Disclosure Update. 112 th Annual Conference. Gregg L. Bienstock. Ed Fierro. Peg Henry. Ethan Klos. 2:00 3:15 May 8, 2018 Ferrara Theater

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1 2:00 3:15 May 8, 2018 Ferrara Theater 112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Gregg L. Bienstock CEO and Co-Founder, Lumesis, Inc. Ed Fierro Senior Counsel, Bracewell LLP Peg Henry Deputy General Counsel, Stifel Financial Corp. Ethan Klos Treasurer, City of Arlington, TX Disclosure Update

2 Overview of SEC Enforcement Efforts/Initiatives Gregg L. Bienstock CEO and Co-Founder Lumesis, Inc. Ed Fierro Senior Counsel Bracewell LLP

3 Regulatory Backdrop: SEC Rule 15c2-12 Rule 15c2-12 requires the state or local government issuing the bonds enters into an agreement (contractual) to provide certain information to the Municipal Securities Rulemaking Board (MSRB) about the securities on an ongoing basis. Annual Financial Information Financial information and operating data provided by state or local government or other obligated persons Audited financial statements for state or local government or other obligated persons, if available Data as June 30, 2013

4 Regulatory Backdrop: SEC Rule 15c2-12 Event Notices Principal and interest payment delinquencies Non-payment related defaults 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 or events affecting the tax-exempt status of the security Modifications to rights of security holders Bond calls and tender offers Defeasances Release, substitution or sale of property securing repayment of the securities Rating changes Bankruptcy, insolvency or receivership Merger, acquisition or sale of all issuer assets Appointment of successor trustee Data as June 30, 2013

5 Regulatory Backdrop: MCDC Initiative 11/2014: MCDC Initiative was intended to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. Underwriters: 72 Firms and >$18mm in Fines Examples of Materiality Provided Engage an Independent Consultant Data as June 30, 2013

6 Regulatory Backdrop: MCDC Initiative Issuers: 71 Issuers Across 45 States Materially false or misleading statements or omissions about their compliance with continuing disclosure obligations Did not include financial penalties Must do the following: Establish Appropriate Policies and Procedures and Training within 180 days Update Past Delinquent Filings Disclose MCDC Order in Offerings for 5 year Data as June 30, 2013

7 Regulatory Backdrop: MCDC Cease & Desist Orders Dealer and Issuer Orders Competitive and Negotiated Deals Materiality -- What We Learned Missed/Late Audited Financial Filings & Operating Data Overall Filing Detailed Operating Data Incomplete Certain financial information as agreed under previous offerings No Statement About Prior Compliance Where Failures Existed Corrective Filings Prior to an Offering Does Not Cure Data as June 30, 2013

8 Regulatory Backdrop: MCDC Cease & Desist Orders Materiality -- What We Learned Failure to File Notice EMMA Cross References OS with an Annual Report filed with EMMA Lacking Cross-Reference to Issue and/or CUSIP Failure to Provide, within EMMA, Cross-References to Previously Filed Audit and Operating Filings Ratings & Certain notices of defeasance No Safe Harbor Examples Do Not = Materiality Boundary Data as June 30, 2013

9 Key Cases/Takeaways: Miami, Beaumont and Ramapo The Commission is bringing actions against more municipal issuers and public officials. Andrew Cerseney, Director of Enforcement (10/13/2016) Keynote Address at Securities Enforcement Forum 2016 Miami Key Takeaways Willingness To Go to Trial/Significant Penalties Miami and its former budget director guilty of securities fraud for faulty disclosures. We will hold municipalities and their officers accountable if they engage in financial fraud or other conduct that violates federal securities laws. Andrew Ceresney, former SEC Enforcement Director Data as June 30, 2013

10 Key Cases/Takeaways: Miami, Beaumont and Ramapo Beaumont Key Takeaways Beaumont, California and its then-executive director settled charges that they made false statements about prior compliance with continuing disclosure obligations in five bond offerings. Uncovered as part of a review of municipal issuers/underwriters that did not self-report under MCDC. The Order noted that negligence is sufficient to establish violations of Sections 17(a)(2) and (a)(3). A misrepresentation or omission is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Data as June 30, 2013

11 Key Cases/Takeaways: Miami, Beaumont and Ramapo Issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations. LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division s Public Finance Abuse Unit Issuer -- Beyond MCDC Voluntary Submission Orders Retention of Independent Consultant Individual Accountability Fine/Barred from Future Bond Offerings Issuer is Accountable for Meeting its Disclosure Obligations Use of Dissemination Agent Does Not Absolve Obligated Party from Obligations Data as June 30, 2013

12 Underwriter Perspective Peg Henry Deputy General Counsel Stifel Financial Corp.

13 Underwriter Perspective Relevant information needed by UW firms and investors Issuer s financial position current and projected Do the issuer s audited financials fairly present their current financial position? Are adequate financial controls in place? Credit for bonds current and projected Are any key taxpayers expected to relocate? Is competition likely to reduce future taxes/revenues? Investigations and audits relevant to issuer s financial practices and key officials Conflicts of interest Continuing disclosure practices

14 Issuer Perspective Ethan Klos Treasurer City of Arlington, TX

15 Why It s Important SEC Protection for Legislative body (Mayor) and Internal Staff Underwriters issuance of future debt Investors

16 Partners Internal departments Financial Advisor Bond Counsel Disclosure Counsel Disclosure software

17 Requirements Know what your obligations are in your outstanding Official Statements (OS) Make sure obligations are specific, not subject to interpretation Review past Continuing Disclosure documents Update Continuing Disclosure document to reflect OS agreements

18 Recommendations Review other entities in your State Work with Financial Advisor to limit the amount of material promised Create a Disclosure Policy Create a Disclosure manual that identifies people, depts, and information Have all parties review the final document

19 GFOA Resources Best Practice Understanding Your Continuing Disclosure Responsibilities Best Practice Using Technology for Disclosure Best Practice Maintaining an Investor Relations Program

20 Understanding Your Continuing Disclosure Responsibilities Recommendation Issuers should have a clear understanding of their specific reporting responsibilities as defined in the bond s CDA Governments should develop continuing disclosure procedures that: Identify the information that is obligated to be submitted in an annual filing Disclose the dates on which filings are to be made List the required reporting events as stated by the SEC and your CDA Ensure accuracy and timeliness of reported information Identify the person who is designated to be responsible for making the filings Event notices should be filed for events specifically identified in accordance with SEC Rule 15c2-12

21 Using Technology for Disclosure Recommendation: Issuers use technology including both their own websites and additional features of the EMMA platform to disseminate information to the municipal securities market Information to include: Bond sale documents Required disclosure Financial condition of entity Other related information Electronic posting of annual continuing disclosure information associated with a bond issue is required to be submitted via the MSRB s Electronic Municipal Market Access (EMMA) system

22 Maintaining an Investor Relations Program Recommendation: Issuers consider developing an investor relations program Commitment to provide full and comprehensive disclosure of annual financial, operating, and other significant information in a timely manner consistent with federal, state and local laws Investor Relations Programs that go beyond the legally mandated requirements of Securities and Exchange Commission (SEC) Rule 15c2-12 promote the efficient sale of debt instruments in both the primary and secondary markets and improve the reception of debt offerings

23 112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at Discuss/Comment: Join the discussion at #GFOA2018 Contact GFOA: To contact GFOA about session topics please research@gfoa.org