SEC Goes After Municipal Bond Underwriters, Fines 36 Firms

By Casey C. Sullivan, Esq. on June 19, 2015 | Last updated on March 21, 2019

The Securities and Exchange Commission has charged 36 firms with securities violations connected to the issuance of municipal bonds. Those banks, underwriters of the bonds, will pay between $40,000 to $500,000 for making materially false statements or omissions about the issuer's compliance with disclosure rules.

The enforcement action is the first the SEC has taken under its Municipalities Continuing Disclosure Cooperation Initiative. The MCDC is a voluntary program that allows participating banks to self-report violations in exchange for standardized settlement terms.

A Bit of Due Diligence Goes a Long Way

According to the SEC, when the banks underwrote the bonds, they failed to conduct proper due diligence. Adequate investigation into the claims being made would have caught the false information regarding the issuers' compliance with disclosure rules, the Commission claims.

For their failure, the underwriters will pay just under $9 million total. The fined banks represent "a substantial portion" of the country's municipal bond issuers, according to the SEC. Fines were based on the number and size of fraudulent offerings, but were capped based on the size of the firm. The ten underwriters given the maximum penalty of $500,000 were:

  • Citigroup Global Markets
  • Goldman, Sachs & Co.
  • J.P. Morgan Securities
  • Merrill Lynch, Pierce, Fenner & Smith
  • Morgan Stanley & Co.
  • Piper Jaffray & Co.
  • Raymond James & Associates
  • RBC Capital Markets
  • Robert W. Baird & Co.
  • Stifel, Nicolaus & Co.

Self-Reporting at Work

Companies who are participating in the MCDC are probably pretty pleased with the results so far. A maximum fine of half a million is nothing compared to the near billion dollar fines some of the same banks have recently received for other violations. Comparatively, the MCDC fines are not even a slap on the wrist, though the $3.7 trillion municipal bond market is just a smidge smaller than the world's entire currency market.

The SEC seems pleased with results of the MCDC as well. Since the initiative has brought in most of the large players in the municipal bond market, it has made regulation and reporting easier. According to the SEC, issuers' failure to comply with continuing disclosure obligations has been a major challenge facing municipal bond investors. Along with the fines, the MCDC requires the issuers and underwriters to institute enhanced disclosure procedures aimed at staving off future violations.

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