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Home My WebLink About2014-01-09 Additional Information Stradlin rn s at Law � Atto ey Presentation to City of Chul � Vist� D � sclosure Responsibilities under the Federal Securities Laws Presented bv: Robert J. Whalen Stradling Yocca Carlson & Rauth, a Professional Corporation Phone: (949) 725-4166 E-Mail: rwhalen@sycr.com Stradlin Attorne s at Law � � Y Presentation to City of Chula Vist� Di � closure Responsibilities under the Federal �ecu �°ities Laws Presented bv: Robert J. Whalen Stradling Yocca Carlson & Rauth, a Professional Corporation Phone: (949) 725-4166 E-Mail: rwhalen@sycr.com � ' � � .,. �, ' � " I . � M � ! 6 M I � O - � o � � � � FOR DI�CLOSURE AND � ��C6�OSURE T�INING � � o � �C R�GIJLATO �Y �`TRIJCTUR� AIVD � ��TORY � � � o �EG�L FRANI �IIVOR�C AND �� LOSUR� STANDARDS �Vo ISCLOSU �E PRIiVCIPLES AND �� NTENT �o � l� MARY Why Is Disclosure Necessary? ■ City of Chula �ista issues securities in the publec capital m a rket� � � nvestors in rr� unic � pal securities have reghts under federal securities � aws ■ All " material " inforrnation must be dosclosed 1 hy Is osclosure Tra � nsn ' � eces� ary? �lhy os Traenang IVece�sary'? � 6n �0 '� 0, SEC found that State of New Jersey's violat�on of �'ederal �ecurit�es laws was due to Back of training � � EC has cleclared that elected officia9s and �op �drnAnos�rators have a du�y to review and be farniliar vuith di�closure documents � SEC �as subs�antially increased er��o�°cernent activi$y on municipal bond arena z SEC Requaring Governments Or Public Entities To Behave Like Corporations � Dodd Frank and SEC proposed rules to change obligations of governments and public issuers, ciealers and advisors with respect to bond offerangs. � �ew enforcement actions highlight need for procedures, policies and compliance training of offocials and employees similar to private sector. � Officials now expected to manage governments and public issuers similar to corporations, including setting proper "tone at the top" frorn senior executives. 3 ; � � cialization lJnits � Asset �llanagerr,ent � Marke� Abuse � Structured and iVew Products � Foreign Cor�upt Practices Act � unicopal Secur�ties and Pub�ic Pensions 4 SEC Has Forrned A 11Aunic; pal � Secu rities U n ; t 1li�hy IVluni � onds ? � $3 . 7 tril9ion market • Perceivecl systematic problems costing an estimated $4 billion/year in public loss � � Importance to both government as� uer� and retail investors 5 �i =.{ �{ � 1'•.` fi �., . 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':_.w:i_�a...a.....��.�r;�.:,..iA:..:J.x.:�e;'.L^..dW.e4AA.,.....af...:.:-.n,1t. `Tirneline of Signifocant Events � ffecting Nlunicipal Disclosure '� 9�� SEC Report on Washington Public Power Supply System default (1IVPPSS) � Proposes Rule 15c2-12 requiring broker dealers to review a Preliminary Official Statement prior to offer to purchase ■ Declares duty of broker dealers to determine accuracy and completeness of key representations in the offering documents 1989 Rule 15c2-12 Adoption 1994 Rule 15c2-12 Amended � Adds requirement for annual continuing disclosuo-e , T� r�e9 � n� of Significant Events �4ffectang � unicipal Di�closure (cont' d ) � 9�� EC Interpret�ve Relea�e on ��losure Obl �gations under Securet�es Lavvs � Discusses obligations of essuers anc9 underwriters � Identifies needed �reas for improved disc9osure ■Conflicts of interest �Risks of securities �Financial information including audit 8 Timeline of Significant Events , Affecting IV� unicipal Disclosure (cont' cl ) 1996 SEC Report on Orange County � Product of Orange County 1994 bankruptcy ■ Violation of securities laws for failure to disclose risks in investment portfolio ■ Announces duty of electecl officials and senior staff to review POS for material omissions or misstater�ents ■ Emphasizes disclosure is responsibility of issuer e Reliance on professionals must be reasonable 9 Tomeline of � ignifican°t Events � ffec�� ng Municipal Disclosure (cont' d ) "�► public official who approves the issuance of securities and related disclosure documents rnay not authorize disclosure that the public official knows to be o�aterial9y false or misleading ; nor may the public official au$horize disclosure while recklessly disregarding facts that indicate that there is a risk that the disclosure may be misleading. When, for example, a public official has knowledge of facts bringing into question the is�uer's abiloty to repay the securities, it