Securities Litigation

The SEC announced July 8 its first settled administrative proceeding against a municipal issuer under its Municipal Continuing Disclosure Cooperation ("MCDC") Initiative. In its Order, the SEC charged Kings Canyon Joint Unified School District with violating '33 Act § 17(a)(2) by making an untrue statement of material fact in a 2010 bond offering that the District had complied with prior continuing-financial-disclosure obligations (required by Rule 15c2-12) undertaken in other bond offerings sold in 2006 and 2007. The District certified it had complied with those obligations when, in fact, it had failed to file some of the earlier disclosures. The District neither admitted nor denied the allegations, but undertook to adopt new compliance policies and procedures, update all prior disclosure filings, cooperate with the Commission's investigations and disclose the settlement in all offerings over the next five years. In re Kings Canyon Joint Unified School District, Rel. No. 33-9610, Admin. Proc. File No. 3-15966 (SEC July 8, 2014). The Kings Canyon settlement terms are standard for issuers who self-report under the SEC's MCDC Initiative. The Commission announced the Initiative on March 10 of this year, as part of its broader Dodd-Frank oversight of the nation's municipal markets. The Initiative is structured to incentivize issuers to self-report (without any fines) and disclose the securities underwriters involved - who then will face fines and similar settlement terms if they also self-report. Reporting broker-dealers face fines of $20,000-60,000 per offering (capped at $500,000), independent compliance-consultant review of underwriting and due-diligence policies and practices and continued cooperation. Commission Staff have indicated they will not vary the MCDC settlement terms and hope to foster "first-in" behavior, saying that firms not self-reporting will face harsher sanctions. Industry groups (SIFMA and Bond Dealers of America) have asked the Commission Staff for some changes to the Initiative, including extending the program beyond its stated September 10 sunset and lowering the penalty cap below $500,000 for smaller broker-dealers. Thus far, the Commission Staff has refused to modify the program. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)