SECURITIES LAW THE YEAR IN REVIEW NABL -BOND ATTORNEY S WORKSHOP SAN ANTONIO OCTOBER 27, 2010 TERI GUARNACCIA

Transcription

1 SECURITIES LAW THE YEAR IN REVIEW NABL -BOND ATTORNEY S WORKSHOP SAN ANTONIO OCTOBER 27, 2010 Good afternoon - TERI GUARNACCIA For those who do not know, I am the current chair of the Securities Law and Disclosure Committee and Jodie Smith is the current vice chair - and I think it s safe to say that it has been far from a quiet year for the securities world and the Committee has therefore been very busy. I ll touch on a number of NABL projects during the course of my remarks but certainly one of the most ambitious was the preparation of a statement submitted to the SEC at the request of Commissioner Walter, (whom we look forward to hearing from tomorrow) relating to the Commission s anticipated update to the 1994 Interpretive Release addressing municipal securities disclosure. Jodie will go into a bit more detail about the topics which NABL suggested would benefit from the Commission s clarification and guidance in this regard, and will also discuss upcoming projects of the Committee. I ll briefly mention two of the Committee s earlier projects from the year - the first of which was the preparation of a Q&A Publication for distribution to NABL members regarding securities law implications of taxable and tax credit bonds. Of course, the Hiring Incentives to Restore Employment Act of 2010 offered the opportunity for issuers to elect babify tax credit bonds and this question for most people (other than that purchaser of all of those deals closed last year) became mostly academic. The second is that - Earlier this year, as Moody s and Fitch announced plans to recalibrate certain of their municipal ratings to a global scale, a committee task force prepared a notice which they suggested be posted on EMMA advising of the recalibration and noting that during the initial stages investors desiring to purchase or sell their securities that they should consider confirming the credit rating by visiting either Moody s or Fitch before making their decision. Of course, as you may know, earlier this month, the SEC approved the MSRB s proposal provide for the posting of credit rating and related information on the EMMA public website. The MSRB is working with the NRSROs in this regard and to the extent that one or more NRSROs agrees to provide credit rating and related information regarding municipal securities to the MSRB, at no charge, through an automated data feed for dissemination on EMMA, EMMA would display such information, along with any documents and identifying information relating to the applicable municipal security otherwise displayed. So I don t have a general news update like John (Cross) other than to say that we at Ballard are NOT as happy as he is that Vicki Tsilas has joined him but Ballard s loss is Treasury s gain. Istead of news, my friend told me that the secret to any good speech is to tell a funny, and if possible, slightly humiliating story so here goes: Earlier this year, I participated at an event at a charter school in Baltimore, the Baltimore Leadership School for Young Women, called Cool Women, Hot Jobs. I was in the legal room with the City State s Attorney (who pretty much just had to say yeah I m who you see on Law and Order to seem cool), a federal judge (ditto on the t.v. references) and an FBI agent WITH A GUN. Needless to say, a municipal bond lawyer was NOT the cool person in the room. You know how when you re at a cocktail party and trying to explain what you do well imagine facing a room of 6 th grade girls. I tried everything to get them excited from explaining that the water got to their shower that DMEAST # v1

