California Contract Cities Association31st Annual Fall SeminarOctober 2011<br />Continuing Disclosure:  <br />Why issuers ...
Tax Exempt Municipal Bonds:  $2.4 Trillion Industry<br />“Full and Fair Disclosure insures the integrity of the <br />Muni...
Securities Act of 1933<br /><ul><li>Regulates the Sale of Securities
Requires Disclosure & Registration—Prior to Sale
Prohibits Fraud
Protects Investors
Applies to Big Corporate Issuers
Municipal Bonds are EXEMPT from Taxation, Disclosure and Registration  </li></li></ul><li>Securities Exchange Act of 1934<...
Formed and Empowered the SEC—to monitor, regulate, set policy and enforce securities laws
Promulgated Rule 10b-5--no fraud or omission of material facts in the sale or purchase of securities</li></li></ul><li>Ame...
TOWER AMENDMENT—no oversight of municipal bonds by SEC or MSRB
MSRB Rules Do Not apply to Issuers—only to Brokers, Dealers and Banks
MSRB Rule G-37-”Pay to Play Rule”</li></li></ul><li>San Diego Fiasco—April 2008“SEC Issues Cease and Desist Order”<br /><u...
Inadequate Disclosure of their $2 Billion underfunded Pension Fund
City Officials Sanctioned:
City Manager
City Treasurer
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Julia Sylva - Continuing Disclosure: Why Issuers Should Be Concerned

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Julia Sylva - Continuing Disclosure: Why Issuers Should Be Concerned

