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Speech by SEC Staff:
Disclosure in the Municipal Market: Fundamental Concepts for Issuers

Remarks of

Martha Mahan Haines

Attorney-Fellow, Office of Municipal Securities
U.S. Securities & Exchange Commission

Before the Michigan Municipal Finance Officers Association
Thomsonville, Michigan
September 19, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Ms. Haines and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

Good afternoon. I want to thank the Michigan Municipal Finance Officers Association for allowing me the opportunity to speak to you today. My name is Martha Haines and I am an Attorney with the Office of Municipal Securities at the Securities and Exchange Commission in Washington, D.C.. Like most of the people in my office, however, I am also a bond lawyer. Actually, I was in private practice for over 20 years in Chicago, helping communities like yours borrow in the bond market.

Before I go any further, I must remind you that my comments here today reflect my own point of view, which is not necessarily shared by my colleagues on the Securities and Exchange Commission's staff, or by the Commission.

I would like to talk with you today about some of the regulatory aspects of the municipal securities market in the United States, some basic principles of the federal securities laws and two topics which are under considerable discussion in the industry right now- electronic disclosure and the selective disclosure of information. I hope this discussion will be helpful when you participate in future bond transactions.

States and local governments have been issuing municipal bonds in the United States for almost two hundred years. The size of today's market may surprise you - approximately $1.5 trillion of municipal bonds are currently outstanding in the United States. Individual investors hold more than 73% of this amount- either directly or through mutual funds. In 1999, Michigan communities borrowed more than $6.6 billion in the municipal bond market in 586 offerings, ranking 10th in the nation.

Overview of the Regulatory Scheme

The disclosure of information to investors by securities issuers and securities brokers and dealers is at the core of the United States securities laws. This guiding philosophy underpinning our system was eloquently expressed by Justice Brandeis, who said: "Sunlight is said to be the best of disinfectants." Unlike so-called "merit regulation" used in some countries and, in theory, in some states in which government regulators must approve an issue before securities may be sold, the SEC does not participate in or approve the issuance of securities. Instead, the U.S. securities laws require that full and fair disclosure be made to each in order that he may make his own investment decision. This light hand of regulators on the securities industry is undoubtedly one of the reasons for the strength and vigor of our American securities markets.

The legal standard for disclosure was established in Section 17a of the Securities Act of 1933 and in Section 10 of the Securities Exchange Act of 1934. A rule adopted by the Commission, known as Rule 10b-5, succinctly describes what are commonly called the "antifraud provisions" of the securities laws. You may notice that market participants frequently use the phrase "10b-5" as shorthand when referring to the antifraud provisions generally.

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

-- to employ any device, scheme, or artifice to defraud,

-- to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading, or

--to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of a security."

The antifraud provisions apply to every participant in all of the securities markets in this country.

Corporate securities offerings in the United States are subject not only to the antifraud provisions, but also to the requirement that they be registered with the SEC. After registering, corporate issuers must make periodic filings (usually quarterly) with the Commission. In addition, before issuing securities, companies must file their prospectus with the SEC. Registration and the issuance of corporate securities are subject to many rules about both format and content. This is sometimes informally called a "checklist" approach. In contrast, municipal securities are expressly exempted from registration and are subject only to the disclosure-based portions of the securities laws, like Rule 10b-5.

This difference between the disclosure requirements for corporate and municipal securities developed out of the political and constitutional history of the United States, as well as perceived differences in the practices and abuses prevalent in each of those market sectors. As a result, the SEC cannot impose detailed rules as to the format or content of disclosure for the sale of municipal securities. Nevertheless, while there is no official "template" or "checklist" for municipal market disclosure as there is for corporate securities, the concepts of materiality, accuracy and completeness found in Rule 10b-5 still control.

The statutory provisions and underlying principles of the federal securities laws are based on making full and fair disclosure to each investor in order that he may make his own investment decision. Although new kinds of municipal securities, new distribution techniques and new methods for preparation of disclosure have and will continue to develop, the disclosure standards remain constant.

The precise application of disclosure standards by local governments issuing bonds and by the legal and financial professionals which they employ, ultimately depends on the facts and circumstances of each offering situation. A common sense approach to disclosure will usually lead you in the right direction. For example, ask yourself "If I were buying these bonds, what would I like to know?" If there are things that come to your mind in answer to that question that for one reason or another have not been made public, it is critically important that you discuss them with your attorney in order to determine if they are material and must be disclosed.

