READ OUR 2014 to Date: SEC Enforcement Round-Up >

To date, 2014 has seen the Securities and Exchange Commission (SEC) continue its trend of the past several years of heightened enforcement in the municipal securities and public pension plan markets. This year has been remarkable, however, for the SEC’s significant efforts to compel greater disclosure, and impose far more rigorous disclosure obligations, than is required either under current federal legislation or in practice. Unquestionably, the most meaningful enforcement event has been the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative), announced on March 10 and intended to address what the SEC perceives as widespread noncompliance with issuers’ continuing disclosure agreements.

The MCDC Initiative encourages self-reporting by municipal securities issuers and underwriters of possible securities law violations related to misrepresentations in offering documents concerning an issuer’s prior compliance with its continuing disclosure obligations. It does not, however, provide incentives relating to other possible violations of the federal securities laws. Many issuers and underwriters have taken a measured approach to self-reporting through the Initiative, whether it is because they do not wish to attract the SEC’s attention, believe the SEC cannot prove its case if required to state one, or have other reasons for doing so.

The SEC has nevertheless continued to promote the MCDC Initiative, despite significant skepticism whether, if litigated, the SEC could establish that a given violation of continuing disclosure obligations is material. On July 8, the SEC announced its first cease-and-desist order under the Initiative. The order does not include a detailed analysis regarding the types of continuing disclosure failures the SEC considers material and consequently offers little guidance to market participants deciding whether to self-report.

In a nod to widespread concern in the market, the SEC announced a handful of changes to the Initiative on July 30, including extending the deadline for issuers to self-report to December 1 and calibrating fines on underwriters to 2013 revenues. The deadline for underwriters to self-report was not extended, however, which led several members of Congress to write to SEC Chair Mary Jo White on August 28 to request that this deadline also be extended.

In other enforcement actions, the SEC’s aggressive posture likewise persisted in the first half of 2014. In an unprecedented move, the SEC obtained an emergency court order on June 25 to prevent the city of Harvey, Illinois, from selling bonds in the municipal market amid allegations the city engaged in fraudulent market transactions. On August 11, the SEC announced a settled action against the State of Kansas. The SEC alleged the State failed to disclose a significant unfunded liability in its pension system in any of eight series of bonds offered over an 11-month period.

In 2014, the SEC also brought its first pay-to-play investment adviser action and wrapped up its high profile case against Henry Morris, a "finder" for the New York State Common Retirement Fund (Fund), and related individuals in actions involving a multimillion dollar kickback scheme to obtain investment business from the Fund. As we previously have noted, pay-to-play violations are likely to remain a focus of SEC enforcement actions.

On the regulatory front, the SEC’s final registration rules for municipal advisors went into effect July 1. In addition to registration requirements issued by the SEC and the Municipal Securities Rulemaking Board (MSRB), municipal advisors are subject to a federal fiduciary duty and the MSRB’s "fair dealing" rule. The MSRB recently filed with the SEC seeking approval of a supervisory rule for municipal advisors and issued a second request for comment on its basic conduct rule for municipal advisors.

Looking ahead to the balance of 2014, the municipal market is likely to see additional MSRB municipal advisor rule changes. In addition, the SEC and MSRB will likely maintain their focus on price transparency for municipal market investors. The SEC has suggested that the MSRB pursue greater pretrade price transparency using its Electronic Municipal Market Access (EMMA) system, and the MSRB recently announced several initiatives—including EMMA’s price transparency tool—to enhance the availability of pricing information. In a recent speech, SEC Chair White stated: "I am . . . concerned that, in the fixed-income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries, and its potential to achieve more widespread benefits for investors, including the broad availability of pretrade pricing information, lower search costs and greater price competition, especially for retail investors, is not being realized."

Summaries of key municipal market SEC enforcement actions brought in 2014 can be found in the sections below:

Offering and Disclosure

Pay-To-Play and Public Corruption

Public Pension Accounting and Disclosure

2014 Update on Prior Enforcement Actions

Ballard Spahr's Municipal Securities Regulation and Enforcement Group advises its clients on the latest securities issues in their public finance transactions, including in regulatory and enforcement matters of the SEC. We advise issuers in a broad range of public offerings and private placements of municipal securities in both the primary and secondary market.

For further information, please contact John C. Grugan at 215.864.8226 or, or Tesia N. Stanley at 801.517.6825 or

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