Julia Sylva - Continuing Disclosure: Why Issuers Should Be Concerned
-
Upload
contract-cities -
Category
Business
-
view
971 -
download
0
description
Transcript of Julia Sylva - Continuing Disclosure: Why Issuers Should Be Concerned
California Contract Cities Association 31st Annual Fall Seminar
October 2011 Continuing Disclosure:
Why issuers should be concerned.
Tax Exempt Municipal Bonds: $2.4 Trillion Industry
“Full and Fair Disclosure insures the integrity of the
Municipal Securities Market”
Securities Act of 1933
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
Securities Exchange Act of 1934
Regulates the Sale and Purchase of Securities 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
Amendments to Securities Act of 1933Adopted in 1975
Formed and Empowered the Municipal Securities Rulemaking Board (“MSRB”)*
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”
San Diego Fiasco—April 2008“SEC Issues Cease and Desist Order” SEC Complaint for intentional violation of Rule 10b-5 Inadequate Disclosure of their $2 Billion underfunded Pension Fund City Officials Sanctioned:
City Manager City Treasurer Auditor Comptroller Deputy City Manager of Finance Assistant Auditor & Comptroller Independent Auditors—direct liability - not aiding and abetting
(“insufficient auditing proficiency”)
San Diego - continued SEC: “Municipal officials are responsible for
municipal bond disclosure, they play a key gatekeeper role in protecting investors.”
Remediation Actions: outside auditors and conduct two annual follow-up reviews
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
New Jersey Fiasco – 2010“SEC Issues Cease and Desist Order”
• State was negligent in the preparation of the disclosure documents
• State failed to exercise “reasonable care” in preparing its bond offering documents
• NO Violation of Rule 105-b (requires intent)
New Jersey - continued
• SEC: “Bond documents created a “fiscal illusion” that the pension funds wee adequately funded
• Settlement—State agreed not to commit further violations; no fines or penalties; no remedial actions
Why Issuers should be concerned…
• Heightened focus by the SEC • Cities are being held more accountable• Must implement sufficient processes for updating disclosure• Must educate public officials, administrators and staff about their
role in disclosure obligations re material facts and developments• Must explain the “overall financial condition” of the issuer• Elected City Officials must adopt and articulate written policy
decisions• Investors must understand the full financial impact—a very difficult
• SEC is raising for issuers…they are now responsible to disclose the unlikely and unknown –very difficult task—practically and politically
SEC adopts Rule 15c2-12Adopted 1995• Prior to Issuance of Municipal Bonds, Underwriters are obligated to
prepare, receive, review and disseminate disclosure documents (“OS”)
• Annual Financial Information• Material Events…within a reasonable time…
• Principal and Interest Payment Delinquencies• Unscheduled Draws on debt reserves• Unscheduled Draws on Credit Enhancements• Substitution of Credit or Liquidity Providers• Adverse Tax Opinions• Defeasances• Rating Changes
• Non Payment related defaults• Modifications to Rights of Security Holders• Bond Calls• Release, Substitution or Sale of Security Interest
SEC Amendments to Rule 15c2-12Adopted June 2010
• “Timely Notice” Defined—within ten (10)days after occurrence of Event (whether material or not)
• Additional Events• Receipt by notices by the IRS re proposed of final
determinations of taxability or tax status of security…• Tender Offers• Bankruptcy, insolvency, receivership…• Merger, Consolidation, or Acquisition re Issuer…or sale
of substantially all of its assets• Appointment of successor or additional Trustee…
Effect of Non Compliance
• U/W must evaluate the likelihood that the issuer will comply with Continuing Disclosure
• U/W may rely on specific issuer certifications as to whether Events have occurred, but NOT as to whether Events are material
• Issuer must remedy disclosure deficiencies—• Otherwise U/W cannot underwrite bonds
Tower Amendment Under Attack• Rumblings of repeal , amendment…• Dodd – Frank Wall Street Reform & Consumer Protection Act
(August 2010)• Coordinate with SEC and MSRB for rulemaking and enforcement
actions• More oversight• Continuing Obligation for Education of Municipal Advisors and
Issuers• Bill: U.S. Comptroller to conduct two (2) years study re Disclosure
and Report to U. S. Senate Committee on Banking• Repeal: Would allow the SEC & MSRB to require issuers to comply
with Disclosure…
Disclosure Counsel
Continuing Disclosure Agreement• Reporting Requirements
• Annual Report• Events (whether material or not)
• Default Remedy: Writ of Mandate or Specific Performance…not deemed a Default on the bonds
• Indemnity Provisions—for Dissemination Agent, officers, directors, employees and agents…
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…
Lessons Learned• Adopt written disclosure policies and
procedures• Train City Officials, Administrators and
Staff• Focus on the “Big Picture” facing the
issuer• Disclose the good, bad and ugly• Hire skilled professional• Take affirmative steps to avoid what
happened in S.D. and N.J.• When in doubt, disclose
LAW OFFICES OF JULIA SYLVA ALC
1100 S. Flower Street, Suite 3300Los Angeles, CA 90015
◊2700 Cherry Avenue
Signal Hill, CA 90755◊
Tel: 562.988.3225Fax: 213.652.1966
www. sylvalawcorp.com
Thank you.