The Securities and Exchange Commission has filed litigation against Oppenheimer & Co. and separately announced settlements with BNY Mellon Capital Markets, TD Securities and Jefferies for failing to comply with municipal bond offering disclosure requirements in connection with limited offering exemptions.
The charges represent a first of its kind for the Commission in addressing limited offering exemptions, or underwriters who fail to meet the legal requirements that would exempt them from obtaining disclosures for investors in certain municipal securities offerings.
The settled administrative orders find that BNY Mellon, TD Securities and Jefferies each violated SEC Rule 15c2-12, which establishes disclosure rules, Section 15B(c)(1) of the Exchange Act as well as Municipal Securities Rulemaking Board Rule G-27 on supervision. Without admitting or denying the Commission's findings, they all agreed to settle the charges and to a cease and desist from future violations.
Rule 15c2-12 generally requires underwriters to obtain disclosure documents from issuers and to reasonably determine that the issuer is able to provide certain information on a continuing basis to the MSRB. But 15c2-12 includes an exemption for limited offerings of municipal securities issued in denominations of $100,000 or more and sold to no more than 35 persons only if the underwriter believes the purchaser is capable of evaluating the merits of the investment as well as if the purchaser is not doing so for more than one account with a view to distribute.
TD Securities and Jefferies lacked the policies and procedures designed to ensure purchasers satisfied the exemption and sold the securities to broker dealers and investment advisors without a reasonable belief that the policies were being adhered to.
BNY Mellon similarly failed to have the adequate policies and procedures in place to ascertain whether the policies were being adhered to.
BNY Mellon agreed to pay $656,833.56 in disgorgement plus prejudgment interest in addition to a $300,000 penalty; Jefferies agreed to pay $43,215.22 in disgorgement plus prejudgment interest and a $100,000 penalty and TD Securities agreed to pay $52,955.92 in disgorgement plus prejudgment interest and a $100,000 penalty.
"I applaud the excellent work of the Division's Public FInance Abuse Unit in bringing these first ever actions in the $4 trillion municipal bond space," said Gurbir Grewal, director of the Division of Enforcement. "We encourage underwriters to examine their practices and to self-report any failures to us before we identify them ourselves."
The Commission charged Oppenheimer with similar violations to the three others but in connection with at least 354 offerings, in addition to violating MSRB Rule G-17 on fair dealing, which prohibits deceptive, dishonest or unfair practices. The charges were filed in federal district court in Manhattan and seeks permanent injunctions, disgorgement plus prejudgment and civil money penalty, the SEC complaint against Oppenheimer said.
"The limited offering exemption requires, among other things, that underwriters like Oppenheimer have a reasonable belief that the municipal securities are being sold only to sophisticated investors that are each buying the securities for a single account without a plan to distribute them," the SEC's complaint against Oppenheimer said.
In order to further comply with the Limited Offering Exemption, an underwriter must sell the securities in denominations of $100,000 or more and cannot sell to more than 35 investors. All of Oppenheimer's offerings were of $1 million or more, but they never sought nor received any information whether the investors met the criteria of the Limited Offering Exemption.
"Disclosure helps protect investors from fraud," said LeeAnn Gaunt, chief of the Enforcement Division's Public Finance Abuse Unit. "Underwriters must take seriously their responsibility to ensure municipal bond investors get the information they are entitled to."
But this is just the beginning for the SEC's enforcement of the limited offering exemption and more are expected.
"The SEC staff has begun investigations of other firms' reliance on the limited offering exemption," the Commission said, urging firms to self-report if they believe they have been in violation.
There had been indications SEC enforcement might be headed in this direction. Earlier this year, then-acting director of the SEC Office of Municipal Securities
"This is likely one of the most aggressive enforcement programs the SEC has mounted in a while," said Paul Maco, of counsel at Bracewell and former director for the Office of Municipal Securities.
The increased enforcement tone the Commission has adopted this year falls in line with how the director of the Division of Enforcement Gurbir Grewal and chairman Gary Gensler laid out their priorities in their remarks at SEC Speaks last year.
"Of course, the risks we protect against are not fixed and what's important to investors and the market can evolve over time," said Grewal in his SEC Speaks speech. "That's why the Division is – as it always has – taking proactive steps to police those issues as well as by bringing a number of first of their kind enforcement actions."
