in doubt, be sure to double check.

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What is the MCDC Initiative?

!Underwriter = buys bonds from the issuer; sells bonds to investors

Financial advisor = advisor (different than an underwriter)

U.S. Securities & Exchange Commission (“SEC”) = federal agency primarily responsible for enforcing securities laws and protecting investors

OfLicial Statement = document describing the bonds and the issuer; used to sell the bonds to investors; subject to federal securities laws

Continuing disclosure = issuers provide ongoing continuing disclosure to the bond market pursuant to Continuing Disclosure CertiLicates or agreements; disclosures include annual audits, operating data, and event notices

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Review of DeLinitions

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What is the MCDC Initiative -‐ again? ! The MCDC Initiative is a program recently announced by the U.S. Securities & Exchange Commission that encourages issuers (cities, villages, towns, school districts, technical college districts, etc.) and underwriters to review and report OfLicial Statements that may contain potentially inaccurate statements regarding the issuer’s continuing disclosure compliance history. !


MCDC Focus:

Potentially Inaccurate Statements in OfLicial Statements …

SpeciLically: Statements Regarding the Issuer’s Continuing Disclosure Compliance History


–  School District issues bonds in 2008 and signs a continuing disclosure certiLicate requiring it to provide its audited Linancial statements, certain other Linancial/operating information, and notices of the occurrence of certain events.

–  School District forgets about these requirements and fails to disseminate its audited Linancial statements or anything else (on the EMMA System) in 2009, 2010, 2011 and 2012.

–  School District issues more bonds in 2013. Instead of noting the above failures, the OfLicial Statement states that the issuer “has never failed to comply in all material respects, in the last 5 years” with its continuing disclosure agreements.

–  On the above facts, the SEC would encourage both the School District and the underwriter of the 2013 Bonds to report the 2013 Bonds to the SEC under the MCDC Initiative.

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1. Example

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–  The focus of the MCDC Initiative is on OfLicial Statements. What matters under the Initiative isn’t merely that the issuer failed to comply with its continuing disclosure requirements. Instead, it is the fact that the OfLicial Statement (in this case, the 2013 OfLicial Statement) inaccurately described the issuer’s failures that matters.

–  Both the Issuer and the Underwriter would be encouraged to report. The underwriter’s reporting does not “cover” the issuer. In fact, just the opposite: the underwriter’s reporting makes it more important that the issuer consider reporting – since the underwriter will identify the issuer. More on this later.

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2. More Comments on the Example


–  Lots of Different Fact Patterns that Need to be Considered on a Case-‐by-‐Case Basis.

–  E.g., OfLicial Statement fails to Describe Partial Failures: E.g., what if the School District did a pretty good job with its continuing disclosure but still failed to disseminate on EMMA one or two elements of the “operating data” that was supposed to accompany the audit (and the 2013 OfLicial Statement didn’t say so)?

–  E.g., OfLicial Statement fails to Describe Prior Late Filings: Or what if the School District Liled everything but was a few days last with its annual Liling in a particular year (and the 2013 OfLicial Statement didn’t describe this failure)?

–  E.g., OfLicial Statement fails to Describe Prior Failure to Provide Notice of a “Material Event”: Or if the School District’s rating changed but the School District failed to Lile an event notice (and the 2013 OfLicial Statement didn’t describe this failure).

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3. Still More Comments on the Example


–  5 Year Statute of Limitations = Relevant OfLicial Statements are Those within the Prior 5 Years: Relevant OfLicial Statements are ones since December 1, 2009 (i.e., ones within 5 years prior to the December 1, 2014 MCDC reporting date).

•  E.g., OfLicial Statement dated March 10, 2010 = YES •  E.g., OfLicial Statement dated June 10, 2007 = NO

–  “5-‐Year Lookback” Period for Each OfLicial Statement: Each OfLicial Statement is required to describe the issuer’s continuing disclosure failures occurring in the 5 years prior to the date of the OfLicial Statement

•  E.g., in OfLicial Statement dated March 10, 2010 should have described any failures of the issuer’s to comply with continuing disclosure in the period from March 10, 2005 through March 10, 2010.

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Time Periods – A Little Tricky

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–  Issuers: •  Report Transactions for which OfLicial Statements Contain Potentially Inaccurate Statements

•  Identify all parties involved •  Reports due DECEMBER 1, 2014

–  Underwriters: •  Report Transactions for which OfLicial Statements Contain Potentially Inaccurate Statements

•  Identify all parties involved •  Reports were due September 9, 2014 > Issuers Report Underwriters… and > Underwriters Report Issuers “Prisoner’s Dilemma”

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How Does Reporting Work?


–  “Comparably Favorable” Settlement Terms:

–  Underwriters Pay Limited Fines – but only if they Report •  The SEC will seek larger Lines from underwriters that do not report if the SEC subsequently discovers inaccurate OfLicial Statements in bond Linancings in which they acted as underwriter

–  Issuers Pay No Fines – but only if they Report •  The SEC will seek Lines from issuers that do not report if the SEC subsequently discovers inaccurate OfLicial Statements relating to the Issuer’s bond Linancings

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More on this “Prisoner’s Dilemma”


–  Issuer Settlement Terms: •  Adopt Policies and Procedures •  Conduct Training •  Remedy Past Continuing Disclosure Failures •  Describe their MCDC Participation in Future OfLicial Statements •  File a CertiLicate with the SEC on the 1-‐Year Anniversary •  Agree to cooperate in any subsequent investigations

–  Issuers that report must complete these tasks if the SEC recommends an enforcement action against the Issuer

–  All enforcement actions will follow these “standardized” settlement terms

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“Comparably Favorable” Settlement Terms:

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–  No Assurances Regarding Individual Liability

•  The MCDC Initiative is for Entities (Issuers, Underwriters)

•  The MCDC Initiative is only for possible violations of securities laws arising from misstatements regarding an Issuer’s continuing disclosure compliance

•  The MCDC Initiative is not for Individuals (individual Issuer ofLicials, individual employees of Underwriting Firms, etc.)

