Recently, the SEC settled with the City of Harrisburg (City) over violations of Rule 10b-5 in connection with material misstatements and omissions made by the City in its public statements and financial information, during a multi-year period.
This settlement underscores the increased focus by the SEC on state and municipal governments in connection with the trillion-dollar municipal bond market.
The SEC alleged that the City violated Rule 10b-5 as a result of its repeated failure to provide financial information and material events notices. As a result of the City’s failure, investors only had access to stale and misleading financial information. Further, the public statements that the City did provide omitted material information regarding the City’s declining financial condition and credit rating downgrades. As a result, investors and trading markets did not have material information regarding the City’s financial condition.
Settlement Demonstrates the Importance of Disclosure and Dissemination Process
The SEC noted in the cease-and-desist order with the City that the City’s recent efforts to create policies and procedures to ensure that its financial information is accurate were a contributing factor to the SEC’s willingness to settle the administrative proceeding.
During the relevant time period, the City did not have in place policies and procedures to ensure that (i) the financial information it was releasing to the public was accurate in all material respects, and (ii) it was complying with its Rule 15c2-12 continuing disclosure undertakings. The SEC noted in the cease-and-desist order with the City various corrective actions taken by the City.
- Policies and Procedures. The City established a disclosure process by instituting formal written policies and procedures with respect to public statements regarding financial information and its compliance with its continuing disclosure undertakings.
- Designation of Responsibility. The City designated an officer as the individual responsible for filing annual financial information and notices.
- Training. The City also developed a training program for relevant administrative staff.
- Use of Web Site. The City committed to submitting its disclosure policy, together with any amendments on EMMA, and placing it in the City’s Web site.