More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
The Securities and Exchange Commission’s enforcement division announced Monday that issuers and underwriters of municipal securities must self-report by Sept. 10 certain securities law violations or face steeper sanctions.
At issue is the disclosure of information that could affect a bond's value or repayment after it is first issued, called continuing disclosure. If issuers fail to share that information as required, they generally must disclose that fact in offering documents over the next five years.
To encourage issuers and underwriters of municipal securities to self-report such failures rather than wait for them to be detected, the agency announced the same day the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.
Andrew Ceresney, director of the agency’s enforcement division, encouraged “eligible parties” in a statement “to take advantage of the favorable terms” the SEC is offering under the MCDC Initiative.
“Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations,” Ceresney warned.
Under the initiative, the Enforcement Division says that it will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.
Mike Nicholas, CEO of Bond Dealers of America, says that BDA "supports the SEC's goal toward self-reporting of violations to the extent an obvious violation of the securities law has occurred." He cautions, however, "that there may be disproportionate administrative, reporting and other burdens on underwriters via the settlement obligation requirements [under the SEC initiative] and we will be examining those in more detail in the coming days."
Rule 15c2-12 generally requires underwriters that buy or sell muni bonds to disclose information that could affect the bonds' value prior to maturity or the issuer's ability to repay the bonds. “The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure,” the SEC says.
LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, said in the statement that “continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations.”
This initiative, she said, is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”
The SEC notes that the agency can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement, the agency said.
An example of such a violation includes a recent SEC charged against a school district in Indiana and its underwriter for falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.
Check out What Goes Up Comes Down: 2013 Sets Record for Bond Fund Outflows on ThinkAdvisor.