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Wait… Agree to Cooperate in Subsequent Investigations?


–  Individual Liability: •  The Division may recommend enforcement action against individuals and may seek remedies beyond those available through the MCDC Initiative.

–  But: •  “Assessing whether to recommend enforcement action against an individual for violations of the federal securities laws necessarily involves a case-‐by-‐case assessment of speciLic facts and circumstances, including evidence regarding the level of intent and other factors such as cooperation by the individual.”

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No Assurances Regarding Individual Liability


–  Underwriter reporting is incentivized by favorable settlement terms (Lines that are limited)

–  Underwriters report transactions and list all parties – including the Issuer

–  Issuers have comparatively favorable settlement terms if they participate (but not if they don’t)

–  No guarantees for individuals but actions against individuals turn on “intent” and “cooperation”

–  All of the above incentivizes Issuer reporting

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Recap: “Prisoner’s Dilemma” & Incentives

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What do I need to do?

–  If an Issuer Reports, the Enforcement Division will either (i) recommend no further action, or (ii) recommend standardized settlement terms

–  The standardized settlement terms accompany an actual “settlement”. . .

–  The SEC charges the Issuer in an enforcement action (which is immediately settled)

–  The settlement entails that the Issuer agrees to a cease and desist order

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But this is Not Just a Paperwork Matter


–  Review your OfLicial Statements dated within the past 5 years

–  Review your Continuing Disclosure Filings for the 5-‐Year Period Preceding each OfLicial Statement

–  Call the Underwriter(s) of your Bond deals and ask whether they intend to report any of your bond Linancings to the SEC under the MCDC program

–  Pay Close Attention to Correspondence from Underwriters

–  Call your Financial Advisor and/or your Bond Counsel Lirm for additional help

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Steps to take:


Dec. 1, 2014

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If an Issuer determines to participate in the MCDC Initiative (by reporting to the SEC):

–  Governing Body or Board action will likely be advisable or required

–  Unless the reporting date is extended, this means Issuers will need to target their upcoming regular meetings, or call special meetings

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Steps to take:


Our Lirm can be engaged to:

–  Assist the Issuer in reviewing its prior Continuing Disclosure Filings and Prior OfLicial Statements

–  Based on the above, assist the Issuer in determining whether to report under the MCDC Initiative

–  Prepare a Resolution Authorizing Reporting

–  Provide sample Policies and Procedures

–  Assist with the Preparation of the Reporting Questionnaire that is required to be submitted by Issuers (and Underwriters) who report under the program

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What is Q&B Doing to help?

Questions?

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Municipal Advisor Rules – What Are They?

•  New rules created under the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

•  Registration – the rules makes it unlawful for “municipal advisors” to

advise a municipal entity or obligated person with respect to municipal Linancial products or the issuance of municipal securities, unless registered with the SEC.

•  You can verify a municipal advisor’s registration on the MSRB’s website at

http://www.msrb.org/msrb1/pqweb/MARegistrants.asp

•  Fiduciary Duty -‐ Similarly, “municipal advisors” and their associated persons have a Liduciary duty to any municipal entity for which they act as a municipal advisor, and may not act inconsistent with that duty.

Municipal Advisor Rules – Why Now?

•  SEC proposed a deLinition of “municipal advisor” in December, 2010

•  Market participants argued that the deLinition was too broad

•  On September 18, 2013, the Commission adopted Linal municipal advisor registration rules. The Linal rules went into effect on July 1, 2014

Municipal Advisor Rules – Why Are They Important?

•  Most broker/dealers and financial advisors are already registered as municipal advisors anyway!

•  The Municipal Advisor Rules define what is a “municipal advisor”!

•  The Rules are important because you can’t be a “municipal advisor” and an underwriter with respect to the same issuance of municipal securities!

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Municipal Advisor Rules – What is a Municipal Advisor?

•  Municipal advisor "means a person (who is not a municipal entity or an employee of a municipal entity) that -‐ (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal 8inancial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such Linancial products or issues; or (ii) undertakes a solicitation of a municipal entity

•  “Advice” – a recommendation particularized to the needs, objectives or circumstances of a municipal entity

•  Advice excludes general information (a person’s professional qualiLications, market information, factual information describing different types of structures, etc.)

Municipal Advisor Rules – What are the Exemptions?

•  Underwriter exemption – underwriters engaged with respect to an issuance of municipal securities can provide advice consistent with the underwriter role (i.e. structure, terms, timing and related matters)

•  RFP Exemption – can provide advice in connection with a “bona Lide” RFP

•  Independent Registered Municipal Advisor (“IRMA”) – if the

municipal entity represents that it is already represented by an independent registered municipal advisor then the person can provide advice

Municipal Advisor Rules – What does it mean for Issuers?

•  Issuers may see new language in underwriter engagement letters asking the Issuer to acknowledge that it is aware of the Municipal Advisor rules and the underwriter exemption

•  If an Issuer has a registered independent municipal advisor, it may

see underwriters seeking written acknowledgement of that fact in order to establish the IRMA exemption

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Municipal Advisor Rules – Questions?

Quarles & Brady LLP

© 2014 Quarles & Brady LLP -‐ This document provides information of a

general nature. None of the information contained herein is intended as legal advice or opinion relative to speci8ic matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.

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FC2014 MCDCPresentation - WASBO€¦ · 9/24/14 1 Chicago | Indianapolis | Madison | Milwaukee |...

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