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The SEC’s enforcement efforts in the municipal securities area in 2015 were dominated by the actions it brought pursuant to its Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative or MCDC). As we discussed in prior updates and alerts, through the MCDC Initiative, the SEC sought to obtain admissions of possible securities law violations by municipal securities issuers and underwriters related to representations in offering documents concerning an issuer’s prior compliance with continuing disclosure obligations.

In 2015, the SEC brought a total of 58 enforcement actions against municipal securities underwriters. On February 2, 2016, the SEC wrapped up its MCDC enforcement actions against underwriters by issuing an additional 14 MCDC cease-and-desist orders. In total, the SEC collected approximately $18 million in fines as a result of its 72 MCDC actions against municipal securities underwriters. In each cease-and-desist order, the SEC provided at least one example of a failure by an issuer or obligated person to comply with its prior continuing disclosure agreements that was not reflected in subsequent offering documents. Approximately half of the examples provided were failures to file required financial information and operating data, while the other half noted late filings. The SEC has begun following up with issuers and obligated persons who filed self-reports, and we expect announcements concerning these actions within the coming weeks. 

The MCDC Initiative is notable not only for the number of self-reports received by the SEC, but also for the legal theory it used to support its enforcement actions. For several years, widespread noncompliance with continuing disclosure obligations had been reported in the municipal market. The SEC unsuccessfully tried to convince Congress to erode or minimize the reach of the Tower Amendment and permit the SEC to require issuers to file annual financials and other continuing disclosure information with the Municipal Securities Rulemaking Board (MSRB).  By resorting to its antifraud authority, the SEC has shown both its willingness to broadly interpret its enforcement reach and its apparent resignation to the unlikelihood of expanded legislative authority. In essence, through the MCDC Initiative, the SEC is seeking to create a body of precedent that, in fact, is founded on voluntary settlements.

Another example of the SEC using its enforcement authority to push regulatory changes occurred in August 2015. It brought an action against an underwriter for failing to adequately monitor whether the markups it charged customers in certain secondary municipal market transactions were reasonable, among other alleged securities law violations. In a press release announcing the enforcement action, the SEC stated that “[b]ecause current rules do not require dealers to disclose markups on municipal bonds, investors receive very little information about their dealer’s compensation in municipal bond trades.” The MSRB responded to SEC pressure to undertake rulemaking related to markup/markdown disclosure in September 2015 by issuing a request for comment on draft rule amendments to MSRB Rule G-15 that would require dealers to disclose the markup or markdown on retail customer confirmations for certain principal transactions. It is likely that these disclosures will continue to be an area of interest to regulators on both the rulemaking and enforcement fronts.

The SEC’s Office of Compliance Inspections and Examinations is in the process of examining all registered municipal advisors for compliance with current federal securities law regulations. The SEC has emphasized the importance of a municipal advisor’s role in municipal securities transactions and it is likely the SEC will bring enforcement actions against municipal advisors soon, including with respect to fulfilling their fiduciary duty to state and local government clients.

Read our summaries of key municipal market enforcement actions brought in 2015.

Ballard Spahr's Municipal Securities Regulation and Enforcement Group helps municipal market participants navigate a rapidly evolving regulatory, investigative, and enforcement environment, enabling them to anticipate and address compliance issues and respond effectively to investigations when necessary.

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