Primary Market Disclosure

In an initial issuance of municipal bonds, at the time an underwriter sends out confirmation statements to his customers memorializing the exact bonds which were purchased, the sale price and some of the bond terms, it is required to deliver a copy of a document making full disclosure to the bond purchaser. This document is generally called an "official statement". Whatever name it is called, it is the primary disclosure document in all municipal securities transactions. Although it may be prepared by counsel to the underwriter, by bond counsel or by the issuer's own disclosure counsel or financial advisor, the official statement is legally the issuer's document. The issuer has ultimate responsibility for ensuring that its official statements meet the disclosure standards of the securities laws and primary liability for failure to meet them.

Rule 10b-5 states the basic standard for official statements. They must not include any untrue statement of a materiall fact or omit to state a materiall fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading. Did you notice the word "material"? It is neither necessary or desirable to disclose every bit of information about an issuer in an official statement; important information would be buried in unimportant detail. However, "material" information must be disclosed to investors. A fact is "material" if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by reasonable investors as having significantly altered the "total mix" of information made available. The focus of materiality is on the importance of the information to investors making an investment decision.

Although there is no "checklist" for municipal securities issues, considerable guidance is available from the Commission's interpretative releases, including releases which relate to antifraud issues in the corporate finance area, the more than 150 administrative actions related to municipal bonds brought by the SEC over the years and the many lawsuits brought by private parties for securities law violations. Further guidance may be found in both the adopting and proposing releases to Rule 15c2-12 and its amendments. You should have received a copy of Selected Sources of Guidance, which I prepared for your reference. A great deal of this material is available on the SEC's web site at http://www.sec.gov. Furthermore, a number of industry groups, such as the GFOA, The Bond Market Association and the National Federation of Municipal Analysts, have also prepared documents regarding disclosure practices which you may find useful.

Municipal bond issuers have primary responsibility for disclosure. As a result, it is important that they use experienced, qualified attorneys and other professionals who are familiar with the securities laws on their transactions. In the last few years there has seemed to be an increasing trend to choose transaction participants, including underwriters and lawyers, primarily on the basis of cost. We certainly appreciate the importance to municipal officials and their constituents of lower costs. It is important to keep quality and competence in mind as well, because ultimately your own liability and that of your local government may be at stake. You do not want to find yourselves, in retrospect, to have been penny wise and pound foolish in hiring persons with little experience or knowledge in securities disclosure. The securities laws have tough enforcement provisions. An issuer will very quickly incur costs far in excess of the amount saved by hiring the low and incompetent bidder if it gets involved in an enforcement action or private lawsuit.

For example, you may wish to establish minimum standards of municipal bond and securities experience for lawyers, underwriters and others advising you and insist that any person retained to assist in the preparation of their disclosure documents has a thorough professional understanding of the disclosure requirements under the securities laws1. Ask questions. Check references. After eliminating unqualified bidders, you may consider the price quotes with a higher level of confidence that you will be getting the advice you need.

It is important that issuers be clear about what person on the transaction team is protecting their interests vis a vis the securities laws. Many issuers are unaware that bond counsel's role does not automatically include overall disclosure responsibilities on the issuer's behalf. You may wish to add it to the scope of bond counsel's engagement or hire separate disclosure counsel. Furthermore, although the issuer and the underwriter generally have a community of interest in adequate disclosure, issuers should remember that they stand on the opposite side of the transaction from the underwriter (i.e., the issuer is the seller and the underwriter is the buyer of securities).

During my years in private practice, I have observed two quite different approaches of lawyers towards disclosure and the securities laws: that of the planner and that of the litigator. The planner, who takes the long view and recognizes the danger of liability and costliness of investigations and litigation, counsels his client to take moderate positions, well within established legal principles. The litigator is more aggressive, willing to take more risk and to push the envelope for his client. As a result, after bonds have been issued, issuers advised by litigator-types may be faced with the challenge of backing away from the precipice of disclosure fraud. Keep in mind that liability is determined by courts, not lawyers in private practice. An issuer being advised by an aggressive litigator should recognize the potential risk. Your lawyer may think you are close to, but not over, the edge, but if a court sees it otherwise - and if you've gone over the edge -- you are the one who loses. If safety is your concern, when in doubt, disclose.

