The SEC reached settlements with 71 governments across 45 states as part of a voluntary self-reporting program called the Municipalities Continuing Disclosure Cooperation Initiative (MCDC). Only five states -- Arizona, Florida, Nevada, Oregon and Rhode Island -- had no governments or government entities censured.
The number of citations show the problem is “widespread and pervasive,” said SEC Enforcement Director Andrew Ceresney in a statement.
MCDC is part of the commission's push for better transparency in the municipal market. Under the program, governments had to review documents associated with bonds they issued over the past five years. If they found anything amiss -- be it that they failed to disclose a previous annual financial report or didn't notify investors of a credit rating downgrade after the sale -- they could voluntarily come forward and obtain favorable settlement terms.
A common muni market assumption has been that smaller governments without much experience issuing bonds are the ones that have problems keeping up with their financial disclosures. But Wednesday’s release shows that financial timeliness is a “national issue,” said Standard & Poor’s analyst Geoff Buswick. "There are states, state transportation departments – major issuers of debt listed here," he said. "It shows that the SEC is looking to tighten [disclosures] up and wants every level of government to step up their game.”
In the list of settlements, most of the infractions involved a government filing an annual financial report more than six months late, and failing to file a late notice with the municipal securities online clearinghouse known as EMMA.
But a number of oversights were worse. The city of York, Maine, filed its 2006 financial report more than three and a half years late. It subsequently filed its 2007 report more than two years late and its 2008 report more than a year late. Fairfield, Conn., had similarly late timelines with its annual reports in the late 2000s. In both cases, the late filings were not disclosed by those governments in subsequent bond offering documents.
In 2014, Chelsea, Mass., said in a bond offering statement that it always had complied with federal disclosure requirements when, in fact, it had only just released its 2010 financial report -- nearly three years late. Meanwhile, the Colorado Department of Transportation failed to file its fiscal 2006-2010 audited financial information and operating data with EMMA, even as it was in the middle of selling more bonds in 2011. And in Central Illinois, the Blue Ridge Community School District sold bonds in 2012 without disclosing that it had yet to file the previous four years of audited annual financial statements for investors.
Largely as a result of governments’ self-reporting, the settlements did not call for monetary fines. But they do require issuers to establish appropriate procedures and training regarding their financial disclosure obligations. The SEC also requires the governments to disclose its MCDC settlement in future bond offerings.
Wednesday’s announcement was the first time the SEC released information about its MCDC settlements with issuers. Over the past year, it has announced settlements, including fines, with 72 financial firms -- representing nearly all the firms in the municipal underwriting business. Those penalties have included a maximum fine of up to $500,000 for the largest underwriters.
Outside of self-reporting, the SEC has been less forgiving. In 2013, the commission charged a school district in Indiana and its municipal bond underwriter with falsely stating to bond investors that the district had been properly providing annual financial information and notices. The underwriting firm agreed to pay roughly $580,000 to settle the charges while the underwriter and the school district were slapped with a one-year ban from the securities industry.
