SEC Says 71 Muni Borrowers Lied About Disclosure Histories

Updated on
  • Borrowers hid disclosure lapses from investors in bond sales
  • Agency reaches settlements with issuers, doesn’t access fines

The U.S. Securities and Exchange Commission said it reached settlements with 71 state and local borrowers for lying to investors about their compliance with disclosure requirements when they sold bonds in the $3.7 trillion municipal market.

Issuers from New York’s Syracuse University to Boulder County, Colorado, to Hawaii voluntary self reported “materially false statements or omissions about their compliance with continuing disclosure obligations” in bond offering documents from 2011 to 2014, the SEC said in a statement. Muni issuers are required to provide investors with annual financial reports and other material event information that could affect the value of their debt.

“Continuing disclosure failures were a widespread and pervasive problem in the municipal bond market,” Andrew Ceresney, director of the SEC enforcement division, said in the statement. The actions will bring attention to disclosure problems in the market and lead to increased compliance, he said.

The actions came under an SEC initiative to crack down on disclosure failures by offering issuers favorable settlement terms in exchange for self-reporting material misstatements and omissions about their compliance with disclosure requirements. Under terms of the settlement the issuers will “cease and desist” from future violations and establish procedures to ensure compliance in the future. The SEC has brought 143 actions over disclosure in the market, according to the release.

Minnesota Example

In 2012, the SEC said in a report that failure to properly comply with disclosure requirements was “a major challenge” for investors trying to find information about their municipal-bond holdings. In February, 14 underwriters agreed to settle allegations by the SEC that they issued bonds for municipalities that failed to make adequate disclosures.

Minnesota, for example, told investors that it hadn’t failed to comply with disclosure requirements in bond issues in 2011 and 2013, when in fact it had failed to file required audit reports in 2008 and 2010 for previous bond issues, according to the SEC’s order.

The state’s commissioner of management and budget failed to comply “in all material respects with its commitment to provide certain types of continuing disclosure,” the order says.

S&P Expectations

The settlement has afforded Minnesota the opportunity to improve its disclosure, said Myron Frans, the commissioner, who joined the agency in January 2015, in a statement in response to the SEC order.

“Transparency is a critical function of government and I am glad to report that our agency published these required disclosures last August, almost one year in advance of the SEC’s order,” Frans said in the statement.

Meanwhile, when the state sold nearly $799 million of general-obligation bonds earlier this month for highways, economic development and higher education, it detailed its disclosure failures in 2012 and some prior years, according to the official statement.

S&P Global Ratings, in a report Aug. 15 in anticipation of the disclosure settlements, said it would consider the potential credit implications of each agreement on a case-by-case basis, but that it would expect limited impact on the credit quality of issuers.

(Adds Minnesota example, starting in the sixth paragraph.)
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