SEC Charges 36 Firms with Fraud in the Sale of Municipal Bonds
Commentary by Steven Lofchie
The SEC announced enforcement actions against 36 municipal underwriting firms for violations that involved municipal bond offerings. These cases are the first to be brought against underwriters under the Municipalities Continuing Disclosure Cooperation ("MCDC") Initiative, which is a voluntary self-reporting program that targets material misstatements and omissions in municipal bond offering documents.
The SEC alleged that between 2010 and 2014, the 36 firms violated federal securities laws by selling municipal bonds using offering documents that contained omissions and materially false statements about the bond issuers' compliance with continuing disclosure obligations. According to the SEC, the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. More specifically, the SEC found that the underwriters "failed to form a reasonable basis for believing the truthfulness of certain material representations by municipal issuers in official statements issued in connection with those offerings."
Commentary
Although this enforcement action was not taken against government officials directly, it is but one among several recent actions brought by the SEC that involve misrepresentations by municipalities. As municipalities come under increasing financial pressure, there is likely to be tension between the SEC, which seeks to raise standards of disclosure in the municipal debt markets, and government officials, who wish to talk down the interest rates that they must pay.