Meeting New Municipal Bond Disclosure Requirements Amid Increased SEC Scrutiny

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Meeting New Municipal Bond Disclosure Requirements Amid Increased SEC Scrutiny Mitigating Government Official Liability, Complying With Primary and Secondary Disclosure Requirements, and More TUESDAY, MARCH 25, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Elaine C. Greenberg, Partner, Orrick Herrington & Sutcliffe, Washington, D.C. William E. White, Partner, Allen & Overy, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Elaine C. Greenberg, Partner, Orrick, Herrington & Sutcliffe LLP William E. White, Partner, Allen & Overy LLP MEETING NEW MUNICIPAL BOND DISCLOSURE REQUIREMENTS AMID INCREASED SEC SCRUTINY

6 Elaine C. Greenberg, Partner Orrick, Herrington & Sutcliffe LLP Washington, DC Ms. Greenberg is a member of Orrick s Securities Litigation & Regulatory Enforcement Group. Her practice focuses on securities and regulatory enforcement actions, securities litigation and public finance. She has more than 25 years of securities law experience. As a Senior Officer at the SEC, she served in dual roles as the first National Chief of the Enforcement Division s Specialized Unit for Municipal Securities and Public Pensions where she was responsible for building and maintaining a nation-wide unit to oversee the SEC s enforcement efforts in the municipal securities and public pension marketplaces, and as the Associate Director of Enforcement for the Philadelphia Regional Office, where she oversaw the SEC s enforcement program for the Mid-Atlantic region. Ms. Greenberg is nationally recognized for producing high-impact enforcement actions, bringing cases of first impression and negotiating precedent-setting settlements. She possesses deep institutional knowledge of SEC policies, practices, and procedures. 6

7 William E. White Partner Allen & Overy LLP Washington DC Tel: Bill is experienced in representing financial services firms, public companies, and their officers, directors, and employees in U.S. Securities and Exchange Commission (SEC) enforcement investigations, FINRA investigations, as well as related criminal investigations, internal investigations, and securities litigation. Over the years, Bill has led dozens of high profile securities matters including those involving insider trading, broker-dealer and investment adviser rules and regulations, accounting issues, public company disclosure requirements, and municipal securities regulation. Bill served for eight years on the staff of the Enforcement Division of the SEC serving as a staff attorney, branch chief and senior trial counsel. While at the SEC, Bill led investigations and litigation involving accounting and financial fraud, insider trading, municipal securities, broker-dealer and investment adviser violations and market manipulation. 7

8 Introduction Increased focus by the SEC on municipal securities -Public statements by Commissioners Increased number of enforcement actions New cooperation initiative Likelihood of increasing penalties and personal liability 8

9 Overview of SEC Priorities Comprehensive July 2012 SEC Report on Municipal Securities Market Highlights Lack of Transparency in the Market Concern that Investors Will Be Harmed if Market is Left Unchecked Emphasis on Issuer Disclosures in Primary and Secondary Markets Scrutiny of Underwriter Due Diligence Practices Considers Conduct of All Market Participants Involved in Offering or Transaction, including Issuers, Public Officials, Underwriters, Broker-Dealers, Municipal Advisors, Project Developers, Counsel, and other Gatekeepers Focus on Accountability of Individuals Remedies Now Include Seeking Financial Penalties against Issuers and Sanctions for Violation of SEC Cease-and-Desist Order 9

10 Source of Disclosure Obligations Municipal securities are largely exempt from the SEC s registration and disclosure rules. But Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder provide liability for materially false or misleading statements or omissions in connection with the offering, purchase, or sale of securities. 10

11 Source of Disclosure Obligations Rule 15c2-12 places obligations on underwriters to, among other things: review the Official Statement to obtain from the issuer a continuing disclosure agreement (CDA) that provides for continuing public disclosure of: annual financial information (an annual financial statement); and disclosure of certain material events. 11

12 Source of Disclosure Obligations Those events include: principal and interest payment delinquencies; non-payment related defaults, if material; unscheduled draws on debt service reserves reflecting financial difficulties; unscheduled draws on credit enhancements reflecting financial difficulties; substitution of credit or liquidity providers, or their failure to perform; adverse tax opinions, Internal Revenue Service (IRS) notices or events affecting the tax status of the security; modifications to rights of security holders, if material; bond calls, if material; tender offers; defeasances; release, substitution, or sale of property securing repayment of the securities, if material; rating changes; bankruptcy, insolvency, receivership or similar event; merger, consolidation, or acquisition, if material; and appointment of a successor or additional trustee, or the change of name of a trustee, if material; and notices of failures to provide annual financial information on or before the date specified in the written agreement. 12