2 morning because of water/ wastewater bonds, and that Camden Yards was financed with bonds, and that THEIR charter school facility was financed with bonds. Nothing was persuasive I was just as uncool as when I walked in the door. BUT I will say that the adults in the room said wow we had no idea that bonds touched so many aspects of our lives. Well that fact has not escaped the notice of the SEC either. In May of this year, Chairman Mary Schapiro announced that Commissioner Walter would lead an effort to gather facts, opinions and analyses about the municipal securities market by holding a series of field hearings across the country. The first of these hearings was held on September 21 st in San Francisco - and NABL was represented by President Elect (well, for another hour anyway) John McNally. Over the course of the next several months, the SEC has announced that it anticipates additional field hearings in Chicago, D.C., Birmingham, Tallahassee, and Austin. Each field hearing will include participants from the local region and will examine different sets of issues, which are expected to include: investor protection; investor education; financial reporting and accounting; the Municipal Securities Rulemaking Board; (pause..) municipalities acting as conduit borrowers for private companies or non-profit entities; market stability and liquidity; offering participants, professionals and market intermediaries; Build America Bonds and other taxable municipal securities; and 529 Plans. AMENDMENTS TO 15c2-12 On May 26, 2010, the SEC adopted final amendments expanding the requirements of Securities and Exchange Act Rule 15c2-12 as well as providing interpretative guidance on the application of the antifraud provisions of the federal securities laws to brokers, dealers, and municipal securities dealers who offer, buy and sell municipal bonds in the municipal bond markets. The amendments have a compliance date of December 1, 2010 which relates to the date the undertaking is entered into. The Rule of course provides a list of events with respect to which, an underwriter must have a reasonable belief that the relevant obligated person has agreed to provide ongoing, continuing disclosure prior to the sale/purchase of securities. While the existing rule provides that notice of all of the listed events need be made only if material. The amended rule both increases the list of events covered and eliminates the need for a materiality determination for five existing events requiring that they are always disclosed. The amended rule also does away with providing for disclosure in a timely manner and instead provides that notices of the events listed in the rule be disclosed in a timely manner not more than 10 business days after the event. Depending on your version of semantics the Rule is also being amended to delete the exemption of certain securities or expanded as the case may be to Cover Additional Municipal Securities more specifically to include new issuances of such variable rate demand obligations which bear interest at a rate that is reset periodically and investors are able to sell them back to the issuer at certain times for their full value. There is some good news in that there is a limited grandfather provision = which gives a reprieve for such securities outstanding as of Nov so long as the remain in authorized denominations of 100 K or more and may be tendered at least as frequently as every 9 months. Additional Guidance The Commission used the adopting release to provide additional guidance and reaffirmed that, to have a reasonable basis to recommend a security, a municipal underwriter must DMEAST # v1 2

3 carefully evaluate the likelihood that a municipality will make the ongoing disclosure called for by the amended rule. The adopting release further states that it is doubtful that an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material nondisclosure. The Commission reiterates that such a determination is dependent on all of the circumstances, and gives a non-exclusive set of factors to consider noting that sole reliance on representations of the issuer will not suffice. NABL had submitted detailed comments in September of 2009 on the proposed amendments to Rule 15c2-12. In the adopting release, the SEC addresses many of the comments offered by industry participants, and shall we say disagreed with a number of NABL s positions - in particular with respect to disclosure related to the letter of credit backed demand obligations and while continuing not to state what information MUST be included in an official statement - reiterated their long-standing position in the still ongoing skinny disclosure debate. Related to the Rule amendments, the MSRB has also received approval from the SEC on proposals for additional disclosure related to municipal bonds both in terms of what underwriters are required to provide (whether the new issue is subject to the continuing disclosure requirements of the Rule, the identity of the entities that will submit continuing disclosure information and the date by which annual financial information is expected to be submitted each year) and what municipal securities issuers will be able to provide voluntarily - including that issuers will be permitted to disseminate pre-sale disclosures through the EMMA website. and on the disclosure front, the MSRB has also received approval on rule changes to enhance the interest rate and descriptive information currently collected from brokers, dealers and municipal securities dealers relating to Auction Rate Securities and Variable Rate Demand Obligations. DODD-FRANK After much discussion, in July, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or Dodd-Frank or just the Act ) was signed into law with sweeping reforms in many areas. NABL prepared a summary of the key provisions related to Municipal Securities you ll hear more to be sure in the Hot Topics in Securities Laws and various other Panels. The Act requires registration and oversight of municipal advisors which are defined to includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap providers, but excludes (among others) underwriters, investment advisors registered under the Investment Advisors Act of 1940, and attorneys offering legal advice or providing services of a traditional legal nature - and the Act provides the MSRB with rulemaking authority regarding municipal advisors. Registration with the SEC for Municipal Advisors was required as of October 1 st and Instructions and Form MA-T relating to the SEC registration process may be found on the SEC s website. The MSRB expects to file the initial set of rules associated with registration in early November 2010 and to begin accepting registrations of municipal advisors in mid November. The Act also reconstituted the board of directors of the MSRB such that at least eight members of the Board are independent of municipal securities dealers, municipal advisors, brokers and dealers and the ability to expand beyond 15 members - and though there has been some public question as to the nature of what independent means that Board did expand to 21 and last week, the newly expanded board held its first meeting with a public majority governing board with representation of municipal advisors. DMEAST # v1 3

