On September 30, the Securities and Exchange Commission (SEC) announced enforcement actions against 22 municipal bond underwriters, the second round of enforcement actions brought by the SEC under the Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative). The SEC brought these enforcement actions based on the underwriters self-reporting potential continuing disclosure-related violations of federal securities law. The SEC’s Division of Enforcement announced the MCDC Initiative, which offered standardized settlement terms to underwriters and issuers who self-reported potential securities law violations, in March 2014.
When combined with the first round, the SEC has brought enforcement actions against 58 underwriters and levied civil penalties of $13.4 million. Fines under the MCDC Initiative are based on an underwriter’s self-reported activity and are subject to a cap based on the underwriter’s revenue. The fines in the second round of enforcement actions ranged from $20,000 to $500,000, the minimum and maximum amounts under the MCDC Initiative. The average fine in the second wave of enforcement orders was $187,273, more than $70,000 less than the $258,333 average fine levied by the first round of enforcement actions.
As with the initial round of administrative orders, the SEC cited one to three instances of issuer non-compliance that an underwriter had failed to identify and adequately disclose. Similar to the initial round of orders, the vast majority of the instances discussed cited complete failures to file required information or a delay of multiple months or even years in filing the information. Further, many of the cited scenarios described issuers that had multiple filing deficiencies. Some other lessons illustrated by the examples in the second round of orders are:
- A supplement may not cure an omission in the official statement. In connection with a negotiated offering, an issuer released a supplement to the official statement to disclose compliance deficiencies which were not disclosed in the official statement. This supplement, issued four months after the offering, did not cure the initial failure to disclose such non-compliance (Sec File No. 3-16867; Edward D. Jones & Co., L.P.).
- To rely on a cross-reference, it must be properly filed. In two offerings, an issuer filed a required audited financial report in an official statement prior to the applicable deadline. However, the issuer’s failure to timely cross-reference the report on EMMA breached its continuing disclosure obligations which should have been disclosed (SEC File No. 3-16863; Commerce Bank Capital Markets Group).
- Late filings must be disclosed even after submitting a late notice filing to EMMA. In a negotiated offering, an obligor’s failure to disclose that it filed an annual financial report four months late was cited, even though the obligor had filed a notice of the late report with EMMA (SEC File No. 3-16861; BB&T Securities, LLC).
- To the SEC, a relatively short delay may be material non-compliance. One order highlighted an issuer that failed to disclose it had filed an annual report 33 days late and also failed to file the late filing notice (SEC File No. 3-16874; Estrada Hinojosa & Company, Inc.).
- As with the first round of enforcement orders, the scenarios provided did not discuss examples of a failure to file notices of the listed events required by Rule 15c2-12.
Industry experts believe the SEC will announce at least one more round of enforcement actions against underwriters because some of the leading municipal underwriters have not entered into settlement agreements under the MCDC Initiative. This round would be likely followed by enforcement actions against municipal issuers who self-reported under the MCDC Initiative.
The SEC’s announcements continue its efforts to highlight investor protection and improve disclosure in the municipal bond market which has been a focal point since the SEC highlighted perceived deficiencies in its 2012 Municipal Market Report.
See the SEC’s press release which includes a listing of the underwriters and their respective fines and a link to the SEC’s orders.