SEC enforcement of federal securities laws

If your government issues public debt, this notice may be of interest to you. According to the US Securities and Exchange Commission (SEC) website, the Division of Enforcement is concerned about “potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents.” Because of this concern, the SEC has undertaken a new initiative to identify and clean up false certifications.

Under the new Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative), the SEC is requesting that issuers and underwriters of municipal securities self-report material false certifications of compliance in bond offering documents. Key points about the initiative include:

  1. Deadline for underwriters to self report is September 10, 2014, at midnight (September 9, for all practical purposes); deadline for issuers has been extended to December 1, 2014
  2. Time period covered is the past five years of bond offerings, however, municipalities must consider the time period covered by the statement of compliance in those bond offering documents
  3. Term “material” has not been defined
  4. Recommended fine for underwriters under the initiative is $20,000‒$60,000 per instance up to $100,000, $250,000 or $500,000, depending on the size of the company; fines are not being recommended for issuers
  5. SEC has not made any assurances with respect to individuals connected with the underwriter or issuer and whether they might be penalized

Following are the Government Finance Officers Association (GFOA) recommendations provided during the 2014 GFOA Annual Conference session, “IRS/SEC Enforcement: Avoiding an Enforcement Action”:

  • If issuers know of a false certification, strongly consider self-reporting under MCDC Initiative
  • If issuers have no reason to believe that a false certification exists, then should not self-report
  • If issuers have reason to believe that there is a possibility of a false certification, the issuer should work with their counsel and underwriters to conduct due diligence on materiality before making a decision to self-report
  • Communicate with bond counsel, disclosure counsel, underwriter counsel, and financial advisors
  • Coordinate due diligence with all underwriters for all bond issues in past five years
  • Review GFOA’s best practices

We expect the increased scrutiny on municipal securities to continue beyond this initiative. Regardless of whether your government decides to self-report, we recommend that all entities issuing public debt take a closer look at their policies and procedures to ensure that they are in compliance going forward. The SEC has made it very clear that no issuer is too small to be involved in an enforcement action. In addition, penalties for violations uncovered after the deadline for self-reporting may be far greater than those mentioned above.

Learn more about the MCDC Initiative and view the self-reporting questionnaire >

Learn more about the case that inspired the initiative >

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.