Disclosure and Accounting Practices in the Municipal Securities Market
Introduction
Many critically important aspects of American life, from airports to sewers and schools to
hospitals, depend on the municipal securities market for financing. All bonds, notes and
other debt securities issued by states and local governments and their respective agencies
and instrumentalities are “municipal securities.”“ They are issued by such government
entities to pay for a variety of public projects, cash flow and other governmental needs
and, by acting as a conduit on behalf of private organizations who wish to obtain
tax-exempt interest rates, to fund non-governmental private projects.1 Maintaining the
health of this key component of our capital markets is important to every resident of the
United States not least to the millions of individuals who invest in municipal bonds. To this
end, staff of the Divisions of Corporation Finance, Enforcement and Market Regulation
and of the Office of Chief Accountant of the Securities and Exchange Commission would
like to bring to your attention some of our ongoing concerns about investor access to full
and accurate information regarding municipal issuers and their securities.
A number of Commission enforcement actions have highlighted continued disclosure
weaknesses, raised concerns about governmental accounting, and suggested the need for
improvements to disclosure practices. These enforcement actions involved allegations that
in disclosure documents used in offerings or other information provided to investors:
” the City of San Diego, California failed to disclose the gravity of its enormous pension
and retiree health liabilities or that those liabilities had placed the City in serious financial
jeopardy;2
” the City of Miami, Florida failed to disclose an unprecedented cash flow shortage which
it had eased, in part, by spending the proceeds of bonds issued for other purposes for
operating costs;3
” Maricopa County, Arizona failed to disclose a material decline in its financial condition
and operating cash flow, the substantial deficit in its general fund, and increased deficit in
another fund;4
” the City of Syracuse, New York falsely claimed a surplus for its general and debt service
funds, materially overstated its ending fund balances in those funds, and misled investors
by describing certain financial information as audited;5
1 The Internal Revenue Code delineates the purposes for which tax-exempt municipal
bonds may be issued for the benefit of organizations other than states and local
governments, i.e., conduit borrowers.
2 In the Matter of the City of San Diego, SEC Release No. 34-54745 (November 14,
2006).
3 Opinion of the Commission In the Matter of the City of Miami, Florida, SEC Release
No. 34-47552 (March 21, 2003).
4 In re Maricopa County, SEC Release No. 33-7354, 34- 37779 (October 3, 1996).
5 In re City of Syracuse, New York, Warren D. Simpson, and Edward D. Polgreen, SEC
Release No. 34-39149 (September 30, 1997).
1
“¾ Orange County, California made misleading statements and failed to disclose material
information about the Countys high risk investment pool and financial condition that
brought into question the Countys ability to repay its securities *ƒ²*ƒ”€š facts about which
members of its Board of Supervisors were aware, but failed to take appropriate steps to
assure were disclosed;6
” A lawyer serving as bond counsel was responsible for misrepresentations and omissions
in an official statement and in his legal opinions, which failed to provide investors with full
information concerning the substantial risk that the IRS would find a municipal securities
issue to be taxable;7 and
” A group of 15 broker-dealer firms engaged in a variety of violative practices in the
auction rate securities market and in certain other practices that were not adequately
disclosed to investors in auction rate securities, some of which had the effect of favoring
certain customers over others, and some of which had the effect of favoring the issuer of
the securities over customers, or vice versa.8
6 Report of Investigation in the Matter of County of Orange, California as it Relates to the
Conduct of the Members of the Board of Supervisors, SEC Release No. 34-36761 (January
24, 1996).
7 Weiss v. SEC, 468 F.3d 849 (D.C.C. 2006) (upholding the Commission decision In the
Matter of Ira Weiss, SEC Release No.34- 52875 (December 2, 2005)).
8 In the Matter of Bear, Stearns & Co. Inc.; Citigroup Global Markets, Inc.; Goldman,
Sachs & Co.; J.P. Morgan Securities, Inc.; Lehman Brothers Inc.; Merrill Lynch, Pierce,
Fenner & Smith Incorporated; Morgan Stanley & Co. Incorporated and Morgan Stanley
DW Inc.; RBC Dain Rauscher Inc.; Banc of America Securities LLC; A.G. Edwards &
Sons, Inc.; Morgan Keegan & Company, Inc.; Piper Jaffray & Co.; SunTrust Capital
Markets Inc.; and Wachovia Capital Markets, LLC, SEC Release No. 34-53888. (May 31,
2006).
9 Other enforcement actions involving the municipal securities market include In the
Matter of the Dauphin County General Authority, SEC Release No.33-8415 (April 26,
2004); Mount Sinai Medical Center of Florida, Inc., M. Brooks Turkel and Harvey W.
Smith, Sec Release No. 34-51797 (June 7, 2005); In the Matter of Neshannock Township
School District, SEC Release No. 34-49600 (April 22, 2004);
SEC v. Manoucher Sarbaz, et al, Civ. Action No. CV 03-881 CJC (C.D. Cal.), Litigation
Release No. 18898 (September 24, 2004); SEC v. Robert Kasirer, et al., Civ. Action No.
04-CV-04340 (N.D. Ill.), Litigation Release No. 19131 (March 11, 2005); SEC v. David
Fitzgerald and Pacific Genesis Group, Inc., Litigation Release No. 17432 (March 22,
2002). A compendium of such actions is available on the SEC web site.
http://www.sec.gov/info/municipal.shtml
10 See, e.g., John Connor, “IRS Muni Cop Criticizes Muni Market Attitudes, Practices,”“
Dow Jones Newswires, November 30, 2006; William Selway, Martin Z. Braun and David
