INVESTIGATIONS AND ENFORCEMENT SEC Steps Up Enforcement Efforts Related to Municipal Bonds The past year has seen stepped up efforts by the U.S. Securities and Exchange Commission (SEC) to cast the enforcement spotlight on the area of municipal securities. During testimony given on 19 March 2015, the Director of the Division of Enforcement (the Division), Andrew Ceresney, noted that the Division intended to focus on, among other things, investigating potential “misrepresentations in connection with bond offerings, failures by underwriters to meet their obligations, undisclosed conflicts of interest, and pay-to-play violations.” Testimony of Andrew Ceresney, “Oversight of the SEC’s Division of Enforcement” (Mar. 19, 2015), https://www.sec.gov/news/testimony/031915-test.html. Consistent with this testimony, the Division has intensified its focus on the issuance and underwriting of these securities, completing a form of “sweep” relating to continuing disclosures made in connection with municipal bond underwritings, and bringing several “first” cases under certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank or Dodd-Frank Act). MCDC INITIATIVE The Division launched a new self reporting program, the Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative). The MCDC Initiative was “designed to address widespread continuing disclosure violations by municipal bond issuers and underwriters.” Id. In order to incentivize self reporting, the MCDC Initiative offered “favorable settlement terms” to municipal bond underwriters and issuers that self reported certain material misstatements and omissions contained in municipal bond offering documents. Press Release, “SEC Completes Muni-Underwriter Enforcement Sweep” (Feb. 2, 2016), http://www.sec. gov/news/pressrelease/2016-18.html. The MCDC Initiative has resulted in three waves of settled enforcement actions against 72 municipal bond underwriting firms from June 2015 through February 2016. Id. See also Press Release, “SEC Charges 36 Firms for Fraudulent Municipal Bond Offerings” (June 18, 2015), http://www.sec.gov/ news/pressrelease/2015-125.html; Press Release, “SEC Sanctions 22 Underwriting Firms for Fraudulent Municipal Bond Offerings” (Sept. 30, 2015), http://www. sec.gov/news/pressrelease/2015-220.html. 34 Each underwriting firm paid civil penalties up to a maximum of $500,000 based on the number and size of the allegedly fraudulent offerings. Collectively, the civil penalties associated with the 72 actions totaled more than $17 million. RECENT SETTLED ACTIONS From January 2016 through June 2016, the Division announced at least seven other enforcement actions involving municipal securities against issuers, advisors, and related persons. Five of the actions resulted in settlements. The other actions currently are being litigated. On 9 March 2016, the SEC charged California’s largest agricultural water district, its general manager, and former assistant general manager with misleading investors about the district’s financial condition. Press Release, “California Water District to Pay Penalty for Misleading Investors” (Mar. 9, 2016), http://www. sec.gov/news/pressrelease/2016-43. html. In that case, the SEC found that the district employed “extraordinary accounting transactions” to reclassify funds from reserve accounts to revenues in order to meet a specific debt service ratio established in prior bond offerings. Securities Act Release No. 10053 (Mar. 9, 2016). The SEC also found that the district failed to disclose other accounting adjustments in 2012 that would have negatively impacted the debt ratio if they had been effected in 2010. Id. In settling the action, the district became the second municipal issuer to pay a financial penalty in an SEC enforcement action. Shortly thereafter, the SEC announced the first action to enforce the fiduciary duty for municipal advisors created by Dodd-Frank. Press Release, “Municipal Advisor Charged for Failing to Disclose Conflict” (Mar. 15, 2016), http://www. sec.gov/news/pressrelease/2016-54. html. The Dodd-Frank Act requires these advisors to put their municipal clients’ interests ahead of their own. 15 U.S.C. § 78. In that case, a municipal advisor and three employees were alleged to have breached their fiduciary duties by failing to disclose a conflict to a municipal client. Exchange Act Release No. 77369 (Mar 15, 2016). The SEC found that two employees and the CEO of the municipal advisor arranged for a municipal bond offering to be underwritten by a broker-dealer that employed all of them as registered representatives. The individuals did not advise their client of K&L Gates Global Government Solutions ® 2016 Mid-Year Outlook