PHILADELPHIA – The Securities and Exchange Commission will continue to go after investment bankers and issuer officials to try to debunk the notion that enforcement is just another "cost of doing business," an SEC official said here on Friday.
Mark Zehner, deputy director of the SEC enforcement division's public finance abuse unit, made the remarks on a panel at the Bond Dealers of America's National Fixed Income Conference here on Friday. He also touched on important considerations market participants should take into account when deciding whether a bank loan or alternative financing should be considered a loan or a security.
Zehner said the focus on individuals in enforcement actions stems from his unit's concern that before its creation in 2010, the muni market wasn't getting the enforcement division's intended message about the importance of complying with federal securities laws.
He said the $1 million Miami settlement with the SEC, finalized on Wednesday, over commission charges that the city fraudulently hid its deteriorating financial condition from investors is a good example of the SEC driving its message home.
"We are trying to come up with different tools, different ways of making sure our message is heard and understood," Zehner said. "I think a million dollar penalty against the city of Miami is a good way of sending the message to other issuers that yeah, you should be concerned about federal securities law issues."
He added that similarly, in the dealer area, the SEC is taking enforcement action against investment bankers.
"You should expect that, whenever we are looking at the work of an investment banking firm, it's not going to simply be with respect to the firm," Zehner said, adding that considering actions against individuals is no longer a trend but a given. "We may very well have concerns with the firm, but we have learned the hard way that simply naming firms is often perceived by some as simply the cost of doing business."
Zehner emphasized that while the enforcement staff is not afraid to pursue individuals when it finds a firm or issuer violated the securities laws, they do not automatically bring charges against every associated firm or entity. He listed several examples, including the case against Miami, where there was an investigation into the activities of the underwriter but no violations were found.
Zehner also gave an enforcement perspective on the debate between whether a bank loan or direct placement should be considered a security, which would mean it would have to be placed by a broker-dealer rather than a muni advisor.
The issue has been a hot topic in the industry and was the subject of a jointly issued Municipal Securities Rulemaking Board and Financial Industry Regulatory Authority notice in April.
The notice told firms that they need to conduct adequate due diligence on the bank loan and direct placement issue using standards outlined in the Supreme Court case Reves v. Ernst & Young, Inc. The notice came after regulators concluded some firms may not have fully considered the applicability of the securities laws and rules underlying bank loans. FINRA officials have also made clear that their examiners are probing firm's involvement with bank loans.
The notice also warned municipal advisors to be aware that they may be engaging in direct placements without fully understanding whether they are acting as MAs or broker-dealers.
Zehner urged the audience members to look at the issue "from a big picture perspective" and advised both dealers and MAs to make decisions with the mindset of avoiding activities that would attract the enforcement division's interest.
"The fundamental reason we have registered municipal advisors is to make sure the issuers are not harmed," Zehner said. "So whatever you are doing, whatever label you put on it, if you are doing something that can reasonably be perceived as hurting the issuer … and you don't have the documentation to show that price and those terms were reasonable, that's going to increase your profile for us."
He said that separate considerations for broker-dealers should come from the standpoint that their role is to protect investors.
"If you are selling whatever the example may be to a massive bank that has its own credit analysis and probably does credit analysis better than you do, then it is hard to argue that you are somehow hurting the investor," Zehner said. "If, on the other hand, you are selling it to a wealthy little old lady, if you are selling to someone who may not be in a position to evaluate suitability … you could raise your profile."
