SEC: Issuer Settlements Show Widespread, Pervasive Disclosure Problems

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WASHINGTON – The Securities and Exchange Commission's settlements with 71 issuers announced on Wednesday under a voluntary continuing disclosure enforcement initiative showed "a widespread and pervasive problem" with continuing disclosure in the municipal bond market but have led to some improvements, the SEC's enforcement chief said Wednesday.

The settlements, which include large and small issuers as well as non-profit borrowers from 45 states, were part of the SEC's Municipalities Continuing Disclosure Cooperation initiative, which promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.

The settlements included disclosure failures that occurred between 2011 and 2014 and were the first ones with issuers under the initiative since the first MCDC action was announced against California's Kings Canyon Joint Unified School District in July 2014.

Andrew Ceresney, director of the SEC's enforcement division, said the commission has seen a dramatic uptick in the number of disclosure filings with the Municipal Securities Rulemaking Board since the MCDC initiative was announced in 2013.

"We think that … market participants are much more focused on [disclosure] issues and [there are many] more that are complying at a much greater rate than they were prior to the initiative," said Andrew Ceresney, director of the SEC enforcement division. "Having said that, we are obviously going to monitor the market closely to make sure that these types of violations are not continuing, but signs are that the market has gotten the message."

However, Ceresney made clear that the scope and diversity of the 71 issuers and borrowers that settled "demonstrate that continuing disclosure failures were a widespread and pervasive problem in the municipal bond market."

Ceresney refused to comment on whether the initiative's findings warrant SEC regulation of issuers' disclosures, saying this is a policy rather than an enforcement matter. He also declined to comment on whether the SEC is investigating any issuer officials in connection with the settled cases.

The enforcement chief said the SEC believes it is important to hold individuals accountable and that he can't rule out actions against individuals in the future.

Ceresney also refused to comment on whether there will be more rounds of issuer settlements under the initiative or how many reporting issuers the SEC reviewed under the program. The underwriter settlements came out in three rounds. The SEC fined 72 muni underwriting firms, comprising 96% of the market share for muni underwritings a total of $18 million.

One lawyer speculated that the SEC did not disclose whether there would be more settlements because of a disagreement within the commission about whether to proceed with the initiative.

The lawyer said it would not be surprising if this is the only round of issuer settlements because the SEC had decided to only go after the most egregious examples of issuers not meeting their disclosure obligations.

"The point is that they clearly were trying to get a representative [group], at least one from each state, and trying to show it was across-the-board," the lawyer said, adding there's "a good likelihood" the SEC "may just declare victory and go home."

Another lawyer said the wording of the SEC's announcement seems to indicate there may be more rounds. The SEC's release said, "Today's actions are the first against municipal issuers since …."

LeeAnn Gaunt, chief of the SEC enforcement division's public finance abuse unit, said in the release that because the issuers voluntarily agreed to take steps to prevent future violations, both they and their investors have benefited from the initiative.

Each of the issuers settled without admitting or denying the SEC's findings and agreed to establish appropriate written policies and procedures as well as conduct periodic training regarding continuing disclosure obligations to ensure compliance with federal securities laws. They each also agreed to designate an individual or officer responsible for ensuring they are compliant with their policies and procedures, which must be adopted within 180 days of the settlement. The designated individual will also be responsible for implementing and maintaining a record of the issuer's disclosure training.

Additionally, the issuers agreed to bring themselves into compliance with all of their continuing disclosure undertakings, including past delinquent filings, within 180 days of the settlement if they are not currently in compliance. They will have to disclose their settlements in future offering documents and cooperate with any subsequent SEC investigations.

The issuer settlements bring the total number of settlements under the initiative to 142 actions against 143 respondents. Although there were 71 issuers named in the actions the SEC announced Wednesday, two Connecticut-based issuers, Lawrence & Memorial Hospital Inc. and its parent corporation Lawrence & Memorial Corp. were combined into one action. The 71 issuers include two states: Minnesota and Hawaii. Seven of the issuers were state authorities, including several focused on transportation, and 29 were localities, which ranged from small towns to larger counties. Additionally, there were seven local authorities, nine school districts or charter schools, and six colleges or universities. Also included were five healthcare providers, five utilities, and one retirement community.

The issuer settlements were somewhat similar to the ones for underwriters in that they included both negotiated and competitive bond deals, although negotiated transactions were more heavily represented.

The SEC also listed each issuer or obligated person's violations in bullet-point form as it did for underwriters. Numerous issuers only had one bullet point listing violations in their settlements and the majority had three or fewer. However, some, like the Andover, Kan. and the Township of East Brunswick, N.J., had five. Berrien County, Mich. had the most bullet points listed, with seven.

The conduct the SEC cited in the settlements ranged from instances where issuers failed to disclose that they had not made continuing disclosures at all to those where the disclosures were very late or incomplete. They also included situations where issuers made false statements that they were in compliance with their continuing disclosure agreements as well as those where issuers were silent about their continuing disclosure and misled investors by omission.

Failure to file a material event notice was also mentioned for example in the settlement with Missouri-based Ascension Health Alliance, which the SEC found failed to file certain notices of defeasances before a 2012 negotiated offering.

The settlements were unlike those with underwriters in that the issuers and borrowers were not fined.

Bond Dealers of America and the Securities Industry and Financial Markets Association each said in releases that MCDC has been a difficult process for the market and urged the SEC to revise and update its Rule 15c2-12 on disclosure.

Citing its recent study of disclosure in the 50 states, SIFMA added it believes "states are in a unique position to improve municipal disclosure" and it would like to see states "adopt policies to insure that local government issuers, at a minimum, meet all federal and contractual requirements."

The settlements may provide fuel for the National Federation of Municipal Analysts' recent disclosure recommendations, including one calling for the SEC to regulate issuers' disclosure practices.

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Enforcement Law and regulation
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