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Municipal Regulators Crack Down on Disclosure Enforement

Municipal-bond regulators are checking to ensure that securities underwriters comply with obligations requiring issuers meet disclosure obligations, officials said at a government-finance conference.

The U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority in the past two weeks began asking underwriters in the $3.7 trillion market to review whether municipalities provided required disclosures when selling bonds, according to Leslie Norwood, vice president of the Securities Industry and Financial Markets Association.

“There’s been an increase in the scrutiny they receive,” Norwood said during an interview at the Government Finance Officers Association’s debt committee meeting over the weekend in Chicago. “It’s something dealers are reacting to.”

The SEC has made clear that disclosure must improve in the municipal-bond market, where issuers sometimes produce financial reports late, provide incomplete information or don’t make it available at all. In March, regulators said they would begin checking on whether dealers have been making sure their clients comply, Norwood said.

Under securities law, municipal borrowers don’t have to provide financial and other information, yet their underwriter banks are required to put language in bond documents that forces the issuers to meet disclosure guidelines.

Proof of Compliance

Some dealers didn’t maintain and didn’t require issuers to maintain adequate written evidence that they complied with disclosure obligations, according to the March alert sent by the SEC. Failure to comply with due diligence on its obligation can lead to violations of anti-fraud provisions of securities laws and other SEC and Municipal Securities Rulemaking Board rules, the alert said.

More borrowers have been asked in recent weeks to go back and document their compliance with the disclosure requirement, Frank Hoadley, director of capital finance for Wisconsin and a member of the debt committee, said in an interview.

During their meeting, the finance officers also approved a new guideline on how issuers should show their pension obligations to investors, a move also driven by the SEC’s effort to improve disclosure in the market.

“It’s clear that the SEC has taken this issue on,” said Ben Watkins, a member of the committee and director of bond sales for the state of Florida. “It’s an initiative that is front and center on their agenda.”

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