6.1.4.2 Lessons from SEC Cases

Many important lessons can be learned from recent SEC enforcement activity:

The SEC will bring cases even when there is no evident financial loss to investors, including cases where there was no default on the bonds or any loss of ratings. The law does not require the SEC, unlike a private plaintiff, to prove any monetary damages, or even that any investors relied on the allegedly mistaken or misleading disclosures; the SEC can and will bring cases based on its assessment of a violation of securities laws in the abstract.
Municipal issuers and underwriters are now subject to a wider range of sanctions. Civil fines are common, and in many cases, parties will be required to engage specialized consultants or legal counsel to help them implement new disclosure policies. Parties may no longer be given the option to “neither admit nor deny” the SEC charges, which has significant reputational impact. Parties subject to regulation by the SEC (e.g., dealers and municipal advisors) may be “censured.”
The level of civil fines has steadily ratcheted upward, with recent fines in excess of $100,000 for issuers.
Individual public officials are at risk of SEC sanctions. The SEC now routinely includes culpable individuals in its cases. These individuals will have to consent to a cease and desist order, may have to pay substantial civil fines, and may be barred from future involvement in municipal financings. Furthermore, the SEC is casting a wider net for culpable public officials, using concepts such as “controlling person” or “aiding and abetting” to sanction officials beyond the individual who signs a “SEC Rule 10b-5 certificate” for a bond issue.
The SEC can take additional actions in unusual cases. In one case the SEC sought and obtained an injunction against an issuer to prevent an ongoing bond offering. In another case (not described above) the SEC referred information to the Justice Department, which brought a successful criminal indictment against officials of a city alleged to have falsified a city’s financial records to hide budget shortfalls.

The most valuable lesson to be learned from the SEC enforcement activity, however, is the importance of accurate and comprehensive disclosure, the culture of transparency, a good disclosure preparation process, assistance from knowledgeable professionals, and the governing board attentiveness that lead to accurate and comprehensive disclosure.