WASHINGTON – Securities and Exchange Commission chair Mary Jo White said in a speech on Friday that the municipal securities market is an example of an area where the commission has brought to bear its "bolder and more unrelenting approach to enforcement to change industry behavior."
White, speaking at a New York University Law School event, detailed the steps the commission has taken to be more innovative in targeting muni market misconduct while not being able to directly require municipalities to make periodic disclosures.
White talked about how the commission has broken new ground in some muni cases, such as using controlling person liability legal provisions to target municipal officials not directly accused of knowledge of misrepresentations in offerings, but who had control over the entities or individuals involved in the misconduct and the bond offerings.
The SEC pursued charges under the control person section of the Securities Exchange Act of 1934 in two 2014 actions, one against the former mayor of Allen Park, Mich. and the other against the mayor of Harvey, Ill.
White also mentioned the SEC's 2013 action against the city of Harvey where it sought and got emergency relief in federal court to enjoin or halt a bond offering until certain safeguards could be put in place as an example of a first-of-its-kind action in the muni market. Additionally, the SEC recently settled with an audit firm and the firm's engagement partner for issuing fraudulent audit reports in connection with municipal bond offerings from the town of Ramapo, N.Y.
The SEC chair also said the commission's Municipalities Continuing Disclosure Cooperation initiative is a "dramatic example of the commission's impactful work" in the muni area.
MCDC promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely stated in offering documents that they were in compliance with their continuing disclosure agreements. The initiative led to settlements with 71 issuers, as well as 72 underwriters, to date. The SEC has not said whether there will be more settlements with issuers in the future.
"All indications are that MCDC has vastly increased issuer compliance with their continuing disclosure obligations," White said. "It is a good example of our innovative, wide-ranging enforcement program – bolder and unrelenting – that is bringing about new, demonstrable benefits for investors."
White, at a recent hearing by the House Financial Services Committee hearing, said the disclosure failures uncovered by the MCDC initiative could lead the SEC to request regulatory authority over muni issuers.
In addition to her comments about the muni market, White also laid out the principles behind the enforcement division's work that she believes have made the program "a resounding success." The principles include: investigating potential cases with litigation in mind; using data analytics to uncover and investigate misconduct; and using whistleblowers to detect misconduct.
White also said the SEC has focused on holding individuals liable for wrongdoing with the idea that "to have a strong deterrent effect on market participants, it is absolutely crucial that responsible individuals be charged."
While White said the SEC's enforcement work during her tenure has been laudable, she noted that "strong enforcement and deterrence can – and should – always be made stronger." She recommended that the program could be strengthened if the SEC were able to expand its reach of liability for firms' senior executives and increase the penalties it can levy.
