By John Filar Atwood
In its first-ever actions against underwriters that failed to meet the requirements that would exempt them from obtaining disclosures for investors in certain offerings of municipal bonds, the SEC brought charges against TD Securities (USA), BNY Mellon Capital Markets, Jefferies, and Oppenheimer. Each of TD, BNY Mellon, and Jefferies agreed to settle with the SEC, but Oppenheimer is litigating the matter in the Southern District of New York (In the Matter of TD Securities (USA) LLC, Release No. 34-95751, September 13, 2022; In the Matter of BNY Mellon Capital Markets, LLC, Release No. 34-95750, September 13, 2022; In the Matter of Jefferies LLC, Release No. 34-95749, September 13, 2022; SEC v. Oppenheimer & Co. Inc., September 13, 2022).
The SEC alleges that in different periods since 2017 the four underwriters sold new issue municipal bonds without obtaining required disclosures for investors. Each firm relied on an exemption to the typical disclosure requirements called the limited offering exemption, but they did not take the steps necessary to satisfy the exemption’s criteria, according to the SEC. The SEC said that as a result of its findings, the staff has begun investigations of other firms’ reliance on the limited offering exemption.
Limited offering exemption. 1934 Act Rule 15c2-12 generally requires underwriters, in primary offerings of $1 million or more, to obtain disclosure documents from issuers and to reasonably determine that the issuer of the municipal securities or an obligated person has undertaken to provide certain information pertaining to the offered securities on a continuing basis to the Municipal Securities Rulemaking Board (MSRB). The rule includes an exemption for limited offerings of municipal securities placed with a small number of sophisticated investors with investment intent.
The limited offering exemption states that underwriters participating in offerings of municipal securities issued in denominations of $100,000 or more that are sold to no more than 35 persons are exempt from the rule’s requirements if the underwriters have a reasonable belief that each purchaser: (1) has sufficient knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment, and (2) is not purchasing the securities for more than one account or with a view to distributing the securities.
TD, BNY, and Jefferies. The SEC found that TD, BNY Mellon, and Jefferies each violated Rule 15c2-12, as well as MSRB Rule G-27 and 1934 Act Section 15B(c)(1).
The SEC determined that TD, BNY Mellon, and Jefferies, while serving as sole underwriter for certain limited offerings, sold securities to broker-dealers and certain investment advisers without a reasonable belief that the broker-dealers and investment advisers were purchasing the securities for investment. In addition, all three firms lacked policies and procedures reasonably designed to ensure that purchasers satisfied the exemption’s requirements.
TD, BNY Mellon, and Jefferies agreed to settle without admitting or denying the SEC’s findings. The three firms also agreed to cease and desist from future similar violations, to be censured, and to pay certain monetary relief. TD agreed to pay $52,955.92 in disgorgement plus prejudgment interest and a $100,000 penalty, while Jefferies agreed to pay $43,215.22 in disgorgement plus prejudgment interest and a $100,000 penalty. BNY Mellon will pay $656,833.56 in disgorgement plus prejudgment interest and a $300,000 penalty.
Oppenheimer. The SEC’s complaint against Oppenheimer alleges the same violations as the other firms in connection with at least 354 offerings. The Commission claims that Oppenheimer failed to satisfy the limited offering exemption because it sold the municipal securities without a reasonable belief that the broker-dealers and/or investment advisers, or any customers and/or clients on whose behalf they may have been buying, were both sophisticated and buying the securities for a single account.
The SEC further alleges that Oppenheimer made deceptive statements to issuers in violation of MSRB Rule G-17 by representing that it would and did comply with the limited offering exemption requirements. The SEC believes Oppenheimer was negligent in making these statements because its regular practice was to not obtain the information necessary to know whether its sales of municipal securities would or did meet the limited offering exemption requirements.
The Commission noted that in connection with the 354 offerings in question Oppenheimer realized at least $1.9 million in net profits. The SEC’s complaint against Oppenheimer seeks permanent injunctions, disgorgement plus prejudgment interest, and a civil money penalty.
The case is No. 1:22-cv-07801.