Investing

SEC Concludes Charges Against 14 Municipal Underwriters

Chris Lange

Published: February 3, 2016 12:40 pm

Last Updated: January 13, 2020 1:40 pm

The U.S. Securities and Exchange Commission (SEC) recently announced enforcement actions against 14 municipal underwriting firms regarding violations in municipal bond offerings. These actions conclude the charges against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.

Essentially, the SEC found that between 2011 and 2014, the 14 underwriting firms sold municipal bonds that used offering documents containing materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations.

Also the agency found that the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

The 14 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future. Under the terms of the MCDC Initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm.

Overall, 72 underwriters have been charged under the voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.

Andrew J. Ceresney, director of the SEC’s Enforcement Division, commented:

The settlements obtained under the MCDC initiative have brought much-needed attention to disclosure obligations in municipal bond offerings. As part of the settlements, 72 underwriting firms – comprising approximately 96% of the market share for municipal underwritings – have agreed to improve their due diligence procedures and we expect that investors will benefit from those improvements.

According to the SEC:

The MCDC Initiative, announced in March 2014, offered favorable settlement terms to municipal bond underwriters and issuers that self-reported violations. The first enforcement actions against underwriters under the initiative were brought in June 2015 against 36 municipal underwriting firms. An additional 22 underwriting firms were charged in September 2015. All of the firms settled the actions and paid civil penalties up to a maximum of $500,000.

The initiative is continuing with respect to issuers who may have provided investors with inaccurate information about their compliance with continuing disclosure obligations. The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking important information about their municipal bond holdings.