  1. 1. California Contract Cities Association31st Annual Fall SeminarOctober 2011<br />Continuing Disclosure: <br />Why issuers should be concerned.<br />
  2. 2. Tax Exempt Municipal Bonds: $2.4 Trillion Industry<br />“Full and Fair Disclosure insures the integrity of the <br />Municipal Securities Market”<br />
  3. 3. Securities Act of 1933<br /><ul><li>Regulates the Sale of Securities
  4. 4. Requires Disclosure & Registration—Prior to Sale
  5. 5. Prohibits Fraud
  6. 6. Protects Investors
  7. 7. Applies to Big Corporate Issuers
  8. 8. Municipal Bonds are EXEMPT from Taxation, Disclosure and Registration </li></li></ul><li>Securities Exchange Act of 1934<br /><ul><li>Regulates the Sale and Purchase of Securities
  9. 9. Formed and Empowered the SEC—to monitor, regulate, set policy and enforce securities laws
  10. 10. Promulgated Rule 10b-5--no fraud or omission of material facts in the sale or purchase of securities</li></li></ul><li>Amendments to Securities Act of 1933Adopted in 1975<br /><ul><li>Formed and Empowered the Municipal Securities Rulemaking Board (“MSRB”)*
  11. 11. TOWER AMENDMENT—no oversight of municipal bonds by SEC or MSRB
  12. 12. MSRB Rules Do Not apply to Issuers—only to Brokers, Dealers and Banks
  13. 13. MSRB Rule G-37-”Pay to Play Rule”</li></li></ul><li>San Diego Fiasco—April 2008“SEC Issues Cease and Desist Order”<br /><ul><li>SEC Complaint for intentional violation of Rule 10b-5
  14. 14. Inadequate Disclosure of their $2 Billion underfunded Pension Fund
  15. 15. City Officials Sanctioned:
  16. 16. City Manager
  17. 17. City Treasurer
  18. 18. Auditor Comptroller
  19. 19. Deputy City Manager of Finance
  20. 20. Assistant Auditor & Comptroller
  21. 21. Independent Auditors—direct liability - not aiding and abetting (“insufficient auditing proficiency”)</li></li></ul><li>San Diego - continued<br /><ul><li>SEC: “Municipal officials are responsible for municipal bond disclosure, they play a key gatekeeper role in protecting investors.”
  22. 22. Remediation Actions: outside auditors and conduct two annual follow-up reviews
  23. 23. Fall Out: lowered credit rating; not able to issue municipal bonds(no current financial statements; have to borrow from private lenders at higher interest rates and costs of SEC investigation: $26 million</li></li></ul><li>New Jersey Fiasco – 2010“SEC Issues Cease and Desist Order”<br /><ul><li>State was negligent in the preparation of the disclosure documents
  24. 24. State failed to exercise “reasonable care” in preparing its bond offering documents
  25. 25. NO Violation of Rule 105-b (requires intent)</li></li></ul><li>New Jersey - continued<br /><ul><li>SEC: “Bond documents created a “fiscal illusion” that the pension funds wee adequately funded
  26. 26. Settlement—State agreed not to commit further violations; no fines or penalties; no remedial actions</li></li></ul><li>Why Issuers should be concerned…<br /><ul><li>Heightened focus by the SEC
  27. 27. Cities are being held more accountable
  28. 28. Must implement sufficient processes for updating disclosure
  29. 29. Must educate public officials, administrators and staff about their role in disclosure obligations re material facts and developments
  30. 30. Must explain the “overall financial condition” of the issuer
  31. 31. Elected City Officials must adopt and articulate written policy decisions
  32. 32. Investors must understand the full financial impact—a very difficult
  33. 33. SEC is raising for issuers…they are now responsible to disclose the unlikely and unknown –very difficult task—practically and politically</li></li></ul><li>SEC adopts Rule 15c2-12Adopted 1995<br /><ul><li>Prior to Issuance of Municipal Bonds, Underwriters are obligated to prepare, receive, review and disseminate disclosure documents (“OS”)
  34. 34. Annual Financial Information
  35. 35. Material Events…within a reasonable time…
  36. 36. Principal and Interest Payment Delinquencies
  37. 37. Unscheduled Draws on debt reserves
  38. 38. Unscheduled Draws on Credit Enhancements
  39. 39. Substitution of Credit or Liquidity Providers
  40. 40. Adverse Tax Opinions
  41. 41. Defeasances
  42. 42. Rating Changes
  43. 43. Non Payment related defaults
  44. 44. Modifications to Rights of Security Holders
  45. 45. Bond Calls
  46. 46. Release, Substitution or Sale of Security Interest </li></li></ul><li>SEC Amendments to Rule 15c2-12Adopted June 2010<br /><ul><li>“Timely Notice” Defined—within ten (10)days after occurrence of Event (whether material or not)
  47. 47. Additional Events
  48. 48. Receipt by notices by the IRS re proposed of final determinations of taxability or tax status of security…
  49. 49. Tender Offers
  50. 50. Bankruptcy, insolvency, receivership…
  51. 51. Merger, Consolidation, or Acquisition re Issuer…or sale of substantially all of its assets
  52. 52. Appointment of successor or additional Trustee…</li></li></ul><li>Effect of Non Compliance<br /><ul><li>U/W must evaluate the likelihood that the issuer will comply with Continuing Disclosure
  53. 53. U/W may rely on specific issuer certifications as to whether Events have occurred, but NOT as to whether Events are material
  54. 54. Issuer must remedy disclosure deficiencies—
  55. 55. Otherwise U/W cannot underwrite bonds</li></li></ul><li>Tower Amendment Under Attack<br /><ul><li>Rumblings of repeal , amendment…
  56. 56. Dodd – Frank Wall Street Reform & Consumer Protection Act (August 2010)
  57. 57. Coordinate with SEC and MSRB for rulemaking and enforcement actions
  58. 58. More oversight
  59. 59. Continuing Obligation for Education of Municipal Advisors and Issuers
  60. 60. Bill: U.S. Comptroller to conduct two (2) years study re Disclosure and Report to U. S. Senate Committee on Banking
  61. 61. Repeal: Would allow the SEC & MSRB to require issuers to comply with Disclosure…</li></li></ul><li>Disclosure Counsel<br />Continuing Disclosure Agreement<br /><ul><li>Reporting Requirements
  62. 62. Annual Report
  63. 63. Events (whether material or not)
  64. 64. Default Remedy: Writ of Mandate or Specific Performance…not deemed a Default on the bonds
  65. 65. Indemnity Provisions—for Dissemination Agent, officers, directors, employees and agents…</li></ul>Disclosure Counsel Opinion—examined originals or certified copies of bond documents…bonds are exempt…not undertaken to determine independently or assume any responsibility for the accuracy of disclosure docs…we have had discussions with Issuer and U/W and no reason to believe information misleading… We offer no guarantee…<br />
  66. 66. Lessons Learned<br /><ul><li>Adopt written disclosure policies and procedures
  67. 67. Train City Officials, Administrators and Staff
  68. 68. Focus on the “Big Picture” facing the issuer
  69. 69. Disclose the good, bad and ugly
  70. 70. Hire skilled professional
  71. 71. Take affirmative steps to avoid what happened in S.D. and N.J.
  72. 72. When in doubt, disclose</li></li></ul><li>LAW OFFICES OF JULIA SYLVA ALC1100 S. Flower Street, Suite 3300Los Angeles, CA 90015◊2700 Cherry AvenueSignal Hill, CA 90755◊Tel: 562.988.3225Fax: 213.652.1966 www. sylvalawcorp.com<br />Thank you.<br />

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