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SEC Charges Against Harrisburg ‘Good News’ for Muni Market: Matt Fabian

Daily Ticker

The Securities and Exchange Commission (SEC) has charged a municipality for allegedly making misleading financial statements outside of the usual securities filings.

The SEC faulted Harrisburg, Pennsylvania, the state’s capital, for misleading statements in the city’s budget report and the mayor’s state-of-the-city address during the 2009-2011 period. At the time, Harrisburg was teetering on the brink of bankruptcy, and it remains in financial straits today, with a state-appointed receiver overseeing its finances.

Earlier this year the SEC charged Illinois for allegedly releasing misleading information about the state’s pension fund and several years ago it filed similar charges against New Jersey.

“The SEC is becoming more activist in the realm of the municipal bond market which is a huge market,” says The Daily Ticker’s Aaron Task. “I wonder if this is a threat to the muni bond market.”

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Matt Fabian, managing director at Municipal Market Advisors, an independent muni research firm, isn’t worried. He tells The Daily Ticker, “It’s hard to see anything but positives coming from this. In theory, issuers will now be more careful and ensure more accuracy in what they say. So investors will be better able to trust issuer statements, and issuers will find their statements carrying more credibility.”

He says the biggest impact of the charges against Harrisburg will be on distressed issuers or issuers that have had problems keeping posted financings up to date. Investors in those securities are usually more heavily reliant on issuer statements.

The Harrisburg charges are reportedly part of a larger effort by the SEC to scrutinize state and local government issuers in the $3 trillion municipal bond market. Fabian doesn’t expect a new wave of litigation.

Still, he says, the Harrisburg case should be a warning to government officials.

“For governments who want to participate in the public debt markets, a standard for accuracy in public statements should be a given,” says Fabian.

The current mayor of Harrisburg, Linda Thompson, who wasn't in office during the time relating to the SEC charges, said in a statement that Harrisburg "has completely revamped its policies and procedures for financial disclosures" to prevent problems in the future.

The SEC didn’t levy any fines against the city of Harrisburg or its officials, who in turn did not admit or deny the charges. The same thing happened with the SEC cases against Illinois and New Jersey.

“I want to compliment the SEC on no fine,” says Henry Blodget. "The idea of fining the taxpayers of Harrisburg, Pennsylvania, who are already broke for statements made by their mayor in crisis would have been ludicrous.”

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