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RECOMMENDATIONS FOR ISSUERS REGARDING THE
SEC’S MUNICIPALITIES CONTINUING DISCLOSURE COOPERATION INITIATIVE
May 2014
Revised August 2014
On March 10, 2014, the U.S. Securities and Exchange Commission (the “SEC”) Division
of Enforcement (the “Division”) announced, and on July 31, 2014 modified, the Municipalities
Continuing Disclosure Cooperation Initiative (the “Initiative”) with the intention of addressing
violations of anti-fraud provisions of federal securities laws. The Initiative provides predictable
settlement terms for issuers and underwriters who self-report possible violations of Rule 15c212 (the “Rule”) involving materially inaccurate statements relating to prior compliance with
continuing disclosure undertakings under the Rule. These settlement terms only apply to
issuers who file completed reports with the SEC no later than December 1, 2014.
BACKGROUND
The Rule, which was promulgated by the SEC under the Securities Exchange Act of
1934, requires that before a municipality can issue municipal bonds to investors in a public sale,
the bond underwriters must reasonably determine that the issuer has undertaken to provide
certain updated disclosure information to the Municipal Securities Rulemaking Board (the
“MSRB”) after the issuance of the bonds. This information includes annual financial and
operating data, audits and notices of certain listed events.
In addition, under the Rule, final official statements must disclose any material failure to
comply with a continuing disclosure undertaking during the previous five years.
The SEC has expressed concern that issuers of municipal securities may not be
complying with their continuing disclosure undertakings, and additionally may not have been
disclosing material non-compliance in their official statements. The Initiative applies to final
official statements for an offering by the issuer in the five years preceding the date of a selfreport under the Initiative. Because the Rule requires disclosure in an official statement of
specific instances of non-compliance for the five years prior to the final official statement, the
scope of review under the Initiative is effectively ten years preceding the date a self-report is
filed under the Initiative.
The SEC has the ability to file enforcement actions under Section 17(a) of the Securities
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against issuers who
inaccurately state in final official statements that they have complied with their continuing
disclosure undertakings. In July 2013, the SEC brought an enforcement action against West
Clark Community Schools, an Indiana school district and issuer of municipal bonds, for
affirmatively stating in offering documents that it had not failed to comply with the Rule in the
previous five years, and for certifying that its offering documents did not contain any untrue
statements of material fact, when in fact it had failed to make any filings in connection with its
continuing disclosure undertakings in the preceding five years. Without admitting or denying the
SEC’s findings, the school district and underwriter each consented to, among other things, a
cease and desist order from committing or causing any violations of Section 10(b) of the
Exchange Act and Rule 10b-5. The underwriter also agreed to pay almost $600,000 in fines.
THE INITIATIVE
Under the Initiative, the Division will recommend standardized settlement terms for issuers
who self-report possible violations of the Rule by the December 1, 2014 filing deadline, and who
comply with the other requirements of the Initiative. These standardized settlement terms
include the following:

The issuer must consent to the institution of a cease-and-desist proceeding by the SEC,
a legal proceeding carried out under federal securities law. The Division will recommend
a settlement in which the issuer neither admits nor denies the findings of the SEC.

The issuer must establish appropriate policies and procedures and implement training
regarding continuing disclosure obligations within 180 days of the institution of the
proceedings. Jones Hall is currently developing standard policies and procedures,
which the firm recommends every issuer have in place as a matter of good practice.
These policies and procedures can be revised as appropriate and adopted by issuers in
order to ensure compliance with the Rule. Please contact a Jones Hall attorney if you
could like a copy of the firm’s standard form of policies and procedures.

The issuer must comply with its existing continuing disclosure undertakings, including
updating past delinquent filings, within 180 days of the institution of the proceedings.

The issuer must cooperate with any subsequent investigation by the Division regarding
the violations disclosed in the self-report, including the roles of individuals or other
parties involved.

The issuer must disclose in a clear and conspicuous fashion its settlement terms in any
final official statement for a bond offering by the issuer in the five years following the
institution of the proceedings.