13 Sources of Disclosure Obligations When must disclosure be made? For issues after December 1, 2010, disclosure must be made in a timely manner. What is a timely manner? Certainly less than ten days which was the prior guidance. Timely likely means as soon as practicable 13

14 Voluntary Disclosure Even if disclosure not required issuers can disclose other information including: quarterly/monthly financial information; timing of annual disclosure (120/150 days); change in fiscal year/timing of annual disclosure; accounting standard (GAAP-GASB/FASB); change in accounting standard; interim/additional financial information/operating data; budget; investment/debt/financial policy; and material provided to rating agency or credit/liquidity provider; consultant reports; and other financial/operating data. Additional event-based disclosures, including: amendment to continuing disclosure undertaking; change in obligated person; notice to investors pursuant to bond documents; certain communications from the IRS (other than those included under Rule 15c2-12); bid for auction rate or other securities; capital or other financing plan; litigation/enforcement action; change of tender agent, remarketing agent, or other on-going party; derivative or other similar transaction. 14

15 Source of Disclosure Obligations The Official Statement must describe the CDA Also, Rule 15c2-12(f)(3) requires disclosure of instances in the past five years where the issuer has not complied with any CDAs. 15

16 SEC s New Municipal Enforcement Cooperation Initiative On March 10, 2014, SEC announced cooperation initiative to encourage municipal issuers and underwriters to self-report continuing disclosure violations Issuers and underwriters of municipal securities may voluntarily report materially inaccurate statements made in offering documents regarding prior continuing disclosure compliance through a program called the Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative ) Issuers and underwriters can take part in the MCDC Initiative by completing a questionnaire and submitting it via , fax or mail no later than 12:00 a.m. EST on September 10, 2014 More favorable settlement terms will be given to those issuers and underwriters that self-report using the MCDC Initiative SEC will not recommend civil penalties for issuers participating in the MCDC Initiative and will agree to a set civil penalty schedule for underwriters who participate 16

17 SEC s New Municipal Enforcement Cooperation Initiative (continued) SEC indicates that those issuers and underwriters not participating in the MCDC Initiative, but who are responsible for materially inaccurate statements concerning prior disclosures, may be subject to increased sanctions In particular, SEC states that it will likely seek financial sanctions against issuers and the financial sanctions against underwriters will likely be greater than the ones set forth in the MCDC Initiative MCDC Initiative only covers issuers and underwriters Does not cover individuals associated with those entities SEC states it may recommend enforcement action against such individuals and may seek remedies beyond those available through the MCDC Initiative, even if the entities participate in the initiative 17

18 SEC Enforcement Actions Against West Clark Community Schools and City Securities (7/29/13) SEC cites to these actions in its March 10th announcement of MCDC Initiative In its Order against West Clark, an Indiana-based school district, the SEC states that the school district publicly offered $52 million of municipal bonds in March 2005 Pursuant to Rule 15c2-12, West Clark executed a Continuing Disclosure Agreement ( CDA ) in connection with the 2005 offering in which it contractually undertook to annually disclose certain financial information, operating data and event notices In December 2007, West Clark publicly offered $31 million of municipal bonds In the Official Statement for the 2007 offering, in a section entitled Compliance with Previous Undertakings, West Clark stated that, in the previous five years, the school district has never failed to comply, in all material respects, with any previous undertakings West Clark also executed a Certificate and Affidavit attesting that the 2007 Official Statement did not contain any untrue statement of material fact 18

19 SEC Enforcement Actions Against West Clark Community Schools and City Securities (continued) The 2007 Official Statement and 2007 Certificate and Affidavit both contained untrue statements of material fact Between 2005 and 2010, West Clark never submitted any of its contractually required disclosures West Clark consented to a cease-and-desist order finding that it violated antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and Section 17(a) of the Securities Act of 1933 and agreed to undertakings that included adopting enhanced written disclosure policies and procedures and implementing annual training for personnel involved in the bond offering and disclosure process This case was the first time the SEC charged a municipal issuer with falsely stating to bond investors that it had been properly providing annual financial information and notices required as part of its prior bond offering 19

