The Securities and Exchange Commission (SEC) recently charged the City of Harrisburg, Pennsylvania (the City), with misleading investors about its financial health in the annual State of the City Address, as well as in its financial and budget reports. This is the first SEC action against a state or local government based on public statements made separately from required municipal bond disclosure documents. The action is also the first to cite the failure of a municipal securities issuer to post continuing disclosure information on the Electronic Municipal Market Access (EMMA) website as contributing to the SEC’s finding of fraud.
The SEC’s allegations relate both to general obligation bonds issued by the City and also to debt for which the City acted as primary guarantor. The SEC order charges that the City’s 2007 annual financial report failed to include that the City had made $4 million in guarantee payments on debt for a resource recovery facility (RRF).
Although the City had been repaid in 2007 from proceeds of a subsequent borrowing, the SEC alleged that the payments were an indicator of possible future debt guarantee payments required for the RRF. The SEC’s order also charges that the City’s 2008 financial report did not accurately reflect the likelihood of continued guarantee payments by the City or their effect on the City’s financial condition.
According to the SEC, the 2009 budget posted on the City’s website did not include the RRF debt guarantee payments the City knew would likely be required and misstated the City’s credit rating. The SEC further alleged that the City’s 2009 midyear fiscal report, intended to reflect the City’s budget-to-actual numbers, improperly omitted $2.3 million in RRF guarantee payments the City made. The final public misstatement alleged by the SEC occurred in the State of the City Address given by the Mayor in 2009 (an election year). According to the SEC, the Mayor improperly described the RRF financial difficulties as an “additional challenge” and an “issue that can be resolved” after it had become clear the City may be forced to make significant RRF debt guarantee payments.
The City failed to timely post its 2008, 2009, 2010, and 2011 annual financial reports and certain event notices on EMMA as required by its continuing disclosure obligations as an issuer and a guarantor, the SEC alleged. As a result, investors looked elsewhere for information about the City’s financial health, and what they found included material misrepresentations and omissions by the City, according to the SEC.
Quoting 1994 Interpretive Guidance issued by the SEC, the order states that “[s]ince access by market participants to current and reliable information is uneven and inefficient, municipal issuers presently face a risk of misleading investors through public statements that may not be intended to be the basis of investment decisions, but nevertheless may be reasonably expect to reach the securities markets.” The SEC found the public statements by the City material, given the “total mix” of limited public information.
The SEC’s order considered remedial actions taken by the City, including developing written disclosure policies and procedures, designating a City administrator to file annual financial information and event notices with EMMA, and implementing an annual training program for City employees involved in the disclosure process. The City also agreed to post its disclosure policy on EMMA as well as on its website. The City consented to the SEC’s order without admitting or denying the allegations, and no monetary fines were imposed.
The SEC’s order has larger implications for the municipal market. Market studies indicate that a significant number of municipal securities issuers are noncompliant with at least some of their continuing disclosure obligations.
While such noncompliance by the City did not form the sole basis for the SEC’s action, the charges indicate that the form, timeliness, currency, and completeness of the information filed with EMMA and posted on issuers’ websites can affect whether or not the SEC finds other public statements made by issuers material in the total mix of information available to investors. It is especially imperative that municipalities struggling to remain solvent are current in their continuing disclosure obligations and provide accurate and complete information.
In addition, the SEC’s order highlights the importance of municipal securities issuers’ adoption of written policies and procedures to ensure proper communication with the investment community.
The SEC’s order follows a municipal market report it issued in July 2012 seeking, among other regulatory changes, additional authority over municipal market disclosure. The report recommends legislation authorizing the SEC to set timing, form, content, and financial audit requirements for continuing disclosures and providing the SEC with “tools” to enforce such requirements.
The report also recommends that the SEC be granted the authority to require trustees to enforce continuing disclosure agreements. On the incentive side, the SEC report recommends a safe harbor from private claims arising from certain forward-looking statements made by issuers who are current in their continuing disclosure obligations. This safe harbor would be similar to the one available to public companies under the Private Securities Litigation Reform Act.
If you have questions, please contact William C. Rhodes at 215.864.8534 or rhodes@ballardspahr.com, Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com, or the member of the Public Finance Department or Municipal Recovery Initiative with whom you work.