The issuer must provide the SEC with a compliance certificate regarding the applicable
undertakings by the issuer on the one-year anniversary of the date of institution of the
proceedings.
So long as the SEC accepts the settlement terms recommended by the Division, the
SEC will not assess financial penalties against an issuer who complies with the Initiative.
Underwriters of municipal bonds must similarly self-report in order to be recommended
by the Division for a settlement under the Initiative. However, for underwriters, the Division will
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recommend that the SEC accept a settlement in which each such underwriter is also penalized
$20,000 per non-compliant offering of $30 million or less and $60,000 per non-compliant
offering of more than $30 million. However, no underwriter who self-reports under the Initiative
will be required to pay more than $100,000, $250,000 or $500,000 for all instances of noncompliance, depending upon the total revenue of the underwriter, which incentivizes
underwriters to thoroughly disclose all possible inaccurate statements in connection with any
issuances they have underwritten in the five years preceding the date of a self-report under the
Initiative.
ELIGIBLE ISSUERS
Any issuer that entered into a continuing disclosure undertaking and subsequently
issued bonds involving a final official statement within the past five years is a candidate for the
Initiative.
To be eligible for the Initiative, an issuer must self-report by submitting the Municipalities
Continuing Disclosure Cooperation Initiative Questionnaire for Self-Reporting Entities by 5:00
p.m. EST on December 1, 2014.
RECOMMENDATIONS FOR ELIGIBLE ISSUERS
Jones Hall recommends that issuers take the following steps to determine how best to
respond to the SEC’s Initiative under each issuer’s individual circumstances.
Contact Bond Underwriters. Issuers should be aware that underwriters will
likely attempt to report every possible lapse in compliance with the Rule in order to
receive favorable settlement terms under the Initiative and pay a one-time fee that
covers all possible lapses. Consequently, it would be wise for any eligible issuer to
contact the underwriters of any of its municipal securities offered in the past five years as
soon as possible in order to determine whether the underwriter believes there may be
any possible lapses in compliance with continuing disclosure undertakings.
Underwriters that self-report under the Initiative must do so by 12:00 a.m. EST on
September 10, 2014, so all reporting information should be available from underwriters
by that time.
Confer with Counsel and Governing Body. Self-reporting under the Initiative
is an important decision that carries significant legal consequences. However, the
potential benefits to eligible issuers may, in many cases, outweigh the consequences.
Issuers should confer with their general counsel, and obtain approval from their
governing body (e.g., city council, board of directors, etc.) before deciding to self-report.
Continuing Disclosure Compliance Review. Issuers who are eligible for the
Initiative should strongly consider reviewing all continuing disclosure undertakings they
have made in the past ten years to determine whether there have been any lapses in the
reporting required by their undertakings. If there have been any lapses, the issuer
should then review all final official statements for securities offered in the past five years
to confirm that such lapses were appropriately disclosed pursuant to the Rule.
Common lapses in compliance with the Rule include a failure to timely file
audited financial statements and annual reports, the filing of incomplete annual reports,
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and the failure to file notices of bond rating changes caused by ratings downgrades of
bond insurance companies, but there are other possibilities that issuers should consider.
In 2010, amendments to the Rule provided for, among other things, an expanded list of
reportable events requiring notice to the MSRB and the reporting of certain events,
regardless of materiality.
The SEC has stated that it will not provide guidance regarding which
misstatements or omissions will be considered material for purposes of the Initiative,
including specifically that it will not make any assurances that ratings changes are not
material. In the event of uncertainty, an issuer may self-report and argue that the lapse
was not material. In the event an issuer reports instances of non-compliance with the
Rule that the SEC does not deem material, there will be no enforcement action taken.
The SEC has acknowledged the difficulty with identifying potential violations in
compliance with the Rule during the period when filings were made in the Nationally
Recognized Municipal Securities Information Repository (NRMSIR) system, which predated the Electronic Municipal Market Access (EMMA) system, and has stated that it will
consider “reasonable, good faith, and documented efforts” made by issuers who selfreport in deciding whether to recommend enforcement action.
Engage Consultants. Issuers may consider engaging an outside firm that
specializes in investigating issuers’ compliance with continuing disclosure reporting and
disclosures about material non-compliance to assist them in determining their
compliance status and options under the Initiative.
Adopt Policies and Procedures. Jones Hall strongly advises all issuers of
municipal bonds to adopt policies and procedures, implement training regarding
continuing disclosure obligations, and remedy any lapses in prior compliance, regardless
of whether such lapses are reportable under the Initiative. SEC scrutiny of continuing
disclosure obligations will continue to increase upon the expiration of the Initiative, and
compliance with continuing disclosure undertakings will be increasingly important for
issuers.
ENFORCEMENT ACTIONS OUTSIDE THE INITIATIVE
The Initiative does not provide any assurances to individuals associated with eligible
issuers, such as elected officials and non-elected staff. The Division may recommend
enforcement actions against any such individuals, and the SEC will decide whether to seek
remedies against individuals on a case-by-case basis based on level of intent, culpability and
other factors, such as cooperation by the individual.
Enforcement actions that occur outside of the Initiative could result in the Division
seeking remedies beyond the standardized settlement terms, and the SEC has stated that the
Division will likely recommend and seek financial sanctions against issuers who have materially
violated their continuing disclosure undertakings and failed to disclose those violations, but do
not self-report under the Initiative. The SEC has affirmed its commitment to locating instances
of non-compliance with the Rule by, and bringing enforcement actions against, issuers who do
not self-report under the Initiative.
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CONCLUSION
Given the relatively short timeframe for self-reporting under the Initiative, Jones Hall
recommends that issuers reach out to their underwriters and begin diligence on possible
instances of failing to report material non-compliance under the Rule as soon as possible.
Should you have any questions regarding the Initiative or continuing disclosure compliance
obligations, please feel free to contact a Jones Hall attorney.
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