Finally, issuer officials who approve the issuance of bonds and/or the form of disclosure document should be aware that they have personal responsibilities under the securities laws. For example, a public official who approves the issuance of securities and use of a disclosure document may not authorize disclosure that the public official knows to be materially false and misleading; nor may that public official authorize disclosure while recklessly disregarding facts that indicate that there is a risk that the disclosure may be misleading. Of course, municipal officials can rely on experts, lawyers and financial advisors - just as officials in public companies do. However, that reliance must be reasonable. Officials who hide their head in the sand are not protected from potential liability.

Secondary Market Disclosure

Your bondholders' interest in the truth applies not only at the time of the primary offering, but continues throughout the life of the bonds. Many investors who didn't buy your bonds in the primary offering may purchase them in the secondary market. Furthermore, your current bondholders are always concerned about whether they should sell or hold the bonds that they own. The Commission believes that purchasers in the secondary market need the same level of financial information and operating data to make their investment decisions as do purchasers in a primary offering. Given that bondholders attach great significance to issuers' continuing disclosure, it would seem to follow that issuers would be more than willing to provide it. Yet investors have consistently complained for years that they receive too little, too late. Aside from being "investor unfriendly," stale disclosure may, depending on the facts and circumstances, create its own problems for an issuer, particularly if the issuer is aware of subsequent material developments contrary to the picture provided investors in that stale disclosure.

The Commission has adopted one rule specifically dealing with secondary disclosure in the municipal market, Rule 15c2-12, which must be met in order for a broker, dealer or municipal securities dealer to act as an underwriter in a primary offering of municipal securities exceeding $1 million (unless it qualifies for one of the exceptions to the Rule). The portion of the Rule adopted in 1989 requires the underwriter of an offering (1) to review an official statement that the issuer deems final before purchasing or bidding for bonds, (2) in a negotiated offering to provide a copy of the preliminary official statement to any potential customer, within one day of request and (3) to contract with the issuer to be furnished with an adequate number of official statements within seven days of the bond sale and in time to accompany the sale confirmations to customers in a primary offering, distribute them to customers and file them with the MSRB and with certain designated repositories.

Rule 15c2-12 was amended in 1994 to include certain continuing disclosure requirements. An underwriter subject to the Rule may not purchase or sell municipal securities unless the issuer of those securities, or an obligated person for whom financial or operating data is presented in the final official statement, has undertaken in a written agreement to make certain ongoing financial and operating information available to bondholders at least annually. The information is filed with each nationally recognized municipal securities information repository, or NRMSIR, and to the appropriate state information depository, or SID, if any. Michigan does/does not have a SID. The names and addresses of the current NRMSIRs and SIDs can be found on the Commission's web site at http://www.sec.gov/consumer/nrmsir.htm. The 1994 amendments to the Rule also require that notice of eleven events, if material, be filed with each NRMSIR or the MSRB and the appropriate SID, if any. The eleven enumerated events are:

(1) Principal and interest payment delinquencies;

(2) Non-payment related defaults;

(3) Unscheduled draws on debt service reserves reflecting financial difficulties;

(4) Unscheduled draws on credit enhancements reflecting financial difficulties;

(5) Substitution of credit or liquidity providers, or their failure to perform;

(6) Adverse tax opinions or events affecting the tax-exempt status of the security;

(7) Modifications to rights of securities holders;

(8) Bond calls;

(9) Defeasances;

(10) Release, substitution, or sale of property securing repayment of the securities;

(11) Rating changes.

In addition, the Rule requires that a notice be sent to each NRMSIR or to the MSRB and the appropriate SID, if any, in the event of a failure of any person to provide the required annual financial information on or before the due date in the written agreement. Of course, you are free to notify the NRMSIRs or the MSRB of any other developments you would like to communicate to the market, and we encourage you to do so.

"Speaking to the Market"

Whenever an issuer releases information which may reasonably be expected to reach investors, it is said to be "speaking to the market." For example, an issuer speaks to the market when it makes its annual filings with NRMSIRs or mails information to investors. Whenever an issuer speaks to the market, it must be sure that the information disclosed does not make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading. The SEC's current action against the City of Miami and certain of its officials illustrates this point. In February, 1995, the City filed its 1994 comprehensive annual financial report and a transmittal letter dated February 28, 1995 to the NRMSIRs. The Commission has alleged that in the transmittal letter, the City materially mischaracterized one of its programs and the impact that it would have on the City's 1995 financial condition. The statements are charged to have been materially false and misleading because they painted an optimistic picture of the City's financial condition at a time that Miami faced a severe cash crisis and large operating deficit. So, keep in mind that while an issuer has no duty to speak to the market other than through its official statement and annual filings, if it does so, the antifraud provisions apply.

