SEC Action Against Municipal Bond Issuer Underscores the Importance of Due Diligence
A recent enforcement action by the Securities and Exchange Commission (SEC) against a municipal bond issuer and an individual staff member underscores the importance for issuers of conducting adequate due diligence with respect to bond offering documents (i.e., Official Statements).
On August 23, the SEC announced the settlement of charges against a municipal financing authority in California (the "Issuer") and its then-Executive Director for inaccurate statements that appeared in the Issuer's offering documents. The underwriter of the bonds and the related underwriter representative also settled charges related to the inaccurate statements. The SEC became aware of violations as part of its review of municipal issuers and underwriters that did not voluntarily self-report under the SEC's Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which had offered more lenient penalties for parties that voluntarily reported possible inaccuracies. The SEC announcement can be found here.
According to the SEC announcement, for a number of years the Issuer had failed to provide necessary information on the Electronic Municipal Market Access (EMMA) system as required by its outstanding continuing disclosure agreements. In its offering documents, the Issuer failed to properly disclose that it had not made all such required continuing disclosure filings. The SEC brought charges against the Issuer, its then-Executive Director, the underwriter and the underwriter representative. The Issuer agreed to take certain corrective measures. The Executive Director agreed to pay a fine of $37,500 and agreed to be barred from participating in any future municipal bond offerings. (The underwriter agreed to pay a $150,000 fine and the underwriter representative agreed to a $15,000 fine and a six-month suspension from the bond industry.)
The Chief of the SEC Enforcement Division's Public Finance Abuse Unit cautioned that "issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations." This latest SEC enforcement action serves as a reminder to issuers to carefully consider how to manage their due diligence responsibilities with respect to bond offering documents such as Official Statements.