20 SEC Enforcement Actions Against West Clark Community Schools and City Securities (continued) In addition to charging West Clark, the SEC also charged City Securities, the underwriter of the bonds In its Order, the SEC states that City Securities conducted inadequate due diligence and, as a result, failed to form a reasonable basis for believing the truthfulness of material statements in West Clark s Official Statement, and in particular, its assertion that it had complied with its prior continuing disclosure undertakings, a fact that City Securities could have easily verified through a review of public repositories As a result, City Securities disseminated the materially false Official Statement to its customers In addition, City Securities recommended the purchase and sale of municipal securities without implementing adequate procedures and without taking steps required by Rule 15c2-12 to reasonably ensure prompt receipt of notice of issuers disclosure submissions 20

21 SEC Enforcement Actions Against West Clark Community Schools and City Securities (continued) Order also contains findings that City Securities engaged in other misconduct, including: fraudulently mischaracterizing expenses for entertainment, charitable donations and gratuities as expenses for Printing, Preparation and Distribution of Official Statement, so as to obtain reimbursement from bond proceeds without the issuers knowledge; and providing improper gifts and gratuities to personnel of certain municipal securities such as multi-day, out-of-state golf trips and tickets to multiple sporting events Settlement included consent to Order finding violations of antifraud provisions, Rule 15c2-12, and MSRB Rules G-17 and G-20, payment of nearly $580,000 in disgorgement and penalties, and undertakings to implement changes recommended by Independent Compliance Consultant to ensure future compliance with federal securities laws SEC also charged the Supervisor of City Securities Public Finance & Municipal Bond Department who consented to a permanent supervisory bar, one-year industry bar, and payment of $38,475 21

22 Best Practices: SEC s Cooperation Initiative The Cooperation Initiative offers real benefits, namely minimal enforcement action (time, cost). Penalties likely more severe after initiative concludes. SEC believes that problems are widespread. Issuers should consider conducting a review of issuances in the last five years to confirm disclosure was accurate. Systematic review (at least some underwriters will likely do the same thing regardless of what issuers do). Well planned and well documented process is required. Involve a team that includes someone from the issuer s legal department. 22

23 SEC Enforcement Actions Against Greater Wenatchee Regional Events Center Public Facilities District, Piper Jaffray & Co., and Others (11/5/13) SEC charged Greater Wenatchee Regional Events Center Public Facilities District ( District ), a municipal issuer located in the state of Washington, with misleading investors in a bond offering that financed the construction of a regional events center and ice hockey rink According to SEC s Order, in 2011, the District defaulted on $41.77 million in Bond Anticipation Notes ( BANs ) it had issued in 2008 to finance the construction of the center The 2008 Official Statement for the BANs was materially false and misleading because it stated that there had been no independent reviews of the financial projections for the center when in fact, an independent consultant twice examined the projections and raised questions about the center s economic viability The Official Statement also failed to disclose that financial projections had been revised upward based in part upon optimistic assurances by civic leaders that the community would support the project 23

24 SEC Enforcement Actions Against Greater Wenatchee Regional Events Center Public Facilities District, Piper Jaffray & Co., and Others (continued) In addition, the Official Statement omitted key information about the possibility that the City of Wenatchee s remaining debt capacity of $19.3 million would limit its ability to support any future long-term bonds SEC also charged a senior staff member who was the Contracts Manager for the District and had executed a Closing Certificate attesting that the Official Statement did not contain any untrue statement of material or omit to state a material fact In addition, the SEC charged the outside Developer of the project and its President and CEO who signed a Certificate certifying that certain information in the Official Statement relating to the center and its revenue and tax projections was accurate Furthermore, the SEC charged the underwriter Piper Jaffray and its lead investment banker for conducting inadequate due diligence and failing to form a reasonable basis for believing the truthfulness and completeness of material statements in the Official Statement 24

