Matt Levine comments on the trend to file required financial documents when municipalities issue bonds:

The SEC found that between 2010 and 2014, the 22 underwriting firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The SEC also found that the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

Sampling the individual settlements brings up a lot of due diligence errorslike this:

Respondent acted as either a senior or sole underwriter in a municipal securities offering in which the official statement essentially represented that the issuer or obligated person had not failed to comply in all material respects with any previous continuing disclosure undertakings. In fact, certain of these statements were materially false and/or misleading because the issuer or obligated person had not complied in all material respects with its previous continuing disclosure undertakings. The offering in which the official statement contained false or misleading statements about prior compliance was

• A 2011 negotiated securities offering in which an issuer failed to disclose that it filed an audited financial report on the MSRB’s Electronic Municipal Market Access system 499 days late, and failed to file the required notice of late filing.

That is: Municipalities issue bonds. When they do that, they promise to file current financial statements in a publicly accessible way. Sometimes — quite frequently, it seems — they forget to do that, or stop doing it, or whatever explains being a year and a half late with the financials. Then they want to issue new bonds. As part of issuing the new bonds, they again promise to file current financial statements, and also promise that they’ve never been late on their financials in the past. Even though in fact they have been 499 days late on their financials in the past. And somehow neither the issuer, nor the underwriters, nor the buyers of the bonds notice that this isn’t true.

That is an obvious failing of due diligence and the underwriters should definitely be in trouble. But I’m kind of more worried about the fact that the municipality here was 499 days late on its filings, and no one noticed, or at least, no one cared enough that it was hard to sell the bonds in the future. And there are lots of cases like this; here’s one with an issuer who “filed three annual financial reports which were between two and 50 months late.” One gets the rather strong impression that no one is reading these filings, and that the whole disclosure system for issuing municipal bonds might be more or less ignored.

by William Haefell, The New Yorker