The SEC announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors. According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.
Shortly after its nationwide review of municipal bond disclosures began, the SEC brought its first-ever enforcement action against a state when it sanctioned New Jersey for failing to disclose to investors that it was underfunding the state’s two largest pension plans. Around the same time, the SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010. As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities. Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures.
The SEC also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.