In a coordinated enforcement action, the federal Securities and Exchange Commission (SEC) announced last week that it had taken measures against 71 municipal issuers and obligated parties nationwide for violations related to municipal bond offerings. The City of Chelsea emerged as Massachusetts’ sole violator in the sweep, having made false statements across three separate bond offerings.
Under the umbrella of the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative—a program designed to encourage voluntary self-reporting of material misstatements and omissions in municipal bond offering documents—these enforcement actions offered favorable settlement terms to municipal issuers, underwriters, and obligated persons. The City of Chelsea participated in this self-reporting program and has maintained a cooperative relationship with SEC investigators throughout the process.
City officials were not available for immediate comment regarding the settlement, which carried no monetary penalties.
Three competitive bond offerings in 2012, 2013, and 2014 contained Chelsea’s problematic statements. In each instance, the City claimed it had maintained continuous compliance with financial reporting requirements for its bond offerings—a claim that proved inaccurate.
The 2012 offering’s false statement stemmed from Chelsea’s failure to timely file its 2007 audited financial report, which arrived 15 months late, along with its failure to file both the annual financial statement and audited financials for fiscal year 2010.
Chelsea’s 2013 bond offering included a false statement because the City had not yet filed its audited financial statement and audited financials for fiscal year 2010 by that offering’s date, despite their prior due date.
When the 2014 offering occurred, the statement was false because Chelsea filed its annual financial statement and audited financials for fiscal year 2010 only 34 months late—just before the offering took place.
According to the SEC’s complaint against Chelsea: “fblikebutton_button”
Chelsea represented one case among many similar violations. Across the country between 2011 and 2014, the SEC determined that 71 issuers and obligated persons had distributed municipal bonds through offering documents containing materially false statements or omissions regarding their compliance with continuing disclosure obligations. Ongoing financial information, particularly annual reports, constitutes a critical component of continuing disclosure for municipal bond investors. The SEC’s 2012 Municipal Market Report had previously flagged issuers’ continuing disclosure failures as a significant obstacle for investors attempting to monitor their municipal bond investments.
Andrew Ceresney, Director of the SEC Enforcement Division, remarked that He added:
All parties involved, including Chelsea, resolved these matters through settlement agreements that neither admitted nor denied the SEC’s findings while committing to prevent future violations. As required under the initiative’s framework, the settling entities committed to establishing suitable policies, procedures, and training protocols for continuing disclosure compliance; fulfilling their existing continuing disclosure commitments through updated delinquent filings; disclosing the settlement in subsequent offering documents; and assisting with any further SEC investigations.
LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, observed: She continued:
The MCDC Initiative has produced 143 total actions encompassing 144 respondents to date. These latest enforcement actions represent the first against municipal issuers following the initiative’s debut in July 2014, when the SEC brought action against a California school district.
By Seth Daniel