Relevant Laws: Securities Laws - Continuing Disclosure
Adherence to federal and state laws is a required component of any bond issuance for the borrowing to be binding and legally valid. Below is a sampling of current laws governing the borrowing activities of school districts.
Continuing Disclosure. Rule 15c2-12, governs the preparation and distribution of official statements for municipal securities. While this Rule applies primarily to directly regulated entities such as underwriters, broker-dealers and dealer banks, a significant portion of the burden of compliance with Rule 15c2-12 falls on the issuer to supply certain information and disclosure and to take the proper steps to comply with Rule 15c2-12 in a timely fashion. As an example of the importance of meeting continuing disclosure requirements, the Securities and Exchange Commission (“SEC”) recently charged a school district in Indiana and a municipal bond underwriter with falsely stating to bond investors that the school district had been properly providing annual financial information and notices required as part of its bond offerings. Without admitting to or denying the SEC’s findings, the school district was ordered to cease and desist from violating securities laws and undertake remedial actions and the underwriter agreed to a $580,000 fine along with a one-year collateral bar and permanent supervisory bar for one of its employees.
The SEC recently announced its Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”) to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. The MCDC Initiative provided issuers and underwriters an opportunity to self-report materially inaccurate statements made in final official statements regarding prior compliance with their continuing obligations as described in Rule 15c2-12. The MCDC Initiative began March 10, 2014 and ended for issuers at 12:00 a.m. EST, December 1, 2014 (the deadline for underwriters was September 10, 2014).
Recently, a California school district was charged in the SEC’s first MCDC-related case. The Kings Canyon Joint Unified School District was charged with misleading bond investors about its failure to provide contractually required financial information and notices as part of a November 2010 $6.8 million bond offering. Kings Canyon agreed to settle the charges without admitting to or denying the findings. The settlement includes consent to an order to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act, adopt written policies for its continuing disclosure obligations, comply with existing continuing obligations, cooperate with any future enforcement investigation, and disclose the settlement terms related to the case in any future bond offerings. This decision illustrates the importance of compliance with the continuing disclosure obligation, as the SEC has not specified the level of disclosure failure and the specific omission which led to the violation.