The SEC is offering municipal borrowers and their bond underwriters reduced penalties in exchange for self-reporting disclosure violations. Hospitals who sold bonds in the last 5 years should determine if they met the rules and if self-reporting is warranted.



Announced in March, the SEC’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative offers issuers, obligors and their underwriters favorable settlement terms if they voluntarily report they sold bonds without disclosing failures to meet continuing disclosure obligations.

The deadline for issuers and obligors to self-report is December 1, 2014, For underwriters, the deadline is September 10, 2014. The deadlines were modified on August 1, see

The MCDC initiative targets violations of continuing disclosure agreements and Rule 15c2-12 and spans a 10-year time period, but there are some simple steps for hospitals to follow in order to decide what to do next.

Continuing Disclosure Agreements

Continuing disclosure agreements (CDA) are included in official statements for bonds offered to the public and typically require hospitals to file annual financial and operating documents within specific dates; some require quarterly filings.

Continuing disclosure was not always a simple matter.

Before the MSRB rolled out its EMMA website in 2008, disclosure required sending information to Nationally Recognized Municipal Securities Information Repositories (NRMSIR).

Some NRMSIRs charged significant subscription fees for accessing their services, which made it costly for hospitals to confirm the information was posted correctly.

By providing a single site for disclosure, EMMA greatly simplified the disclosure burden.

SEC Rule 15c2-12

In addition to continuing disclosure agreements, borrowers who sell bonds in the public markets must comply with SEC Rule 15c2-12.

The Rule requires certain events to be disclosed within 10 days irrespective of what any continuing disclosure agreement may require.

The Rule classifies reportable events as either mandatory, or subject to materiality.

Mandatory events which always require disclosure include:

  1. Rating changes.
  2. Principal and interest payment delinquencies.
  3. Unscheduled draws on debt service reserves reflecting financial difficulties.
  4. Unscheduled draws on credit enhancements reflecting financial difficulties.
  5. Substitution of credit or liquidity providers, or their failure to perform.
  6. Adverse tax opinions or events affecting the tax-exempt status of the bonds.
  7. Defeasances.
  8. Tender offers (excludes regularly scheduled mandatory sinking fund redemptions).
  9. Bankruptcy, insolvency, receivership or similar event.

Events which must be disclosed if material include:

  1. Modifications to rights of bondholders.
  2. Non-payment related defaults.
  3. Consummation of a merger, consolidation or acquisition.


Relevant Time Period

The MCDC initiative covers disclosure violations that could have occurred over the last 10 years.

That’s because the SEC has a 5-year statute of limitations for seeking civil penalties, so bonds offered 5 years ago (in 2009) could have misled investors if there were disclosure failures in the 5 years prior to the date of issuance that were not mentioned in the official statement.

Next Steps

Hospitals can follow some simple steps to determine how to respond to the MCDC initiative:

  1. Determine if bonds were offered to the public in the last 5 years.
  2. For each offering in the last 5 years, determine if there were failures to disclose in the 5 years prior that were not disclosed in the official statement.
  3. Determine whether each failure was materially misleading so that it can be reported it to the SEC before September 10.

Deciding which failures are materially misleading and should be reported is going to be the big question.

The SEC has not provided guidance on materiality, but is likely more concerned with failures to file annual financial and operating documents.

The SEC may be less concerned with issuers who fail to disclose a rating change, but emphasized that those should be corrected as soon as possible once found.

A hospital may decide that a bond insurer downgrade or being a few days late in filing annual financial statements are not material events, while another hospital may take a more conservative approach and decide to report all technical failures to the SEC.

Changes in rating outlook are not considered rating changes, and most direct bank placements are not considered public offerings thus not included in the scope of the MCDC initiative.

According to a 2011 DPC report, half of acute care hospitals failed to meet disclosure requirements at least once from 2005 to 2009.

Given the large number of reports expected by September 10, the SEC will likely have to prioritize and go after serious failures first.

Hospitals should consult with their legal counsel and financial advisors to determine the best course of action.

Click here for an overview of the MCDC initiative on the SEC website.

Email or call (813) 347-9150 to discuss the MCDC initiative and what your organization can do to comply.