25 SEC Enforcement Actions Against Greater Wenatchee Regional Events Center Public Facilities District, Piper Jaffray & Co., and Others (continued) All parties agreed to settle the SEC charges The District s settlement included: Payment of a $20,000 penalty, which was the first time the SEC ever obtained a financial penalty against a municipal issuer Undertakings that included establishment of policies, procedures, and internal controls relating to disclosures in the offering of municipal securities and continuing disclosures pursuant to Rule 15c2-12, and ongoing training Cease-and-Desist Order for Securities Act Section 17(a)(2) Violations The District s Contract Manager settled to a Cease-and-Desist Order for Section 17(a)(3) Violations The Developer settled to a Cease-and-Desist Order for Section 17(a)(2) Violations and Payment of a $10,000 penalty 25

26 SEC Enforcement Actions Against Greater Wenatchee Regional Events Center Public Facilities District, Piper Jaffray & Co., and Others (continued) The Developer s President and CEO settled to a Cease-and-Desist Order for Section 17(a)(3) Violations and Payment of a $10,000 penalty Piper Jaffray s settlement included: Payment of $300,000 penalty Censure and Cease-and-Desist Order for Sections 17(a)(2) and (3) Violations Undertakings that included retention of independent consultant to review policies and procedures Piper Jaffray s Lead Investment Banker s settlement included: Payment of $25,000 penalty Cease-and-Desist Order for Sections 17(a)(2) and (3) Violations Undertakings that included limiting certain activities as an associated person of a broker-dealer or municipal advisor for 12 months 26

27 SEC Enforcement Action Against Public Health Trust of Miami-Dade County (9/13/13) SEC charged Public Health Trust ( PHT ), the operator of the largest hospital in Miami-Dade County, with misleading investors about the extent of its deteriorating financial condition SEC found that in the Official Statement for an $83 million bond offering in August 2009, PHT made material misrepresentations and omissions regarding its current and future revenues PHT also failed to properly account for an adverse arbitration award involving patient accounts receivable in its 2008 audited financial statements appended to the Official Statement, and therefore misrepresented that its financial statements were prepared in accordance with GAAP PHT settled SEC action by agreeing to a Cease-and-Desist Order for Securities Act Sections 17(a)(2) and (3) Violations 27

28 SEC Enforcement Action Against City of Miami (7/19/13) SEC charged the City of Miami and its former Budget Director with securities fraud in connection with several municipal bond offerings SEC also charged the City with violating a 2003 SEC Cease-and-Desist Order that was entered against the City based on similar misconduct -- the first time the SEC has alleged further wrongdoing by a municipality subject to an existing C & D Order SEC s Complaint alleges that the City and its Budget Director made materially false and misleading statements and omissions about certain interfund transfers in three 2009 bond offerings totaling $153.5 million as well as in the City s CAFRs The SEC alleges that the City, through its Budget Director, transferred $37.5 million from its Capital Improvement Fund and a Special Revenue Fund to the General Fund in 2007 and 2008 in order to mask increasing deficits in the General Fund The SEC s Complaint seeks injunctive relief, civil penalties, and an order commanding the City to comply with the SEC s 2003 Order 28

29 SEC Enforcement Action Against City of South Miami (5/22/13) SEC charged the City of South Miami with defrauding investors about the taxexempt financing eligibility of a mixed-use retail and public parking structure SEC s Order states that the City failed to disclose that it jeopardized the taxexempt status of two bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering In August 2011, the City entered into agreements with the IRS by paying it $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million in order to preserve their tax-exempt status The City s settlement with the SEC included a Cease-and-Desist Order for Securities Act Sections 17(a)(2) and (3) violations and undertakings requiring the retention of an independent consultant, who for three years will conduct annual reviews of the City s policies, procedures, and practices related to its disclosures for municipal securities offerings 29

30 SEC Enforcement Action Against City of Harrisburg and Section 21(a) Report (5/6/13) Settled action in which the SEC charged the City of Harrisburg with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated SEC found that the misleading statements were made in the City s budget report, annual and mid-year financial statements, and a State of the City address Case marked the first time that the SEC charged a municipality for misleading statements made outside of its securities disclosure documents SEC found that the City failed to comply with its undertakings in Continuing Disclosure Certificates to provide ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the City As a result, investors had to seek out Harrisburg s other public statements in order to obtain current information about its finances 30

31 SEC Enforcement Action Against City of Harrisburg and Section 21(a) Report (continued) Simultaneously with its Enforcement Action, SEC issued a separate Report under Section 21(a) of the Exchange Act to address the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities 21(a) Report states that public officials should be mindful that their written or oral public statements may affect the total mix of information available to investors and could result in antifraud liability if such statements are materially misleading or omit material information Report further states that public officials should consider taking steps to reduce the risk of misleading investors 31