is reckless for that official to approve disclosure to investors without taking steps appropriate under the circumstances to prevent the dissemination of materially false or rnisleading information regarding those facts.,' 10 Tirnelone of Significant Events Affecting 6Vlunicipal Disclosure (cont' d) 1996-2001 SEC � nforcernent Actions ■ Maricopa County, AZ; Syracuse, NY; Miami, FL _ ■ Actions against entity and officials ■ Failure to reveal negative changes in financial condition 2004 G�►SB 45 Issued e Requires financial reporting on postemployment benefits (OPEB) ■ Disclosure added re OPEB liabilities 11 Tor�e9ine of Segnificant Events Affecting � un � cipal Disclosure (cont9d) 2006 SEC Enforcement Action Against City of San Diego � Misleading disclosure on pension and OPEB obligations 0 Failure to disclose substantial projected increase in unfunded liability and under funding of plans "the City's procedures, policies and practices for disclosure and financial reporting are inadequate in major respects. Undermining the reliability of its public disclosure have been, among other factors, the (1 ) the City's excessive reliance on outside professionals to generate its disclosure documents, (2) its lack of procedures to verify the accuracy of those documents and (3) the absence of high-level oversight to judge the clarity and completeness of information provided to the investment markets." 12 1'� rneline of Significant Events Affecting IViunicipal Disclosure (cont' d ) 2008 SEC Charges City of San Diego Officials ■ 5 top officials charged ■ Failure to disclose re pension and OPE� ■ Officials pay frorn personal funds 13 T� rr�el � ne of Segneficant Eve�ts �ffec#Ang � Mun � c� pal Disclosure (cont' d ) 2010 SEC Enforcement Action �►gainst State of IVew Jersey � Failure to disclose underfunding of pensions � SEC attributes violations to � Lack of disclosure training ■ Lack of written procedures re disclosure "Treasury had no written policies or procedures relating to the review or update of the bond offering documents. In addition, Treasury did not provide training to its employees concerning the State's disclosure obligations under the accounting standards or the federal securities laws. Accordingly, the State's procedures were inadequate for ensuring that material information concerning [the pension plans] or the State's financing of (the pension plans] was disclosed and accurate in bond offering documents." 14 T°ir�eline of Significant Events Affecting Municipal Disclosure (cont' d ) 2010 SEC Nlunicipal Task Force Formed ■Nationwide ■Municipal enforcement listed as one of top enforcement areas 2010 Rule 15c2-12 Amendr� ents ■Expands list of material events ■Requires reporting within 10 business days ■Eliminates exemption for variable rate bonds 15 Tirr' eline of Significant Events ' Affect� ng Munic� pal Disclosure (cont' d ) 2012 Report on the IViunicipal Securities f�iarket � °��meliness of Financaal Information/Interirr� Financials � Pension and OPEB Disclosure � Exposure to Derivatives � llse of Disclairreers in Official Stater�ents � Disclosure of Conflicts of lnterest (financial re6ationships, political contributions, bid rigging) 16 �. Recent Enforcernent Actions � West Clark Community Schools District (Indiana) — The SEC charged that the District included fraudulent misstatement in a 2007 Official Statement when it stated that it was in compliance with its disclosure , obligations related to prior bond offerings. However, the district had not submitted any of the required annual reports or notices for a previous 2005 bond offering, and the underwriter did not conduct adequate due diligence with respect to continuing disclosure compliance. (The District entered into consent order to settle the charges.) � City of Harrisburg (Pennsylvania) — The SEC charged the City with securities fraud based on material misstatements in budget documents, audited financial reports and public statements. Generally SEC actions are based on Officials Statements or continuing disclosure filings, however the SEC stated that, since the City failed to make required annual disclosure filings, investors were forced to rely on the public documents and statements. (The City entered into a consent order to settle the charges.) 