SEC Warns Public Officials About Potential Liability

The SEC instituted a settled cease-and-desist proceeding against the City of Harrisburg, Pennsylvania for its violations of Section 10(b) of the Securities Exchange Act (“Exchange Act”) and Rule 10b-5.  In connection with the settlement, the SEC issued a Section 21(a) report captioned “Report of Investigation in the Matter of the City of Harrisburg, Pennsylvania Concerning the Potential Liability of Public Officials with Regard to Disclosure Obligations in the Secondary Market”.

The report states “Public officials should be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors, and should understand that these public statements, if they are materially misleading or omit material information, can lead to potential liability under the antifraud provisions of the federal securities laws.”

The gist of the report is this:  When a municipal entity is faced with deteriorating health, investors of the municipality’s obligations may well look to written and oral information provided by public officials.  If the municipality is not providing complete and accurate information, the lack of disclosures may increase the risk that municipal officials’ public statements may be misleading or may omit material information. Hence, potential 10b-5 liability.

What can public officials do to reduce this risk?  Nothing much, other than be careful.  The SEC suggests, among other things:

  • adopting policies and procedures that are reasonably designed to result in accurate, timely, and complete public disclosures;
  • identifying those persons involved in the disclosure process;
  • evaluating other public disclosures that the municipal securities issuer has made, including financial information and other statements, prior to public dissemination; and
  • assuring that responsible individuals receive adequate training about their obligations under the federal securities laws.

What is a Section 21(a) report? See our blog here.

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