June 18, 2015 / 5:03 PM / 2 years ago

UPDATE 3-U.S. SEC charges 36 firms over fraudulent muni bond offerings

(Adds industry comment)

By Sarah N. Lynch

WASHINGTON, June 18 (Reuters) - Thirty six municipal bond underwriters operating in the $3.7 trillion muni market will collectively pay about $9 million to settle civil charges over fraudulent offerings, as part of the first pact of its kind with U.S. regulators.

The U.S. Securities and Exchange Commission said on Thursday that the charges stemmed from a March 2014 invitation to brokers and bond issuers to voluntarily report disclosure violations in offering documents, such as material misstatements and omissions.

“(It is) putting everyone on notice here that if there was any laxity on disclosure in the past it won’t be tolerated in the future,” said Richard Ciccarone, head of Iowa-based Merritt Research Services.

The cases were the first under the program intended to increase transparency in a lightly regulated sector.

Andrew Ceresney, head of the SEC’s enforcement division, said the firms represented about 70 percent of the dollar value of all municipal bonds issued in the United States during the four years ended on Sept. 30.

Among the firms charged include units of banks such as Bank of America Merrill Lynch, BNY Mellon, Goldman Sachs, Citigroup, JP Morgan, Royal Bank of Canada and Morgan Stanley. All have agreed to settle the charges without admitting or denying the allegations.

In exchange for self-reporting, issuers and underwriters were told they would receive favorable settlement terms.

The deadline for underwriters to self-report was in September, and the SEC first charged a bond issuer under the program in July.

Some argued that the SEC measures did not go far enough.

“It requires some self-policing on a go-forward basis... but what stops this from happening again?,” said David Tawil, President of hedge fund Maglan Capital, who called the penalties “de minimis”.

One major municipal bond investor who requested anonymity said the SEC should in the future threaten harsher penalties and tell market participants “the next time it is not a slap on the wrist.”

A Citigroup spokesman said the company was pleased to resolve the matter, while representatives of the other banks declined to comment.

Academics and industry experts said they believed the SEC’s actions could help spur better disclosures in the market.

“The municipal bond market for many years has been criticized for its opaqueness,” said Andrew Clinton, president of Clinton Investment Management.

The settlement requires each firm to pay civil penalties based on the number and size of the fraudulent offering. The maximum penalty is $500,000 for large firms and $100,000 for smaller ones.

The firms also must hire independent consultants to review their policies and procedures.

A lawyer who represented one of the firms said the SEC’s voluntary program was difficult to refuse, particularly with the enticement of a penalty cap.

The kinds of disclosure violations in the SEC’s cases run the gamut.

In one case a brokerage worked on bond deals in 2011 and 2013, even though the issuer never disclosed it had not filed any annual financial reports since 2009.

The SEC did not disclose the names of the bond issuers, but Ceresney said he expected the agency to bring actions against issuers in the future.

The municipal bond market is more lightly regulated than the rest of the U.S. securities market because of a rule known as the “Tower Amendment.”

In recent years, however, the SEC has said the rule only prevents the agency from requiring bond issuers to file details of their offerings before selling them to investors and has pushed to bring precedent-setting enforcement actions. (Reporting by Sarah N. Lynch; Additional reporting by Hilary Russ, Jessica DiNapoli and Megan Davies in New York and Lisa Lambert in Washington, D.C. , additional writing and editing by Megan Davies; Editing by Andrew Hay; Editing by Bill Trott and Lisa Von Ahn)

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