Man With Hands Over Eyes_000019163093.jpg


According to its July 29, 2013 SEC News Digest, the U.S. Securities and Exchange Commission (“SEC”) charged the municipal bond underwriter, City Securities Corporation (“City Securities”), and a debt securities issuer, Indiana-based West Clark Community Schools (“West Clark”), with “falsely stating to bond investors that the school district had been properly providing annual financial information and notices requires as part of its prior bond offerings.” Besides non-compliance, the SEC website states that its investigation discovered problems with providing “improper gifts and gratuities to representatives of municipal bond issuers.” A settlement of $580,000 and various sanctions are laid out in “SEC Charges School District and Muni Bond Underwriter in Indiana with Defrauding Investors.” Notably, Andrew Ceresney, Co-Director of the Division of Enforcement, says that this is “the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering’s official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings, and an underwriter and its principal for not doing the necessary research to attest to the truthfulness of that claim.” Neither City Securities nor West Clark admiited or denied the charges. Click to read the SEC cease and desist order dated July 29, 2013.

In their recent article, Bracewell & Giuliani LLP attorneys Britt Cass Steckman and Paul S. Maco wrote that the “SEC charged the issuer with violation of Exchange Act Section 10(b) and rule 10b-5 thereunder, a scienter-based fraud charge, as well as violation of Securities Act Section 17(a)(2), a negligence-based charge” and that the focus on scienter “underscores the SEC’s view of the serious nature of the violation.” See “Securities and Exchange Commission (SEC) Fraud Charges Against School District Demonstrate Increased Focus on Disclosure Compliance by Municipal Issuers” (National Law Review, August 1, 2013).

Based on my current research regarding the state of disclosures associated with municipal bond offerings, I agree that there is more to come in this area. Indeed, I believe strongly that current events are only the tip of the enforcement and litigation iceberg.

Certainly the SEC has not been shy about its intent to continue asking tough questions. Interested readers can click to access “SEC Returns Enforcement Spotlight to Issuers and Public Officials and Underscores Importance of Robust Disclosure and Tax Compliance Procedures” (Bracewell & Giuliani LLP Commentary, 2013).

Proper due diligence is always important. With a heightened focus on the municipal bond market by enforcement officers, organizations (and individuals) such as bond issuers, underwriters and asset managers have even more of an incentive to clean house, if necessary. McGuire Woods attorneys Louis D. Greenstein, Charles Wm. McIntyre, Robert Plotkin, Jeremy D. Freeman and Molly M. White offer action steps in “SEC’s Focus on Municipalities and Municipal Securities Continues” (July 24, 2013). They urge issuers (and other interested parties) to carry out a regular review of policies, procedures and internal controls for municipal bonds. They likewise provide a list of items on which SEC regulators have focused to date. These include the following:

  • Financial statement disclosures;
  • Disclosures regarding credit ratings;
  • Use of proceeds;
  • Public announcements concerning financial health and credit ratings;
  • Available staff and outside experts who have disclosure-related duties;
  • Whether an individual has been identified to make sure that there is adequate compliance with policies, procedures and internal controls; and
  • Creation and repeated offering of compliance and disclosure training programs.

I presume that the SEC is interested in vetting training programs (if they exist) that are offered to those persons with a need to know about disclosure and compliance requirements. In addition, I assume that the SEC is reviewing policies, procedures and internal controls for adequacy as well as adherence. After all, an organization can comply with bad policies, procedures and internal controls, thereby offering scant protection to municipal bond investors.