Use of Electronic Media

At the end of April, the Commission issued a new interpretive release on disclosure over the internet. Due to numerous issues which arise because of the registration requirements applicable to corporate securities, the principal subjects of this electronic disclosure guidance are corporate entities. However, the release also speaks specifically to the municipal market about issues which arise under the antifraud provisions of the federal securities laws. It discusses issues related to the electronic delivery of information to investors, web site content (including hyperlinks and information placed in proximity to disclosure documents) and "on-line" offerings. But it also defers some issues, such as the continuing existence of outdated information on web sites, while seeking comments from the public on those deferred topics.

In the introduction to this release, the Commission notes that "the increased availability of information through the internet has helped to promote transparency, liquidity and efficiency in our capital markets." The Commission "considered the significant benefits that investors can gain from the increased use of electronic media ... and the potential for electronic media ... to be used to defraud the investing public." The guidance is intended to advance the central goals of the federal securities laws: "ensuring full and fair disclosure to investors; promoting the public interest, including investor protection, efficiency, competition and capital formation; and maintaining fair and orderly capital markets."

Regarding electronic delivery for all securities issues, whether corporate or municipal, the release provides: an issuer or market intermediary may obtain consent to electronic delivery of documents telephonically, and that consent may be on a "global," multiple-issuer basis; that issuers and market intermediaries may deliver documents electronically in portable document format ("PDF"); and a "hyperlink" that is "embedded" in an offering or any other document required under the securities laws causes the hyper linked information to be a part of that document.

In a section concerning only the municipal securities market, the release states:

A municipal securities underwriter may rely on a municipal securities issuer to identify the documents on, or hyper linked from, the issuer's web site that comprise the preliminary, deemed final and final official statements, even if the issuer's web site contains other documents or hyperlinks to other web sites. Hyperlinks embedded within an official statement itself, however, will be considered part of the official statement, even if a municipal securities issuer has not specifically identified the embedded hyper linked information. For any municipal securities offering subject to Rule 15c2-12, the paper and electronic versions of each of the preliminary, deemed final and final official statements must be the same.

The release also solicits comments regarding certain technology concepts: whether access and delivery should be equated; electronic notices; implied consent of investors to electronic delivery; exclusively electronic offerings; antifraud liability for outdated information on an issuer's web site; communications when in registration; and internet discussion forums.

This guidance on access and attribution relates, of course, to the responsibility of market participants under the antifraud provisions. " It is important for issuers to keep in mind that the federal securities laws apply in the same manner to the content of their web sites as to any other statements made or attributable to them." The ultimate determination of liability would still be based on whether a claim has been established under Section 10(b) of the Exchange Act and Rule 10b-5.

Selective Disclosure

Recently, there has been a considerable amount of discussion among municipal finance professionals regarding the potential liability of issuers who disclose information to some investors before it is available to other investors. A lot of discussion has centered on a rule recently adopted by the Commission known as Regulation FD (Fair Disclosure). 2 The first thing that you should know about Reg. FD is that it does not apply to municipal securities. It addresses the selective disclosure of material nonpublic information by companies registered with the Commission. It addresses a very specific problem found in the corporate finance arena. For example, a registered company might invite a group of analysts to participate in a conference call in which the last quarter's earnings are disclosed to those analysts, but not to the public in general until a later time.

Regulation FD is designed to promote the full and fair disclosure of information by issuers, and to clarify and enhance existing prohibitions against insider trading. The Commission does not believe that allowing issuers to disclose material information selectively is in the best interests of investors or the securities markets generally. The Commission wants for all investors to compete on a level playing field and, to the maximum extent practicable, to have access to an issuer's material disclosures at the same time.

Now if there is one thing that you should remember, it is that Regulation FD does not apply to municipal securities; it is not based on the antifraud provisions of the securities laws. However, as is often the case with other Commission regulations, rules and positions in the corporate arena, Reg. FD sometimes can be a useful source of guidance on how to proceed for municipal securities issuers and practitioners. For example, if you want to "speak to the market" because you are concerned that information may have been revealed to a few, but not all, investors, why not take a cue from Reg. FD and promptly send a notice to the NRMSIRS and issue a press release?

