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Bond issuers must be mindful of their disclosure requirements

For many novice investors, the securities market has always been a scary place where varying levels of volatility and general uncertainty combine to create an environment that is less than confidence inspiring. Up until recent years, the government bond market, which includes municipal bonds, was a relative bright spot of stability and consistency for those investors. However, that changed following the start of the Great Recession.

After Detroit’s bankruptcy and with talking heads issuing "the sky is falling" warnings of widespread municipal insolvency and the threat of an impending flood of municipal bankruptcy, this longtime bastion of relative reliability was called into question.

"It was perhaps as a result of this newfound uncertainty and the potential impact of a growing lack of investor confidence that regulatory agencies, like the U.S. Securities Exchange Commission, ratcheted up their scrutiny of municipal market participants and the advisors that facilitate their entry into the market, including underwriters," explained Tiger Wells, the Municipal Association’s government affairs liaison.

In March 2014, the SEC launched its Municipalities Continuing Disclosure Cooperation Initiative to address potential violations of federal securities law.

The SEC offered consideration for entities that self-reported a violation and agreed to a number of actions aimed at ensuring future compliance, including establishing appropriate policies, procedures and training related to continuing disclosure obligations.

While the window to self-report violations closed in December 2014, an SEC representative encouraged municipal attorneys attending the December meeting of the SC Municipal Attorneys Association to not leave the meeting with a belief that the SEC would now double back and play a game of "gotcha" with those issuers who may have missed the opportunity to self-report.

Robbie Mayer, senior counsel with the SEC’s Municipal Securities and Public Pension Unit within the Commission’s Division of Enforcement, served on MAA’s continuing disclosure panel with bond attorney Bill Hirata of the Law Offices of William L. Hirata PLLC.

Noting that her comments and opinions were her own and not that of the SEC, Mayer said she felt that the SEC, despite the expired self-reporting period, would continue to view positively those issuers that disclose those occurrences that they should have shared previously. The SEC’s primary goal is compliance, according to Mayer.

She shared that continuing disclosure filings increased 45 percent since the SEC began its MCDC Initiative.

When issuing municipal bonds that are then resold on a secondary market, the city must submit information about the entity’s financial condition and commit to providing continuing disclosure, including information about its financial condition. Issuers must also commit to give notice of any changes in credit rating or a change in credit worthiness or risk.

In addition, any final official statement prepared in connection with a sale of municipal bonds must contain a description of any instances in the previous five years in which the issuer failed to comply with any previous commitment to provide that continuing disclosure.

Municipal officials who issue misleading financial information or fail to disclose financial information on a timely basis run the risk of being charged with securities fraud. The risk extends beyond that of the municipality. Local officials could be held personally liable.

Local officials should consult with appropriate legal counsel to determine whether their municipalities’ existing disclosure policies and procedures are sufficient. Officials should then follow those policies and procedures to avoid violations.