Two Canadian banks are among a list of 36 financial firms that have settled allegations from the U.S. Securities and Exchange Commission that they sold U.S. municipal bonds using materially false statements or omissions.
The SEC announced enforcement actions against Royal Bank of Canada and Bank of Montreal, along with dozens of others including Citigroup, Morgan Stanley, Goldman Sachs and J.P. Morgan Chase & Co. Generally, the bigger the firm, the bigger the penalty: RBC's $500,000 (U.S.) penalty was the among the most severe, while BMO's $250,000 was somewhere near the middle.
That's a relative slap on the wrist compared with the combined earnings of $3.5-billion (Canadian) for both banks in the fiscal second quarter. But the SEC made it clear that things could have been harsher had the firms not self-reported the violations.
The issue stems from the SEC's Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, announced in 2014 – which encouraged the issuers and underwriters of municipal securities to self-report violations of securities laws and receive what the SEC called "favorable terms."
"The MCDC initiative has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers' disclosure obligations and enhanced disclosure policies and procedures," said SEC chair Mary Jo White, in a statement released on Thursday. "This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors."
The U.S. municipal bond market has swelled to a value of $3.7-trillion (U.S.), as everything from school districts to states have tapped the market to finance infrastructure projects. According to the SEC, 75 per cent of the securities holders are retail investors, either directly or indirectly through funds. Yet, according to a 2012 report, the market has not been subject to the same level of regulation as other areas of capital markets – a lapse that the SEC has set out to change.
In its release on Thursday, the SEC alleges that the 36 firms subject to enforcement actions violated laws by selling municipal bonds between 2010 and 2014 with "offering documents that contained materially false statements or omissions about the bond issuers' compliance with continuing disclosure obligations."
The firms on the list did not admit or deny the findings. An RBC spokesperson said the bank had no comment to make about the matter; a BMO spokesperson could not be reached for comment.