Who’s Afraid of the SEC?

I apologize in advance if this blog gets a little technical but here it goes. I also would like disclosure that I am not an expert in SEC reporting requirements but I have done plenty of research over the past week on this matter.

Municipal Bonds are a way to raise money, much like a home mortgage, when a municipality doesn’t have enough cash to pay for various items that they would like to build, buy, renovate, etc. Currently, The Village of Palmetto Bay currently has over $14.6 million in Municipal Bonds outstanding which were floated, I assume, to pay for various capital expenditures (i.e. Village Hall).
Municipal Bonds, much like stocks and commodities, are publicly traded and have certain reporting requirements and guidelines dictated by the Securities and Exchange Commission (SEC.) The SEC has put these requirements into effect to protect investors to give them the opportunity to understand and be fully informed when they are purchasing a publicly traded investment (think Enron, Lehman Brothers).

Rule 15c2-12 is the SEC rule that dictates Municipal Bonds reporting requirements. It was adopted in 1989 and expanded greatly to protect investors by detailing disclosure requirements upon the issuance of Municipal Bonds and on an ongoing basis after the primary offering and during secondary trading. This rule focuses on disclosure misrepresentations and omissions.

The disclosure requirement for the financial condition of the particular Municipality that is issuing bonds is concerned with its Annual Financial Statements. These are the same Financial Statements I discussed on my last blog that seem to have a material misrepresentation.
  
So what does this mean and how does it affect the Village?

If something material is not disclosed by the Village that could affect someone’s decision whether or not to purchase Palmetto Bays Municipal Bonds, that omission is a violation of SEC Rule 15c2-12. The whole reason there is an SEC is to protect investors from mis-information perpetrated by the people who create financial instruments so that prudent investor s can have access to the reliable information necessary to make an informed decision on their investments. For example, pending litigation that could result in a significant judgment against a Municipality might very well be one of those SEC violations.

The Village of Palmetto Bay is currently engaged in litigation, with a potential judgment against it in excess of 12 Million Dollars. Based on the Village’s own financial reports, this exceeds the Village reserves. This is probably a fact that a prudent investor would like to know prior to purchasing Village of Palmetto Bay bonds since an unfavorable judgment could significantly affect bonds ratings and trading value.

While the litigation has been mentioned in the Villages Financial Statements, it has been downplayed “in the opinion of management and legal counsel” as not having a “material adverse effect on the financial position of the Village.” I would assume that the SEC would feel strongly that the amount of potential litigation should be disclosed on the Villages Financial Statements. I would also assume by not disclosing the potential litigation as material, the Village exposes itself to SEC fines and future litigation from bond holders if the Village was ordered to pay Palmer Trinity a substantial sum of money.

Furthermore, the SEC rules allow for there to be personal liability up to $150,000 in fines each for elected officials and staff members who knowingly perpetrate a misrepresentation in Financial Statements. This is a clever way to keep elected officials and staff from feeling free to act outside the law by assuming they can hide behind a municipal legal shield. Their $150,000 fines won’t pay the whole tab for the wrong-doing, but it certainly should be enough tough medicine to keep council and staff on a straight and narrow path.

So it seems it’s best for Mayor, Council, Village Manager, Village Attorney and staff to err on the side of disclosure – too much information to the public is much better than not enough. When the full faith and credit of our Village is at stake due to the obstructionist attitude of Mayor Stanczyk, Councilwoman Lindsay, and Village Management, the SEC can help us. It would be prudent for the Council to act on this matter soon to determine if they need to disclose the magnitude of a potential judgment against the Village as a material liability. One never knows what could happen if the SEC shows up with financial microscopes.