32 SEC Enforcement Action Against City of Harrisburg and Section 21(a) Report (continued) Report states that, at a minimum, public officials should consider: Adopting policies and procedures that are reasonably designed to result in accurate, timely, and complete public disclosures; Identifying those persons involved in the disclosure process; Evaluating other public disclosures including financial information made by the municipal issuer; and Assuring that responsible individuals receive adequate training about their obligations under the federal securities laws 32

33 SEC Enforcement Actions Against City of Victorville, Kinsell, Newcomb & DeDios, and Others (4/29/13) SEC charged that the City of Victorville, Calif., its Assistant City Manager, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios ( KND ), the underwriter of the Authority s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering SEC alleged that the Assistant City Manager, KND s owner, and KND s Vice President were responsible for false and misleading statements made in the bond offering SEC also charged KND, working through a related party, with misusing more than $2.7 million of bond proceeds to keep itself afloat SEC alleged that the principal amount of the bond issue was partly based on using a $65 million valuation for airplane hangars even though the Assistant City Manager, KND s owner, and KND s Vice President knew the county assessor valued the hangars at less than half that amount SEC alleged that the inflated figure allowed the Authority to issue more bonds 33

34 SEC Enforcement Action Against State of Illinois (3/11/13) Settled enforcement action in which the SEC charged the State of Illinois with securities fraud for misleading bond investors about the State s approach to funding its pension obligations SEC found that the State failed to inform investors of more than $2.2 billion of the State s bonds about the impact of problems with its pension funding schedule The State failed to disclose that its statutory plan significantly underfunded its pension obligations and increased the risk to its overall financial condition The State established a 50-year pension contribution schedule that backloaded the majority of contributions far into the future The State also misled investors about the effect of changes to its funding plan, particularly pension holidays, and its ability to meet its pension obligations 34

35 SEC Enforcement Action Against State of Illinois (continued) According to the SEC, the State s misleading disclosures resulted from various institutional failures As a result, the State lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures The State had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the State s pension plan was assembled and communicated to individuals responsible for bond disclosures The State also did not adequately train personnel involved in the disclosure process or retain disclosure counsel The result was a process in which no one fully accepted responsibility for identifying and analyzing potential pension disclosures 35

36 Best Practices: Continuing Disclosure Starts with great policies and procedures Given the SEC s level of interest, this is a opportune time to either create formal policies and procedures or to review existing policies and procedure to make sure they are up to date and accurate. Once put in place, issuers must follow those policies and procedures or document deviations. 36

37 Best Practices: Continuing Disclosure What should policies and procedures include? Should designate someone to own the policies and procedures and someone who oversees them. The policies and procedures should require frequent, robust, and timely disclosure that at a minimum includes a baseline of the continuing disclosure mandated by the CDAs the issuer has entered into. Before implementing policies and procedures, issuers should undertake a review of the CDAs they are entered into and the policies and procedures should reflect those requirements. All new CDAs should be measured against the baseline and any new requirements should be reflected in updated or amended policies and procedures. 37

38 Best Practices: Continuing Disclosure The key question that should be answered in the policies and procedures is: Who is supposed to do what and when? Assign responsibility for continuing disclosure work/tasks to specific individuals/positions. Make sure that each person assigned responsibilities know what is expected of them and what they have to do. 38

39 Best Practices: Continuing Disclosure Revisit assignments at least once a year and reconfirm that assigned individuals know what they are supposed to do. If staff turnover is an issue; a more frequent review is required. The policies and procedures should be specific, for example: Assistant Controller must cause the audited financial statements to be submitted to EMMA within five business days of receipt. 39

40 Best Practices: Continuing Disclosure Create a mechanism to look back and make sure the policies and procedures are being followed. Internal audit External auditors Disclosure counsel Internal resources Document, document, document. Continuing education/training 40

41 Best Practices: Continuing Disclosure Policies and procedures should also: require timely disclosure; mandate complete disclosure (not just promotional information); require consideration of whether periodic (i.e., quarterly) disclosure, even if not mandated, would be appropriate. require consideration of whether other publically available information should be filed with MSRB. 41