SEC Pelts Municipalities with Enforcement Action

By Shafroth, Frank | Nation's Cities Weekly, December 18, 1995 | Go to article overview

SEC Pelts Municipalities with Enforcement Action


Shafroth, Frank, Nation's Cities Weekly


The federal Securities and Exchange Commission (SEC) recently has unleashed a series of enforcement actions against municipal governments and officials. For the first time ever, the SEC is pressuring cities and municipal officials to enter into consent decrees confessing federal securities fraud violations.

The growing list of targets includes both large and small cities and counties and public elected officials of local governments. The SEC expects to take enforcement action against Denver, Colo., and against the California cities of Anaheim, Irvine, Avenal, and Wascoe. Elected officials in Orange County, Calif., also will be targets. Much broader action against other municipalities is reportedly under consideration.

With SEC Chairman Arthur Levitt making municipal finance his number one priority (see related letter from Levitt, this issue) the federal actions raise serious questions about whether cities and towns--especially smaller and less sophisticated ones-can and will be permitted to rely on the advice and expertise of underwriters, bond lawyers, and financial advisors in preparing and issuing notes and municipal bonds.

NLC has repeatedly raised with the SEC the issue of the cost of compliance with new federal securities disclosure mandates with the SEC. NLC was the only organization representing municipalities to express opposition to the new rules.

A Federal Double Standard

The SEC action not only raises serious questions about the cost and access to public borrowing for smaller cities and towns, it also raises the question of a federal double standard.

The increased SEC scrutiny on municipalities comes as Congress is calling for significantly less scrutiny of and disclosure by corporations and investment advisors involved in the sale of securities to municipalities and munieipal pension funds.

President Clinton has until this week to sign or veto sweeping legislation which would reduce options for cities to recover from fraudulent investment activities involving a municipality's pension or other investment funds. The bill would make it far more difficult for cities and towns to sue investment advisors, securities firms, broker dealers, bond counsel, accountants, or other financial advisors of fraud.

So even as the SEC is expanding the scope of its investigations to impose penalties on municipalities for fraud, the Congressional bill would make it almost impossible for municipalities to sue for securities fraud, no matter how badly a company misled a city or town. …

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