Regulatory Amnesty: Evidence from the Municipalities Continuing Disclosure Cooperation Initiative

Abstract

We examine the impact of the SEC’s 2014 Municipalities Continuing Disclosure Cooperation (MCDC) initiative, a regulatory program that granted amnesty, in the form of favorable settlement terms, to municipal debt issuers and underwriters that voluntarily self-reported making inaccurate disclosures in their bond offering documents. Because violations of municipal continuing disclosure requirements are publicly observable, this setting allows us to directly observe the impact of the initiative on the overall level of disclosure compliance. Consistent with entities facing the greatest ex-post enforcement threat being the most likely participants, we find that 16% of underwriters with non-compliant issuers, comprising 65% of municipal debt, participated in the initiative, while only 2% of non-compliant issuers, comprising 5% of municipal debt, participated. However, we find that municipal issuers subject to continuing disclosure requirements are 33% more likely to provide no disclosure following the initiative, suggesting that the amnesty program was ineffective and exacerbated issuers’ lack of compliance with continuing disclosure requirements. We also find that this effect is significantly weaker for municipal issuers with underwriters that participated in the amnesty program, relative to those with underwriters that did not, suggesting that participating underwriters have a positive influence over municipal issuers’ continuing disclosure decisions, albeit not a sufficient influence to prevent a decline in compliance following the MCDC. Overall, our findings highlight that the success of regulatory amnesty programs depends on the credibility of the subsequent enforcement threat against non-compliant entities, and provide evidence on the role of underwriters in municipal issuers’ continuing disclosure decisions.