4 I had hoped to gain a little insight from Cliff (Gannett) on what exactly happens at the meetings under the MOU signed by the SEC and the IRS in March which has the entities meeting quarterly to work cooperatively to identify issues and industry trends within the tax exempt bonds/ and municipal securities industries and develop strategies in connection therewith to find out what might also happen at the meetings required by the Act where the MSRB is to meet with the SEC and FINRA at least twice a year to share information about the interpretation of MSRB rules and examination and enforcement of compliance with such rules, but despite not finding out the gossip about what s happening there it does seem likely to expect further enforcement discussions to be forthcoming as a result of such efforts. The Act creates several new offices and entities including the Office of Municipal Securities within the SEC, which is to administer the rules related to municipal securities brokers and dealers, municipal securities advisors, municipal securities investors, and municipal securities issuers and coordinate with the MSRB with regard to rulemaking and enforcement actions and also creates an Office of Credit Ratings within the SEC with its own compliance staff and the authority to fine agencies. The SEC is required to examine Nationally Recognized Statistical Ratings Organizations ( NRSROs ) at least once a year and make key findings public. The Act contains a number of rules regarding rating agencies including independent representations on boards, conflicts of interest, disclosures of credit ratings and filing requirements designed to minimize false, misleading or insufficient information. The Act carves out municipal securities dealers from the jurisdiction of the newly created Bureau of Consumer Financial Protection s. In one area where industry participants would have liked some clearer carving out are the securitization provisions. The Act includes provisions intended to reform securitization markets by requiring credit retention or as it is often referred to skin in the game. so that Originators and sponsors of securitizations will need to retain a portion of the securitized financial assets on their balance sheets, with the intent of leading lenders to adopt stricter underwriting criteria the Act requires the SEC to adopt regulations requiring each issuer of an asset backed security to disclose more information about the underlying assets. Despite a letter from a consortium of governmental, not for profit issuers and market participants to Chairman Dodd and Chairman Frank, urging the exclusion of municipal securities completely from the provisions applying to asset back securities neither the definition of ABS nor the provisions related thereto went quite that far instead the Act Directs the SEC to provide a a total or partial exemption for any asset-backed security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) A proposed rule in connection with the aforementioned disclosure has come out this month and as Jodie will note there is a NABL task force to respond to a number of questions specifically relating to municipal securities that the SEC asks in the proposal. Which brings us to Swaps! The Act divides jurisdiction over derivatives and rulemaking into three categories: security based swaps generally covered by the SEC, swaps generally covered by the Commodities Futures Trading Commission ( CFTC ) and mixed swaps subject to joint regulation. In general, although the existing exemption for State and municipal obligations contained in the CFTC Act should be expected to continue to be applicable to State and municipal swaps, the new provisions requiring reporting of municipal swap transactions apply, as will the new rules regarding the business conduct standards for swap providers and swaps advisors providing services to municipal entities, DMEAST # v1 4

