On Oct. 16, 2024, the Western District of New York entered final judgment on a Securities and Exchange Commission (SEC) enforcement action against the City of Rochester, New York, its former Finance Director, and their municipal advisor and principals.

The SEC enforcement action surrounds the August 2019 offering and sale of both a Bond Anticipation Note (BAN) and a Revenue Anticipation Note (RAN) issued by the City of Rochester (City) to benefit the Rochester City School District (District). As provided in the offering documents, the purpose of the BAN was to provide financing for both District and City projects. The purpose of the RAN was to provide cash flow for the District for Fiscal Year 2020, due to the yearly delay in aid revenue provided by the State of New York (State).

The City’s then Finance Director, Rosiland Brooks-Harris, oversaw the offering of the BAN and the RAN, and the City’s municipal advisor Capital Markets Advisors, LLC, along with its principals (CMA) facilitated the bond offering and drafted the offering documents. The offering documents included a Preliminary Official Statement, a Supplemented Preliminary Official Statement, and a final Official Statement, designed to provide the necessary disclosure to provide investors with pertinent information to make an informed investment decision. CMA provided their services on a contingency basis.

According to the SEC, the District experienced a significant cash decline of $63 million in the 2019 fiscal year (FY2019). The SEC alleged that this decline was due to overspending on teacher salaries. The Preliminary Official Statement did not include cash flow information for FY2019, only projected cash flow for the following year. CMA drafted a Supplemented Preliminary Official Statement that included FY2019 cash flow information but did not provide any disclosure to investors on the reason for the decline. According to the SEC, this would lead a reasonable investor to believe the FY2019 cash flow decline was due to the delay in State aid revenue and would be cured upon issuance of the RAN. The SEC claims the statements and omissions made by the District were misleading to investors and “concealed the District’s true financial condition and concealed that the notes issued by the City had more risk than investors were led to believe.” After the discovery by an external auditor two months after the sale of the BAN and RAN of a $42 million operating deficit, the District’s long-term rating was downgraded and the District was assigned a negative outlook.

The SEC filed claims for relief against both the City and Brooks-Harris, its municipal advisor CMA, and its principals. In April 2024, CMA and its principals settled with the SEC. The court found the contingency arrangement lawful, but failing to disclose the arrangement to investors was in violation of Section 15B(c)(1) of the Securities Exchange Act, which imposes fiduciary duties on municipal advisors, and MSRB Rule G-42, which requires disclosure of conflicts of interest.

On Oct. 17, the Western District of New York entered final judgment on the case. The City and Brooks-Harris neither admitted nor denied any of the court’s findings. Both the City and Brooks-Harris were enjoined from future violations of Section 17(a) of the Securities Act. Additionally, Brooks-Harris received an industry ban. However, neither the City nor Brooks-Harris were ordered to pay any monetary penalty. The City views this as a positive, stating, “No city employee should face financial penalties for situations that are out of their control.”

Although the court in this case did not impose financial penalties, material information is required to be disclosed and not be misleading to avoid enforcement action by the SEC. Additionally, while contingency fee arrangements surrounding municipal securities offerings are not unlawful, they must be disclosed pursuant to both the Securities Exchange Act and MSRB Rules.