17 ; Recent Enforcement Actions — (cont.) � City of Miami (Florida) — The SEC charged the City and its Budget Director with making materially false and misleading statements and omissions to investors and rating agencies about certain interFund transfers in bond offerings and in the city's audited financial reports. SEC Report: "[the Budget Director] orchestrated the transfers from the city's Capital Improvement Fund to its General Fund in order to mask increasing deficits in the General Fund, which is viewed by investors and bond rating agencies as a key indicator of financial health." (The City is contesting the charges.) � City of South Miami (Florida) — The SEC charged the City with making material misstatements in documents provided to the issuer of bonds to finance a City project, which the issuer relied on in connection with the issuance of the bonds. The misrepresentations related to the City's compliance with various tax requirements, and were not specifically contained in the Official Statement for the bonds. (The City entered into a consent order to settle the charges.) 18 . Recent Enforcement �►ctions- ; (cont.) � City of Victorville (California) — The SEC charged the City with . securities fraud in connection with a 2008 bond offering, by utilizing inflated values relating to property securing the bonds. The SEC charged that the City and the bond underwriter were aware of the facts the property values were overstated. (The City is contesting the charges.) ° State of Illinois — The SEC charged the State with misleading investors by omitting material information relating to the unfunded liabilities of its pension system. (The State entered into a consent order to settle the charges.) ' 19 � ce t nforcernent Acteons- � (cont.) � Greater Wenactchee Regional Events Center Public Facilities District (Washington)—The SEC charged the District with securities fraud in connection with a 2006 bond offering, by falsely stating that revenue projections had not been independently reviewed when in fact they had been and questions had been raised regarding the viability of the projections and for failing to disclose that financial projections had been revised upward based upon optimistic assurances by civic leaders that the community would support the center. (The District entered into a consent decree and paid a $20,000 penalty representing the first time that the SEC had assessed a financial penalty against an issuer.) 2� � The Secu rities Act Of 1933 ■ 'i 933 �4ct has two substantive rules : ■ Registration requirement ■ Antifraud rule ■ IVlunicipal securities are exer� pt from the registration requirement, but are subject to antifraud rule 21 ecu �mties Exchan e Act Of 1934 g ' � u I � 1 b �5 � '! 934 Act creates ongoing disclosure requirernents for publec companies � Regulates brokers and clealers � �41so contains antifraud provisions � 1975 amendrnents to 1934 Act made it clear that antifraud provisions apply to government issuers � 19�5 Tower Amendr�ent prohibits direct regulation of municipal issuers under federa6 securities laws 22 � , ; Rule 10b -5 " It shall be unlawful for any person . . a) To employ any device , scheme or � artifice to defraud , b To make any untrue statement of a ) . material fact or to omit to state a material fact necessary in order to make the statements made , in the light of the circumstances under which they were made , not misleading . . . ." 23 e i6 ateri � laty" Stan ar � "[w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest." � Materiality is determined in context of all the facts and circumstances, but usually on a retroactive basis � Guidance comes primarily from court decisions and SEC enforcement cases 24 sz ( 66aa�u � o � s „ ) pn �a�� p o� �ua�u � � ssaus�� . a� u � � � l �� . /C� iliq �dl � � �O � I ��a-� , 9Z �� .. .�: ;;�; `� �; ;;�. :�` `' ` ; ,' `,;, 3 k`Y'�i _ '� �' 'i..�.r. 3, ,._: - -��. -• •,• �:,L o1 .,` �� ' 'f ' 1 V ,' ��•� • - . •' 'r.. � �..-.: `r'.; 1-< ::� ..':' 4�$'�k u� i - c Y.. 4T J' w'..�/.t�N , IlVhen Do Disclosure Rules Apply? ■ New offerings ■ Annual Report under Rule 15c2-12 ■ Any other circumstance where an Issuer is "speaking to the market" • Applies to Information released to the public that is reasonably expected to reach investors � At this time, securities law does not impose a requirement to update or correct any statement previously made, if there is no other reason to be making a statement to the market 2� : ., ...... . _......