5 And finally Dodd Frank outlined studies to be undertaken relating to Municipal Markets requiring the GAO - to study the municipal securities markets, including: (i) an analysis of the mechanisms for trading, quality of trade executions, market transparency, trade reporting, price discovery, settlement, clearing, and credit enhancements, (ii) provide recommendations on how to improve transparency, fairness and liquidity in such markets and (iii) potential uses of derivatives in the municipal securities markets. This study must be completed within 18 months of the date of enactment. In a topic that s been talked about and alluded to quite often in recent years the GAO is also required to study the value of enhanced municipal issuer disclosure, and the advisability of the repeal or retention of the Tower Amendment. This study must be completed within 24 months of the date of enactment and I think we ll all be interested in the results. ENFORCEMENT: In January, the Enforcement Division of the Securities and Exchange Commission announced the appointment of the newest members of its national leadership team as the Division undertakes its most significant reorganization since its establishment in 1972, including new leaders for a specialized unit in for Municipal Securities and Public Pensions led by Elaine C. Greenberg and Mark Zehner as Unit Deputy Chief both of whom are scheduled to speak on several panels here. The unit s stated focus is on misconduct in the large municipal securities market and in connection with public pension funds including: offering and disclosure fraud; tax or arbitrage-driven fraud; pay-to-play and public corruption violations; public pension accounting and disclosure violations; and valuation and pricing fraud. And they have been busy - considering in August that New Jersey became the first state ever charged by the SEC for violations of the federal securities laws. In a press release relating to its August 18 Cease and Desist Order, the SEC announced it had charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was underfunding the state's two largest pension plans - the Teachers Pension and Annuity Fund (TPAF) and the Public Employees retirement System (PERS). The SEC's order requires the State of New Jersey to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of New Jersey consented to the issuance of the order without admitting or denying the findings The Order links the antifraud violations to inadequate disclosure procedures and the SEC sets out two violations (in paragraphs 49 and 50). The first specifically states the statutory sections violated and how the violations occurred: the State made material misrepresentations and omissions in preliminary official statements, official statements, and continuing disclosures regarding the State s under funding of these two pension funds. The second violation interestingly doesn t reference any statutory sections violated, but rather describes the cause to which the violations are attributed noting that the State was aware of the under funding of TPAF and PERS and the potential effects of the under funding. But that due to a lack of disclosure training and inadequate procedures relating to the drafting and review of bond disclosure documents, the State made material representations and failed to disclose material information regarding The Order notes the efforts made by New Jersey to review, evaluate and enhance it s disclosure well as the implementation of an annual mandatory training program conducted by disclosure counsel for the State s employees involved in the disclosure process and cited these factors in determining to accept the State s offer of settlement and consent into the Order. And so if you have not already had a discussion or DMEAST # v1 5

6 two about disclosure processes with your issuer clients you probably will soon! NABL will, as noted in the Bond Buyer (great photo John!), have a task force related to pension disclosure, and Jodie will touch on that as well. In another first, four former San Diego officials have agreed to pay civil penalties totaling $80,000 to settle charges with the Securities and Exchange Commission that they were negligent in misleading investors about the city s pension and retiree health care liabilities. The settlements, which were agreed to earlier this year but not publicly released until last Friday, mark the first time issuer officials have had to pay civil penalties in connection with an SEC enforcement action. Though the SEC had originally claimed that the former city officials intentionally misled investors, the four individuals agreed to settle the matter by consenting to lesser charges of negligence and to the civil penalties. The complaint said that the former officials specifically knew that the city s unfunded liability to its pension plan was projected to dramatically increase. But the officials failed to disclose these and other material facts to rating agencies or to investors in bond offering documents and continuing disclosures. They did not admit or deny the SEC s allegations, but are enjoined from further violations of the securities laws. ACTION! I could go on but I do know that folks want a drink. As busy as this year as been between the upcoming updated advice from the SEC, results of the field hearings and the broad nature of Dodd Frank (which leaves much to the rule makers) - and with more than 100 rules and 20 studies to write as well as 5 offices to staff, the SEC has been very busy and will continue to be so but we need to remember that we need to busy as well. In a July 21 Bond Buyer Article, Commissioner Walter was quoted as saying, We have certain ideas that if left to our own devices we would recommend today, but It struck us as being a much better process and robust process to give everyone an opportunity to participate. We should see this as our call to action - we need to take this unprecedented time in history to become more vocal than ever - whether it is speaking to congress about the extension of ARRA provisions or other legislative changes or using the forums created by the SEC or becoming more involved in NABL committees and with that and to talk about one of the ways to do that, I will turn it over to Jodie! DMEAST # v1 6