Recent Enforcement Actions By The Sec Underscore The Importance Of Meeting Municipal Disclosure Obligations
Overview
Since an SEC 2012 report on the municipal securities market, in which the SEC highlighted both inadequate disclosure and shortcomings in current disclosure practices, the SEC has increased its regulatory focus on continuing disclosure by municipal issuers. The SEC has subsequently brought a series of enforcement actions, as summarized below, that set precedents in SEC enforcement and illustrate that agency’s resolve to address the issue of municipal disclosure.
An administrative proceeding by the SEC against the City of Harrisburg, Pennsylvania was the first time where the SEC charged a municipality for making misleading statements outside of its securities disclosure documents. The SEC charged Harrisburg with securities fraud for making misleading public statements in a state of the City address, the City’s budget report, and in certain annual and mid-year financial statements. Furthermore, all these statements were made while the financial condition of the City was deteriorating and the publicly available financial information was either stale or incomplete.
The first instance where the SEC assessed a financial penalty against a municipal issuer was when the Greater Wenatchee Regional Events Center Public Facilities District in the state of Washington, paid a $20,000 penalty after the District defaulted on approximately $41,000,000 of bond anticipation notes it had issued to finance a multi-use arena and ice hockey rink. The SEC found that the official statement for the notes was false and misleading because it stated that no independent review of the financial projections in the official statement had been made when in fact such reviews had been made, that the official statement failed to state that the projections had been questioned and revised, and that municipal support for the project was constrained by limitations on debt capacity. Additionally, the underwriter Piper Jaffray and Co. and its lead banker were required to pay penalties of $300,000 and $25,000, respectively, for violating the securities laws.
In a West Clark Community Schools proceeding in the state of Indiana, the SEC charged the School District with securities violations for claiming in a 2007 official statement for a bond offering, that “in the previous five years, the school district has never failed to comply, in all material aspects, with any previous undertakings…” In fact, the School District had prepared an official statement in 2005 for a bond issue and subsequently entered into an undertaking to provide annual information for such bonds. However, the School District had never provided any annual information from 2005 to 2010. Additionally, as in the Greater Wenatchee proceeding above, a separate administrative proceeding was brought against the underwriter City Securities and its lead banker, wherein City Securities agreed to pay nearly $580,000 to settle the SEC charges, and the lead banker of City Securities agreed to an industry bar for one year and a permanent supervisory bar for violating the securities laws.
Finally, in 2013, the SEC charged the City of Miami and its budget director with securities fraud in connection with several bond offerings and other disclosures made to the investing public. The SEC also charged the City with violating a 2003 cease and desist order entered against the City for similar conduct. This was the first time the SEC sought injunctive action against a municipality under an existing SEC cease and desist order.
The proceedings above are instances where, for the first time, the SEC (i) charged a municipal issuer with making materially misleading statements outside of disclosure documents, (ii) imposed financial penalties against a municipal issuer, (iii) charged a municipal issuer with making false statements about continuing disclosure to bond investors in an official statement, and (iv) charged a municipal issuer with violating an existing cease and desist order.
These are just a sample of recent SEC enforcement actions. Taken as a whole, they illustrate the agency’s emphasis on ensuring that municipal issuers comply with their disclosure and continuing disclosure requirements when issuing municipal obligations. This underscores the need for municipal issuers to analyze their past continuing disclosure undertakings and determine whether they are in compliance with such undertakings. If non-compliance issues arise, then further thought must be given to participating in the SEC’s Municipalities Continuing Disclosure Cooperation Initiative in order to avoid becoming the subject of an SEC enforcement action like the ones listed above.