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Legal Experts: SEC Harrisburg Action Has Ripple Effect

The Securities and Exchange Commission’s fraud charge and cease-and-desist order against Harrisburg, Pa., have larger implications for secondary market disclosures, legal experts said.

“Market studies indicate that a significant number of municipal securities issuers are noncompliant with at least some of their continuing disclosure obligations,” partner William Rhodes and associate Tesia Stanley wrote in a special commentary for Philadelphia law firm Ballard Spahr LLP. “It is especially imperative that municipalities struggling to remain solvent are current in their continuing disclosure obligations and provide accurate and complete information.”

The SEC last week said Harrisburg, mired in $350 million of debt largely from financing overruns to an incinerator retrofit project, misled investors about its deteriorating finances from 2009 to 2011. Its charges are the first citing a city for not submitting disclosures to the Municipal Securities Rulemaking Board’s EMMA website.

Essentially, the commission said that in the absence of audits or securities disclosure statements, other forms of public expression such as budgets posted on websites or even state of the city addresses amount to disclosure.

The SEC cited a 2009 budget that did not include the incinerator debt guarantee payments Harrisburg knew would likely be necessary, and that misstated the city’s credit rating. The SEC also noted that then-Mayor Stephen Reed improperly called the related financial difficulties an “additional challenge” and an “issue that can be resolved” after the city clearly knew it would have to make additional debt guarantee payments.

“Investors should be expected to act reasonably, and if municipalities don’t post disclosure in a timely manner, then investors can reasonably look elsewhere,” Rhodes, who chairs Ballard Spahr’s public finance group, said in an interview Monday. “If you’re a weak credit, it’s all the more important to get up to speed. Don’t wait until the next time you come to market. The total mix – a buzzword the SEC has used since the mid-1990s -- has to be robust.”

One upshot, according to Rhodes and other legal experts, is that some distressed cities could get skittish about what information they report and attorneys could warn issuers to be careful what they say. “If I’m a politician, I want to be able to make my speech without being vetted,” said Rhodes.

The SEC has also settled with Illinois and New Jersey after accusing those two states of sloppy disclosure about pension liabilities. It settled similar charges against San Diego in 2006, and secured financial penalities from four city officials in 2010.

Moody’s Investors Service on Monday called the SEC’s increasingly aggressive stance on disclosure requirements a long-term credit positive for the industry.

“While the city avoided fines and did not admit to wrongdoing, the Harrisburg fraud charge alerts the growing number of distressed municipalities about the SEC’s stepped-up scrutiny,” the rating agency said. “Increased enforcement gives municipal issuers a stronger incentive to provide accurate and timely financial disclosure.”

Harrisburg, Pennsylvania’s 49,000-population capital, expects to close on the lease of its incinerator to the Lancaster County Solid Waste Management Authority next month. Later in May, state-appointed receiver William Lynch expects to submit a plan to lease the system of municipal parking garages to the Commonwealth Court of Pennsylvania.

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