Recent Municipal Enforcement Actions

During the past six years, the Commission has brought more than 90 enforcement actions in the area of municipal securities. Today's review is confined to developments over the last year. The principles that form the bases of all these Commission actions illustrate the fundamental principles of the federal securities laws. The underpinnings of the U.S. system will continue to be applicable to municipal securities issuance circumstances and fact situations yet to unfold. These recent actions also illustrate applicability to all issuance participants -- - issuers, their officials, bankers, lawyers, accountants and conduit parties. Proving that there is nothing new under the sun, these recent enforcement actions involve three old familiar themes: serious disclosure lapses, conflicts of interest and corruption. Furthermore, they arise out of both the primary and secondary markets.

In the Matter of the City of Miami, Florida, Cesar Odio and Manohar Surana, Securities Act Release No. 7741, Exchange Act Release No. 41896, A.P. File No. 3-10022 (September 22, 1999): Last fall, the Commission instituted cease-and-desist proceedings against the City of Miami and against two top city officials - Cesar Odio, the City Manager, and Manohar Surana, its Director of Finance. The Commission's order alleged that the City, through Odio and Surana, violated the antifraud provisions in connection with the offer and sale to the public of municipal bonds issued by the City in June, August and December of 1995. The order also alleged that the City, through Odio, violated the antifraud provisions when it disseminated its "Comprehensive Annual Financial Report" for fiscal year 1994 to the investing public in September 1995. On April 14, 2000, Odio entered into a settlement without admitting or denying the allegations. The proceedings against Manohar and the City are still pending. This action involves both initial and secondary market disclosure.

The next three cases, in Federal District Courts in Florida, Georgia and Pennsylvania, are civil suits brought by the Commission that involve conflicts of interest, including receipt of undisclosed compensation, in violation of the antifraud provisions.

SEC v. William Jay Ramsey, Civ. Action No. 4-99CV-303-WS (N.D. Fla.); Litigation Release No. 16241 (August 4, 1999): Last August, the Commission announced the filing and settlement of an enforcement action against William J. Ramsey, a former board member of the Florida Housing Finance Agency, for failing to disclose his receipt of compensation in connection with selecting a brokerage firm for the Agency's bond business, Stephens Inc. of Little Rock, Arkansas. Without admitting or denying the allegations, Ramsey agreed to settle the action by paying a $ 10,000 penalty, disgorging the compensation he received plus interest, and consenting to the entry of an injunction prohibiting him from future violations of the antifraud provisions. In a related action, Stephens, without admitting or denying the findings, consented to the issuance of an administrative order that found, among other things, that Stephens secretly paid Ramsey and failed to disclose the actual and potential conflict of interest created thereby to the Agency and investors in the Agency's bonds. In the Matter of Stephens Inc., Securities Act Release No. 7612, Exchange Act Release No. 40699, A.P. File No. 3-9781 (November 23, 1998).

SEC v. Paschal Gene Allen, Civ. Action No. 1-99-CV-2986 (N.D. Ga.); Litigation Release No. 16362 (November 18, 1999): In November of 1999, the Commission filed a complaint against Paschal Gene Allen, a former public finance banker in the Atlanta office of Stephens Inc., for taking undisclosed payments in connection with an investment that he recommended to his financial advisory client - Fulton County, Georgia. The complaint also charges Allen with taking undisclosed compensation from underwriter's counsel in connection with five local bond issues in Georgia. The complaint, filed in the Northern District of Georgia, alleges that, in conduct from 1991 through 1998, the defendant did not disclose arrangements for payments to him by other participants in the transactions, and that his failure to disclose the actual and potential conflicts of interest created thereby violated the antifraud provisions (along with MSRB Rule G-17 on fair dealing). Without admitting or denying allegations, Allen agreed to the entry of a final judgment permanently enjoining him from future violations of the antifraud provisions and MSRB Rule G-17. In addition, Allen agreed to pay disgorgement of just over $ 6,000 and a civil penalty of $ 20,000. He also agreed to the entry of a Commission order barring him from associating with any securities broker or dealer or municipal securities dealer.