__ . , : ,.. - � � � t houl � e D � s � � osed ? ew Offer� ng � � lJnlike corporate securities, there is no "line item" set of rules for what goes into an Official Statement � Starting in 19��, leaders in rnunicipai rnarket created a set of Guidelines for Official Stater�ent content (GFOA) • Other groups have suggested disclosure for particular rr�oarket segments (NFMA) � Look at practices in the industry; recent developrr�ents (e.g., Pension, OPE�, Continuing Disclosure Cornpliance) � In the end, issuer must use i#s own good judgment 28 � Disclosure Principles � Broad description of City's financial and economic condition ■ Description of budget process, major revenue sources and expenditure programs e Information on recent and current budgets - "structural" deficit or financial pressures? ■ inforrriation on debt - types and amounts � Inforrnation on derivatives � Litagation 29 ; i � closur� Pr� nciples - (cont.) � Provide main points but do not ove�-vvhelm readers with detail � Highlight important developments "up front99 a Deterrx� ine appropriate level of importance for any particular event or budgetary item � �ringing all these factors together into final product is ongoing process of give and take 30 � P rocess � m Staff Actively Directs Disclosure Process and Preparation of Offering Document ■ Empower staff at all levels � City coordinates . Counsel helps pull information together and maintains document � Drafts reviewed by working group � " Due diligence" meeting before distribution of Preliminary Official Statement e Council Members review prior to approval 31 ; City D � � closure � Officiai Staterr�ent is offering document to investors - equivalent to prospecta�s � IVlust contain all material inforrnation for the particular bond saAe � Official Staterr�ent is City's document � Underwriter�, financial adviser� and lawyers can help develop the Official Statement but City of Chula Vesta is ultimately responsible for content 32 � Disclosure Considerations � Tomorrow's " hot topic" �nay be different than today's � Disclosure must evolve to reflect changing circumstances � Read the disclosure with "fresh eyes" � 6f you think something may be a concern , raise the issue with colleagues and the working group � There are no "stupid questions" ■ Political sensitivity and confidentiality considerations are not exceptions to disclosure 33 Current ot To ics : p . � Pace of recovery fror� recession � Status of fund balance and reserves � Expected increases in retirement related payments ; unfunded liabilities (pension and OPEB ) � Potential effect of new GASB standards (GAS � 68) � Derivative exposure 34 � 1°oming Considerations For Bond Sale ■ F�rogression of an offering � POS/sale/finalOS/closing � Supplements are possible ■ Very rare and disruptive after sale ■ �e mindful of public actions or releases likely to occur � State budget, City's budget, mid-year reports � OPEB Actuarial Studies ■ Pension Plan Information � Pending Litigation � �►udits or Investigations 35 � on �� n � � ng Disclosure Annual Report� � Aaad �ted Financial Reports � Inforrnation ( se e. table�) iden#ified � n Contonuin Di�closure lJndertakin g g � Addatoonal voluntary inforr�ation � Consider Rule 10b5 irr� plica�ion� — is there rno�e you should be saying . � �a� an th � n happenecl �ince the date of the au ited �nancial reports that has materia0ly irnpac�ed your financial condit�on? 36 Investor Corn �nunications � fVo obligation to do it � Tension between market (and SEC) desire for transparency, and potential issuer liability � IVo corollary to Regulation FD (requiring public corr� panies to disseminate specified information which it provides to any investor) � Establish a single point of contact � Consider voluntary dissemination of information provided to specific investors 37 � � �t � Co r� unicatio s � ( c nt � ) • Speeches or Presentataon� • Websites � Discuss with individual investors 38 Conse uences of � acl - q � Disclosure � SEC Investigation - fees for lawyers and consultants � Adverse publicity � Reduced market access � IVlay have to irnpose new procedures and oversight to settle SEC actions 39 , � u nn nnary � Flave the right people involved — make sure that the personnel involved in disclosure preparation can reasonably be expected to know material information � Empower everyone in the organization ■ Review the entire POS � Seek information and ask questions of the officials, employees, and professionals who supplied information to be included in the POS e Ask follow up questions to determine the reasonableness of any assumptions or estimates that were used in the POS � When in doubt, disclose � Give the investors all the material facts, and let them decide 40