More SEC Pension, Disclosure Cases May Be On Way

The Securities and Exchange Commission will continue to consider possible enforcement actions over pension and other disclosure failures such as those that occurred in Illinois and Harrisburg, Pa., the SEC’s muni office chief said Wednesday.

Speaking on a panel about municipal market issues at the Financial Industry Regulatory Authority’s annual meeting here, the SEC’s John Cross highlighted both cases as examples while discussing the future of SEC enforcement actions and the commission’s goal of improving secondary market disclosure in the muni market.

Illinois settled with the SEC in March after the commission charged it with securities fraud for failing to disclose that its statutory funding plan significantly underfunded its pension obligations and increased risk to its overall financial condition.

Cross told attendees that cases relate to pensions will continue to be of interest because of the large amounts of money involved.

“The dollars are so big in pensions,” he said.

Cross added that public officials also need to take care about the market-relevant information that is included in their public statements.

The SEC hit Harrisburg with a cease and desist order earlier this month after it found the city had made misleading public statements about its financial condition, while failing to file timely continuing disclosure documents. The commission contended investors had to rely on various fraudulent statements made by city officials in the absence of proper disclosure filings. The information was stale, he said.

Cross said the SEC wants to encourage state and local governments to have procedures in place for continuing disclosure, as well as for releasing current information more regularly. His office is considering ways to accomplish this, he said.

“We want to encourage more interim financials,” he told the attendees.

Cross also said that although the forthcoming and long-awaited municipal advisor definition will not be precisely what is suggested by legislation pending in the House of Representatives, but will address some of the broker-dealer community’s concerns that the SEC’s initial proposed definition in 2010 rule might have cast too wide a net.

H.R. 797, sponsored by Reps. Steve Stivers, R-Ohio and Gwen Moore, D-Wis., would clarify Section 975 of the Dodd-Frank Act and define MAs as those engaged with issuers to provide financial advice for compensation. The bill contains exceptions for dealers seeking to be underwriters and those providing related advice, as well as bankers, swap dealers and governmental board members.

But some market participants have complained the measure goes too far with such exemptions.

“We expect to be addressing that theme in our rules,” Cross said. “We’re not going to do exactly, technically what they did.”

Other panelists discussed a variety of issues concerning the municipal market, including the Municipal Securities Rulemaking Board’s fair-dealing rule.

Jim Jones, president of dealer firm Crews & Associates, Inc. in Little Rock, Ark., said the requirement under Rule G-17 for underwriters to make certain disclosures to muni issuers  has created an awkward situation between firms and their customers. The rule requires underwriters to inform issuers that they do not have a fiduciary duty to put the issuer client’s interest first. But this has led some customers to question the trustworthiness of the firm or to ask why its business practices seem to have changed.

“That can be especially difficult with a new customer,” Jones said.

The MSRB is currently working on an initiative designed to distill G-17’s more than 30 pages of interpretive guidance into a more manageable size, in part by creating two stand-alone rules defining sophisticated municipal market professionals and laying out dealer obligations to SMMPs. The board also is “ giving ... a lot of thought” to the creation of a best execution rule, according to MSRB deputy general counsel Lawrence Sandor. The rule was recommended by the SEC’s report on the municipal market.

For reprint and licensing requests for this article, click here.
Law and regulation
MORE FROM BOND BUYER