SEC v. Patrick H. McCarthy, Civ. Action No. 1-99-cv-2003 (M.D. Pa.); Litigation Release No. 16356 (November 17, 1999) (and six related actions): Also last November, the Commission filed a complaint for securities fraud against Patrick H. McCarthy, a Philadelphia attorney and former fundraiser and senior advisor to the past Treasurer of the Commonwealth of Pennsylvania. The complaint charged McCarthy with arranging for his law firm to receive undisclosed compensation, in violation of his fiduciary duty, and for influencing the selection of a securities dealer in two Pennsylvania refunding bond offerings in 1994. This is a complicated story involving multiple relationships among consultants and attorneys advising a state issuer of municipal securities, and I refer you to the court papers for the particulars. The Commission's complaint alleged that the defendant had knowingly or recklessly failed to disclose to the Treasurer's office or to the Commonwealth that he had a conflict of interest arising from his payment arrangements with a financial advisor and a broker-dealer relating to the refunding offerings. Without admitting or denying the Commission's allegations, McCarthy consented to the entry of a final judgment. That judgment enjoins him from violating the antifraud provisions and to pay a civil penalty of $ 100,000; in addition, his law firm voluntarily returned to the Commonwealth of Pennsylvania more than $ 172,000 in payments it had received from a consulting firm and from a broker-dealer, Alex. Brown and Sons Incorporated. The Commission also instituted administrative proceedings with other individuals and entities involved with the Pennsylvania refundings, including BT Alex. Brown Incorporated, Alex. Brown's corporate successor, and Arthurs Lestrange & Company, another broker-dealer involved in the transactions. In the Matter of BT Alex. Brown Incorporated, Securities Act Release No. 7772, Exchange Act Release No. 42145, A.P. File No. 3-10097 (November 17, 1999) (Settled Final Order); In the Matter of Arthurs Lestrange & Company and Michael P. Bova, Securities Act Release No. 7775, Exchange Act Release No. 42148, A.P. File No. 3-10100 (November 17, 1999) (Settled Final Order).

This is a good place to point to the SEC website, http://www.sec.gov/enforce.htm, where you may find the particular files in which to obtain additional information on these and other enforcement proceedings. It is also an appropriate moment to emphasize the Commission's ongoing concern with application of the antifraud provisions to situations of conflict of interest and corruption, as well as misleading disclosure, in connection with the offering of municipal securities.

Four related administrative proceedings and court cases filed recently concern disclosure in the secondary market, as distinguished from initial issuance.

In the Matter of Albert Adamczak, C.P.A., Exchange Act Release No. 42743, A.P. File No. 3-10196; In the Matter of Stephen H. Spargo, C.P.A., Exchange Act Release No. 42742, A.P. File No. 3-10195; SEC v. David W. McConnell and Charles P. Morrison, Civ. Action No. 00CV2261 (E.D. Pa.), Litigation Release No. 16524 (May 2, 2000): In the Matter of Allegheny Health, Education and Research Foundation, Exchange Act Release No. 42992, A.P. File No. 3-10245 (June 30, 2000).

The Commission recently instituted proceedings against two senior officers in the accounting department (Albert Adamczak and Stephen H. Spargo) and filed a complaint against two senior officers (David W. McConnell and Charles P. Morrison) of a non-profit healthcare organization in Pennsylvania, the Allegheny Health, Education and Research Foundation, or AHERF. It also instituted an administrative enforcement action against AHERF itself. AHERF was the parent holding company of numerous subsidiaries, which filed for Chapter 11 bankruptcy on its own behalf and four of its subsidiaries in July 1998. Those subsidiaries were hospitals and health care organizations that were contractually obligated to make payments to cover debt service on bonds issued publicly on their behalf by tax-exempt issuers in Pennsylvania. At the time of the Commission's actions, such outstanding municipal securities aggregated more than $ 900 million.

The Commission found in its orders that Adamczak and Spargo, and alleged in its complaint that McConnell and Morrison, had violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by (1) overstating the net income of one of AHERF's subsidiaries for 1996 and (2) overstating AHERF's own and a subsidiary's net income for 1997 in its annual financial statements which it then included in its "Secondary Market Disclosure Reports." Those were the reports it filed pursuant to its contractual commitments with its underwriters for continuing disclosure, as required by the Commission's Rule 15c2-12, with a "nationally recognized municipal securities repository." Adamczak and Spargo entered into settlements simultaneous with the filings, without admitting or denying the Commission's findings; the orders also barred them from practicing before the Commission pursuant to its Rule 102(e). Without admitting or denying the allegations, McConnell agreed to the entry of a final judgment enjoining him from violating the antifraud provisions and ordering him to pay a penalty of $40,000. Litigation of the action against Morrison is pending.

