On May 6, 2013, the Securities and Exchange Commission (the “SEC”) issued important guidance to public officials regarding their legal responsibilities for accurate disclosure to the secondary market for municipal securities. This guidance appears in a settled cease and desist proceeding against the City of Harrisburg, Pennsylvania (the “City”) and a related SEC Section 21(a) report of investigation. The proceeding relates to the failures of the City to adequately disclose its deteriorating financial condition and credit ratings during the period 2009 to 2011. The SEC describes the City as “a near-bankrupt city under state receivership” largely due to $260 million in debt guarantees for a municipal resource recovery facility.
The SEC’s statements are important because they represent the first time the SEC charged a municipality for misleading statements outside of its securities disclosure documents. In this case, the misleading statements were in the City’s budget and accompanying transmittal letter, the annual State of the City address and a mid-year fiscal report, each of which were available on the City’s website. The significance of this information was heightened because the City did not comply with its continuing reporting obligations by failing to file its annual CAFR and did not file material event notifications to report its ratings downgrades, thus leaving investors dependent on other public information from the City about its financial situation. The SEC emphasized that anti-fraud liability is based upon the particular facts and circumstances and that written or oral statements of public officials, even if not intended to be the basis of investment decisions, but which nevertheless may be reasonably expected to reach investors and the securities markets, can affect the total mix of information available to investors and be the basis for antifraud liability. In this connection, the SEC referred to its 1994 interpretive guidance concerning the obligations of participants in the municipal securities markets under the antifraud provisions of the federal securities laws and to its Orange County report emphasizing the responsibilities of public officials for disclosure in connection with primary offerings. The Harrisburg enforcement action extends those responsibilities to disclosure to the secondary market.
In view of their disclosure responsibilities, the SEC cautions public officials to consider taking appropriate steps to reduce the risk of misleading investors, including adopting disclosure policies, procedures and controls and assuring that those persons responsible for disclosure receive adequate training.
The Harrisburg enforcement action sends a clear message that public officials need to be mindful of their municipal securities disclosure obligations, whether dealing with formal disclosure documents designed for investors in both the primary and secondary markets or other statements that include relevant information, especially when there are delays in providing formal disclosure information. Thus, public officials should seek to comply with continuing disclosure and material event notification requirements and, if they are unable to provide those disclosures, they should so notify the markets and provide such of the required information as they can, while at the same time being especially sensitive to the accuracy of the other information that may be available to investors. Furthermore, compliance with these obligations can best be assured if there are specific disclosure policies, procedures and controls in place that are tailored for and proportionate to the needs of the particular issuer.