SEC Could Have Materiality Problem With MCDC

07 August 2014

This article from The Bond Buyer describes an August 2014 webinar in which NERA Senior Vice President Dr. Vinita Juneja and attorneys from Ballard Spahr discussed how materiality is proven in court under federal securities laws. The Municipalities Continuing Disclosure Cooperation (MCDC) initiative allows both issuers and underwriters to get favorable settlement terms if they voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. However, said Dr. Juneja, the Securities and Exchange Commission could have trouble punishing issuers and underwriters in court if they choose to fight rather than settle under the MCDC.

Dr. Juneja, who frequently serves as an expert witness in securities litigation, said that if a bond's price does not drop because of a disclosure failure, that could be used as evidence that the information is not material to the market. In a case where an issuer failed to make a disclosure, market studies can determine whether the bond's price likely would have been affected or the court could look at whether a similar disclosure on a similar security moved that other bond's price. But even proving a price impact requires reliable pricing info, Dr. Juneja explained, pointing out that muni securities frequently do not trade for long periods of time or can show notable price discrepancies within the same day.