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School District First To Report Violation Under SEC Leniency Program



A California school district is the first to report a municipal securities violation under a program designed to encourage municipal bond issuers to come forward instead of waiting for regulators to take action, the Securities and Exchange Commission (SEC) has announced.

Under the terms of the settlement, the Kings Canyon Joint Unified School District east of Fresno, has agreed to establish procedures and implement training with regard to the disclosure of securities-related information.

The district, which employs 1,000 full-time and part-time employees, also has agreed to designate an employee responsible for compliance issues, the SEC said.

The SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC), which began March 10 and expires Sept. 10, allows issuers of municipal debt to step forward and admit disclosure shortcomings during previous securities transactions.

In exchange for “owning up” under the MCDC initiative, SEC regulators will recommend more lenient settlement terms, the SEC said. Under the program, there is no penalty to the issuer, but underwriters will be required to pay fines based on the size of the offering.

In the case of the Kings Canyon Joint Unified School District, the SEC found the school in violation of Rule 15c2-12 of the Securities Exchange Act of 1934. The 15c2-12 rule pertains to the ongoing disclosure of information related to the issuing of municipal securities.

District Superintendent Juan Garza said Kings Canyon JUSD did not dispute the facts in the government’s complaint and welcomed the SEC’s offer to take advantage of the MCDC program.

“We consider the case closed, we’re moving on,” he said in an interview with InsuranceNewsNet. No fine was levied against the district.

Municipal advisors should take note of the MCDC program.

Issuers and underwriters who don’t come clean now as part of the MCDC program run the risk of getting hit with higher penalties later after the program expires.

“For issuers, the (SEC Enforcement) Division will likely recommend and seek financial sanctions,” the SEC said in a statement outlining the program. “For underwriters, the division will likely recommend and seek financial sanctions in amounts greater than those available pursuant to the MCDC initiative.”

Sanctions and penalties are steep for municipalities found in violation of securities laws.

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Last July, the West Clark Community Schools in Clark County, Indiana, and Randy G. Ruhl, head of public financial and municipal bond department at City Securities Corp., settled with SEC regulators to the tune of nearly $580,000.

As part of its $52 million municipal bond offering in 2005, West Clark agreed to submit annual reports and notices to a securities information database but never did so, the SEC alleges.

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, said Kings Canyon’s stepping forward to take advantage of the program is an example of a municipal issuer resolving issues efficiently.

“An important component of the MCDC program is that it provides issuers who were already under investigation the opportunity to accept the standard terms and resolve their enforcement matters in a fair and efficient manner,” she said.

In a November 2010 bond offering for $6.8 million, Kings Canyon claimed there was “no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure information,” the SEC said.

Because the district hadn’t disclosed information between 2008 and 2010 pertaining to previous municipal bond offerings in 2006 and 2007, the statements the district made in the 2010 documents about prior disclosure were false, the SEC said.

Any underwriter or issuer that has made “materially inaccurate statements in a final official statement regarding their prior compliance and their continuing obligations” should consider self-reporting to the Enforcement Division, the SEC said.

SEC officials said they would offer “no assurances” of leniency to MCDC initiative-eligible issuers and underwriters that do not choose to self-report.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said that complying with disclosure obligations maintains the integrity of the municipal bond market. “Our MCDC initiative is one piece of our efforts to ensure that issuers meet their obligations going forward,” he said.

In the wake of the 2008 financial crisis, the SEC has tightened disclosure requirements for participants in the $3.7 trillion municipal bond market.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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