SEC Settles With 14 Municipal Bond Underwriters

The SEC filed fourteen settled actions against municipal underwriting firms this week. The settlements were part of a program that commenced in 2014 called the Municipalities Continuing Disclosure Cooperation Initiative. The program offers favorable settlement terms for municipal bond underwriters who self-reported violations. It is continuing.

The actions filed this week center on the period 2011 to 2014. The offering documents used by the 14 firms when selling municipal bonds typically contained materially false statements or omissions about the issuer’s compliance with continuing disclosure obligations. The underwriter firms also failed to conduct adequate due diligence to identify misstatements prior to the offering.

Each case was settled without admitting or denying the allegations in the Order. The penalties ranged from $500,000 paid by Barclays Capital Inc., D.A. Davison & Co, Janney Montgomery Scott LLC and TD Securities (US) LLC to $20,000 paid by Mitsubishi UFJ Securities (USA) Inc.

Typical of these actions is the one brought against Barclays Capital, Inc., In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17084 (February 2, 2016). Respondent is a registered broker-dealer, investment adviser and municipal advisor. It acted as either a senior or sole underwriter in a number of municipal securities offerings.

Rule 15c2-12 requires that before purchasing or selling municipal securities in connection with an offering the underwriters must obtain executed continuing disclosure agreements. That includes an agreement to provide an annual report containing the financial information and operating data to the MSRB’s Electronic Municipal Market Access system and certain notices. Rule 15c-2-12(f)(3) requires that the final notice disclose instances over the prior five years where the issuer failed to comply with prior continuing disclosure undertakings.

In the offerings involved here Respondent essentially represented that the issuer had not failed to comply in all material respects with any prior continuing disclosure obligations. In fact that representation was incorrect. The Order alleged violations of Securities Act Section 17(a)(2).

To resolve the proceeding Respondent, whose cooperation was considered by the SEC, agreed to implement a series of undertakings. Those included the retention of an Independent Consultant to review the firm’s policies and procedures regarding municipal securities underwriting due diligence. Essentially, Respondent will adopt the recommendations of the consultant. The firm also consented to the entry of a cease and desist order based on the Section cited in the Order and will pay a penalty of $500,000.

To date 72 underwriters have self-reported under the program. Generally reporting firms made misstatements and/or omissions in municipal bond offering materials. Typically the firms settled the actions by consenting to a cease and desist order based on Securities Act Section 17(a)(2) and with the payment of a penalty.

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