UK: SEC Enforcement Action For Fraud Relating To Misrepresenting Continuing Disclosure Failings

On July 29, 2013, the Securities and Exchange Commission announced settled enforcement orders against an Indiana school district and the district's underwriter for material false statements in the school district's official statement relating to the district's failure to comply with its prior continuing disclosure undertakings.

Rule 15c2-12 (the "Rule") under the Securities Exchange Act of 1934 is intended to improve the quality and timeliness of disclosure in the municipal securities market. The Rule prohibits any underwriter from purchasing or selling municipal securities unless the issuer of the securities has entered into a written contract, usually referred to as a continuing disclosure agreement or undertaking, to provide notices of certain significant events and annual financial information and operating data of the type presented in the official statement relating to the securities. The Rule also requires issuers to disclose in their official statements all instances during the prior five years in which the issuer has failed to comply in all material respects with any previous continuing disclosure undertaking.

The West Clark Community Schools, an Indiana school district, entered into a continuing disclosure agreement in connection with a 2005 bond issue. The school district issued bonds again in 2007. City Securities Corporation served as sole underwriter in both bond offerings. The official statement prepared for the 2007 issue stated that the district had not failed in the previous five years to comply in all material respects with any prior disclosure undertakings. However, the official statement was false in this regard because, in fact, the district had failed to submit any of its required disclosures under the 2005 continuing disclosure agreement. Despite the omission of any mention of its two and a half year lapse in disclosure filings and a specific statement in the offering document to the contrary, district officials executed a closing certificate for the 2007 bonds attesting that the official statement did not contain any untrue statements of material fact.

The SEC concluded that the school district knew or was reckless in not knowing that it had not submitted the annual reports and significant event notices required by the 2005 continuing disclosure agreement. Citing the importance of financial disclosure to the integrity of the primary and secondary market for municipal securities, the SEC determined that by its untrue statements the school district had violated the antifraud provisions of the Securities Act of 1933 and the Exchange Act. The SEC ordered the school district to ensure that its required disclosure submissions were up to date and accurate, to adopt written disclosure policies and procedures and to implement training for district personnel involved in the bond offering process.

City Securities, the district's underwriter, was cited by the SEC for conducting inadequate due diligence, resulting in a failure to form a reasonable basis for believing the truthfulness of the district's 2007 official statement. The SEC faulted the underwriter for not taking reasonable steps to ensure it would receive prompt notice of the district's required disclosure filings, which might have alerted the underwriter to the issuer's failure to make those submissions. City Securities relied solely on the school district's assertions, and did not attempt to verify the district's compliance with its disclosure obligations. The SEC found that employees at the underwriting firm were not adequately trained about the requirements of the Rule. As a result, City Securities was sanctioned for willful violations of the Rule and antifraud provisions of the Securities Act and the Exchange Act. The SEC also sanctioned City Securities for violations of Municipal Securities Rulemaking Board ("MSRB") rules requiring fair dealing, prohibiting deceptive practices and barring improper gifts to issuers. The SEC censured and fined City Securities for its role in the matter. The supervisor of its Municipal Bond Department was individually fined and barred from working in the securities industry for one year.

Continuing Disclosure: Best Practices for Issuers

This matter highlights the importance of sound policies and procedures for monitoring and reporting significant events and annual financial information and for accurately disclosing compliance with continuing disclosure agreements. A continuing disclosure agreement remains in effect as long as the bonds and notes to which it applies remain outstanding. Issuers must employ measures to ensure that their securities disclosure obligations are met over the long term.

Issuers should consider adopting the following "best practices" for upholding their continuing disclosure responsibilities, including, in particular:

  • Establish written policies and procedures to ensure that the issuer submits all documents, reports and notices required to be submitted to the MSRB in a timely manner.

  • Review offering documents, confirm compliance with existing continuing disclosure obligations at the time of each new issue and promptly rectify any continuing disclosure lapses.

  • Disclose in each official statement any instances during the prior five years of any failure to comply in all material respects with applicable continuing disclosure obligations.

  • Implement annual training for personnel involved in the bond offering and disclosure process, including familiarity with the significant events described in the Rule and an understanding of the issuer's written policies and procedures governing disclosure practices, including continuing disclosure.

  • Identify an individual or individuals who will be responsible for reviewing and complying with the issuer's disclosure obligations on a regular basis.

  • Maintain a complete and accurate record of all of the issuer's continuing disclosure undertakings and filings, including electronic confirmation of disclosure submissions.

  • Develop a calendar reminder system to track annual filing deadlines and requirements.

  • Consult with counsel as needed to resolve potential issues and address any questions.

  • If desired, engage disclosure counsel or a designated agent to make continuing disclosure filings on the issuer's behalf.

Due Diligence regarding Continuing Disclosure Compliance

The SEC does not consider reliance on the issuer's affirmative statements alone sufficient to verify an issuer's compliance with its continuing disclosure obligations. Enhanced due diligence in this area may also include the following:

  • Review the issuer's policies, procedures and training regime used to ensure compliance with its disclosure duties and continuing disclosure undertakings.

  • Confirm the timeliness and completeness of the issuer's continuing disclosure submissions using online resources, including EMMA (described below), and for filings from September 7, 2004 until June 30, 2009, on www.disclosureusa.org.

  • Request written evidence of past continuing disclosure submissions.

  • Sign up for EMMA alerts (discussed below) to receive prompt notice of the issuer's continuing disclosure filings.

Electronic Submission of Continuing Disclosure on EMMA

Under the Rule, continuing disclosure documents must be submitted in word-searchable PDF format to the MSRB via the MSRB's Electronic Municipal Market Access ("EMMA") system, either directly by the issuer, or indirectly through an indenture trustee or a designated agent of the issuer. EMMA provides electronic receipts to the submitter for each submission. EMMA has alert features to notify individuals whenever a submission is made relating to specified securities and to remind submitters when an annual financial report is due to be posted. In order to submit documents to EMMA, users must create an account on the MSRB Gateway. The EMMA website offers online training, FAQs and a user guide on its EMMA Dataport page: http://dataport.emma.msrb.org/AboutDataport.aspx?ReturnUrl=%2fSubmission%2fSubmissionPortal.aspx.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.