The Commission's orders stated: "Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Any issuer that releases information to the public that is reasonably expected to reach investors and trading markets will be subject to the antifraud provisions. ... The antifraud provisions are equally applicable to disclosures in the secondary market for municipal securities. ..."

Both continuing disclosure in the secondary market and disclosure by tax-exempt issuers (and their officers and employees) on behalf of obligated persons, each of which is involved in these facts and circumstances, are important subject areas to which issuer officials should pay close attention.

Yield-Burning (April 6, 2000): In April of this year, the Commission announced that it had brought and settled civil administrative fraud charges against ten Wall Street and regional brokerage firms for overcharging municipalities for U.S. Treasury securities in a practice commonly known as "yield-burning." The settlements were part of a "global resolution" of all yield-burning claims, with a total of 17 brokerage firms, by requiring them to pay a total of more than $ 120 million to the United States Treasury. (Those payments will preserve the tax-exempt status of more than 3,600 separate issues of municipal bonds.) In addition, municipalities will receive directly more than $ 18 million. The global resolution payments are the largest settlement in any municipal securities case, and among the largest ever paid in any SEC settlement. Without admitting or denying the findings, each firm consented to a censure, a cease-and-desist order prohibiting future violations, and agreed to disgorge ill-gotten gains. (Together with four previously settled yield-burning actions, 21 brokerage firms have paid $ 148 million into the U.S. Treasury and $ 22 million to municipal issuers concerning over 3,700 tax-exempt issues.)

In addition, two of the firms, Dain Rauscher Incorporated and William R. Hough & Co., were charged with violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. In the case of those two firms, the Commission found that they had breached their fiduciary duty to a financial advisory client (a public entity issuing municipal securities) by failing to make necessary and important disclosures in connection with a refunding and by charging excessive, undisclosed markups on securities sold to the clients. SEC v. Rauscher Pierce Refsnes, Inc., Dain Rauscher Incorporated and James Feltham, Civ. Action No. 98-CV-0027 PHX ROS (D. Ariz.), Litigation Release No. 16505, A.P. File No. 3-10182 (April 6, 2000); In the Matter of William R. Hough & Co., Securities Act Release No. 7826, Exchange Act Release No. 42632, A.P. File No. 3-10176 (April 6, 2000).


The current wave of economic expansion in the United States is unprecedented. The direction and duration are remarkably consistent across all areas of the country. This remarkable business cycle is reflected in the cash receipts of our state and local governments, where general fund surpluses have become the norm. Keep in mind, however, that the standards of the antifraud provisions of the federal securities laws remain the same in good times as well as in bad. Avoiding disclosure of bad news in good times can be the source of just as much trouble for an issuer as in bad times.

Please avail yourselves of the resources of the Commission. Please feel free to contact me or others in the Office of Municipal Securities. Our phone number is 202-942-7300. Our e-mail address is oms@sec.gov. And for those of you preferring "snail mail," we do have a postal address as well - Mail Stop 0509, 450 Fifth Street, N.W., Washington, D.C. 20549-0509. We have prepared a compendium of Commission actions involving municipal securities. It is available on the internet at http://www.sec.gov/offices/munisec/mbonds/omstoc.htm.

The Office of Municipal Securities is conducting an extensive program of reaching out to market participants, in forums like this one, in professional dialogues, and in compilation of written references. The Commission sponsored the First Annual Municipal Market Roundtable last fall, and the transcript is also accessible on our web site, at http://www.sec.gov/rules/othrindx.htm. We will host another annual roundtable on Thursday, October 12, 2000, at the Commission's offices in Washington, D.C., with a cross-section of industry panels on current topics, and we invite each of you to attend.

In conclusion, why does disclosure matter? Complete and accurate disclosure of facts material to an investment in a security is essential to a prospective purchaser because of the unusual nature of the commodity. A share or a bond has no intrinsic value, but represents a defined right in a private or public enterprise. A security is unique in not being susceptible to any form of tangible inspection. The investor's evaluation of an investment decision is dependent upon access to relevant and truthful information uniquely within the control of the issuer. Protection from fraudulent or misleading material statements or omissions is the regulatory means of ensuring the full and free flow of information to the marketplace. Disclosure defines the information age in municipal securities.


1 Of course, the Commission has not established and does not require that any such standards be established or used.
2 SEC, Rule FD, Selective Disclosure and Insider Trading, Release Nos. 33-7881, 34-43154, IC-24599, File No. S7-31-99, 17 CFR Parts 240, 243, and 249 .