As the first municipal issuer to admit wrongdoing in an SEC enforcement action, the Port Authority of New York and New Jersey agreed to pay a $400,000 civil penalty to settle charges that it failed to disclose known risks in connection with its authority to fund a series of New Jersey roadway projects to bond investors. The Port Authority also agreed to cease and desist from further violations and to retain an independent consultant to review its policies and procedures concerning disclosures of legal and governance risks in connection with municipal securities offerings (In the Matter of the Port Authority of New York and New Jersey, Release No. 33-10278, January 10, 2017).
"Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest," said Andrew M. Calamari, the director of the SEC’s New York Regional Office.
Disclosure failures. According to the Commission, the Port Authority, one of the largest municipal issuers in the U.S., approved New Jersey’s requests for funding of certain non-revenue-generating roadway projects and initially allocated bond proceeds for them. However, the SEC found, the Port Authority offered and sold $2.3 billion worth of bonds to investors without disclosing risks surrounding the potential lack of legal authority to fund the projects.
Port Authority lawyers explicitly identified "the risk of a successful challenge" by bondholders and investors in connection with the projects’ funding and noted the lack of a "clear path to legislative authority," the Commission stated, but the agency made no external disclosures concerning these risks. The Port Authority knew, or should have known, that the undisclosed risks were material to potential investors and failed to disclose the information necessary to make other official statements not misleading, the Commission stated.
By this conduct, the Port Authority violated the antifraud provisions of Securities Act Sections 17(a)(2) and 17(a)(3), the SEC found.
Settlement. In determining to accept the settlement offer, the Commission considered the Port Authority’s cooperation and remedial acts, including enhancements to its process for approval of capital projects and retaining outside bond counsel and hiring a new general counsel. The independent consultant will conduct a review of the Port Authority’s policies and procedures as they relate to disclosures concerning legal and governance risks in connection with offerings, and the agency establish written policies and procedures relating to bond-offering disclosures and legal authorization of expenditure approvals.
The release is No. 33-10278.
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