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Health Care

Foley & Lardner LLP: SEC's MCDC Initiative - The Clock is Ticking

By David Y. Bannard

Not-for-profit health care providers that have borrowed on a tax-exempt basis within the last five years should be aware of the Securities and Exchange Commission’s (SEC) Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative. The MCDC Initiative applies to municipal issuers and obligated persons, such as tax-exempt hospital borrowers, that provided materially misleading disclosure in Official Statements issued within the past five years regarding compliance with their continuing disclosure obligations under SEC Rule 15c2-12. The SEC is offering to enter into settlements pursuant to which such borrowers neither admit nor deny wrongdoing, but agree to a cease and desist order against future misleading disclosure and agree to certain undertakings, such as remedying all past disclosure failures, cooperating with subsequent SEC investigations, disclosing the settlement terms for five years in Official Statements, and establishing training programs regarding continuing disclosure obligations. However, the MCDC Initiative expires on September 10, 2014. After that date, the SEC has indicated that penalties for such misleading disclosure are likely to be more severe and may include fines.

Under Rule 15c2-12, the SEC requires underwriters of municipal bonds to obtain a continuing disclosure undertaking from the ultimate borrower of the bond proceeds. The borrower is required to file certain financial and operating information annually with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) website as well as post notices of certain events on EMMA. The disclosure document relating to each issue of bonds, the Official Statement, must contain a section describing the borrower’s compliance with its continuing disclosure undertaking over the prior five years. A failure to accurately and completely describe any failure to meet the requirements of the undertaking could be important to an investor and, therefore, constitute a material misstatement or omission.

One aspect of the MCDC Initiative that has attracted a good deal of attention is the “modified prisoner’s dilemma” the SEC has created. Both the underwriters of municipal bonds and the ultimate borrowers of such bonds are being asked to self-report any material misstatements or omissions separately and, while underwriters will be assessed financial penalties, those penalties are capped. Thus, many analysts have suggested that underwriters may be motivated to report all disclosure failures, whether or not they are material. The SEC has indicated that it will seek to match the borrowers’ and underwriters’ MCDC reports. A borrower that fails to self-report under the MCDC Initiative may find the SEC investigating based upon a report filed by its underwriter. Thus, it is likely prudent for all such tax-exempt borrowers to review promptly the statements in their Official Statements for the past five years regarding their compliance with the continuing disclosure undertakings.

The SEC’s announcement regarding the MCDC Initiative and the form of self-reporting questionnaire are available here.

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