SEC charges seventh firm for violating limited offering exemption

Fifth Third Securities has been added to the growing list of underwriters charged by the Securities and Exchange Commission for violating its limited offering exemption.

For its role in in issuing 79 offerings without obtaining the required disclosures, Fifth Third, without admitting or denying the findings, has agreed to settle the charges, cease and desist from future violations of the exemption, a censure, and has been ordered to pay $442,465.59 in disgorgement, $67,506.09 in prejudgment interest and a $200,000 civil money penalty.

SEC Rule 15c2-12 includes an exemption for underwriters engaged in limited offerings, where they do not have to provide continuing disclosures for the sale of securities that remain in denominations of at least $100,000 and sold to no more than 35 persons who are capable of evaluating the merits and risks of the prospective investment.

Many have compared the Commission’s tight focus on the limited offering exemption to the Municipalities Continuing Disclosure Cooperation Initiative (MCDC), introduced in 2014 to address potentially widespread violations of federal securities laws. It provided a window for municipal issuers and underwriters to self-report potential violations and offered potential favorable settlement terms to those that self-reported.

Lawyers familiar with the matter have already noted  its effect on the market,  with internal policies tightening, with some underwriters acquiring specific investor letters to comply with the exemption, in addition to others forgoing the exemption entirely.

Fifth Third’s violation occurred between March 2018 and Sept. 2022, when they sold securities to broker-dealers and certain investment advisors without a reasonable belief that they were satisfying the exemption.

The firm also lacked the requisite policies and procedures designed to determine if they had satisfied the provision or not and sold the municipal securities to broker-dealers with separately managed accounts, the SEC alleged.

As a result, the firm also violated MSRB Rule G-27 on supervisory procedures, requiring municipal securities underwriters to adopt, maintain and enforce written supervisory procedures designed to comply with 15c2-12, the SEC said.

Fifth Third joins Oppenheimer & Co., BNY Mellon Capital Markets, Jefferies, TD Securities, PNC Capital Markets, Keybanc Capital Markets, which have been charged with violating the exemption.

All firms except Oppenheimer & Co. have settled with the Commission, and litigation with Oppenheimer remains ongoing.