• How Commissioners Discharge Their
Legal Obligations Under Federal
Securities Laws
February 14, 2023
Mark D. Blake, Deputy City Attorney
Steve Spitz, Partner, Orrick Herrington & Sutcliffe LLP High Level Overview
• PUC issues Bonds to finance capital projects for its respective enterprises (i.e. water, wastewater or power)
• Bonds are accompanied by disclosure to investors regarding the respective enterprise’s financial position
• Important for disclosure to be accurate
Good reception in the market
Provides defense to liability against SEC and private plaintiffs • Today we will address how you, as a Commissioner, discharge your responsibilities regarding approval of the PUC’s disclosures to investors under Federal securities laws
2 SEC Jurisdiction in Municipal
Securities Arena
• no requirement for PUC’s Bonds to be registered with the SEC (unlike corporate securities)
• but antifraud provisions apply
• SEC regulates municipal securities brokers and dealers (Rule 15c2-12) • SEC regulates municipal advisors
3 Disclosure Contexts Triggering Antifraud
Provisions
Primary market – bonds first sold
Preliminary and final Official Statements
Rating Agency presentations; Investor presentations
Certifications relied upon by bond counsel for tax exemption analysis
Comprehensive Annual Financial Report (appendix to Official Statements)
Secondary market – trading over life (often, 30 years) of bonds Rule 15c2-12 Continuing Disclosure
Voluntary filings
communications “reasonably expected to reach investors” 4 Rule 15c2-12
Rule applies to broker-dealers acting as underwriters of the PUC’s bonds, and not to the PUC directly
But PUC has entered into, and will be entering into, Continuing Disclosure Agreements, to allow broker-dealers to meet Rule 15c2-12
Paragraph (b)(5) – underwriter must reasonably determine that PUC will provide, for the life of the bonds, “annual financial information” and notices of specified events respecting the bonds Concern – if PUC were not to comply, underwriter may not be able to reach “reasonable determination” for future bond offerings
5 Disclosure Standard
Rule 10b-5
“unlawful for any person . . . to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .”
6 Disclosure Standard
Material
“substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable [investor].”
7 SEC Enforcement Actions
the governmental issuer (as entity)
individual members of the PUC Commission
governmental officials and employees
third parties (e.g., underwriters, financial advisors, bond counsel)
8 Litigation
• SEC
administrative
civil
criminal (referral to Department of Justice)
• Private Plaintiff
9 Rights of Action
Rule 10b-5 of 34 Act – fraudulent intent or
recklessness
Section 17 of 33 Act (SEC only)
(a)(1) - fraudulent intent or recklessness
(a)(2); (a)(3) - negligence
10 Disclosure Regime
The next series of slides will describe in some
detail the preparation, review, certifications,
and approval processes that underlie the PUC’s
disclosures to investors
Purpose is to establish a reasonable basis for
your reliance on the accuracy and quality of the
PUC’s disclosures
11 Disclosure Process
The PUC has adopted a Debt Policy, an integral component of which are Disclosure Policies and Procedures.
Prior to the distribution of all primary disclosure documents (i.e. POS), the substantially final drafts will be approved by the Commission will have been thoroughly and critically
reviewed
by SFPUC officers and staff (in consultation with the SFPUC's professional advisors, including Disclosure Counsel) to reflect the best and most current material information available at the time. The POS will be accompanied by a Q&A to assist
Commissioner review.
12 Disclosure Process
In general, the Commission will be asked to approve a draft Official Statement and to delegate to the General Manager or the Chief Financial Officer, Assistant General Manager Business Services to finalize such document (e.g., including most recent PUC financial information)
13 Commissioner’s Responsibility
Two options:
Either, read and review the disclosure documents,
particularly Official Statements, and ask staff to clarify disclosure or otherwise respond to questions
OR
Rely upon staff and third parties to prepare the disclosure documents, if such reliance is reasonable
14 Official Statement Approval
Basic Inquiries:
What is the purpose of the bond issue?
What is the source of payment of the bonds?
What are the risks that the source of payment may be
insufficient to repay the bonds?
Are there any factors that could pose a material risk to issuer’s financial position?
15 Official Statement Approval (cont.’d)
Do I have knowledge of any other events that would affect the deliberation of a reasonable investor?
Have such risks and events been brought to the attention of our staff, disclosure counsel, bond counsel and other
professionals?
Have such risks and events been disclosed, and if not what is the rationale for the non-disclosure?
16 Official Statement Approval (cont’d.)
Have we contractually agreed to provide continuing disclosure with respect to this bond issue, and if we have, who is responsible and what are the procedures for preparing and distributing the information? In reviewing the “relevant portions” of the OS, are there any “red flags” that should be brought to the attention of the financing team and/or for which I as a Commissioner would like a further explanation? 17 Commission Members’ Responsibility
Elements of Reasonable Reliance by Commission Members:
Confident that the Disclosure Policies and Procedures are designed to produce disclosure documents that are accurate and complete
Disclosure Policies and Procedures (i) identify who is responsible for what, (ii) clearly state the process by which the disclosure is drafted and reviewed, and (iii) provide checks and balances allowing a reasonable sharing of responsibilities (key elements are outlined by SEC Staff)
Periodic training (such as today’s training) is provided regarding applicable disclosure requirements of the federal securities laws
18 Commission Members’ Responsibility
Even assuming Reasonable Reliance can be established, Commission members should:
Consider whether they may know of a potential material financial development of which the staff is not yet aware that should bring to staff’s attention
Ask for clarification or explanation of any particularly sensitive areas of disclosure (e.g. litigation, cybersecurity intrusions, environmental matters, State legislative initiatives), and be comfortable with the explanations provided
19 The End
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M E M O R A N D U M
TO: SAN FRANCISCO PUBLIC UTILITIES COMMISSION
FROM: ORRICK, HERRINGTON & SUTCLIFFE LLP
DATE: FEBRUARY 14, 2023
COMMISSIONERS’ SECURITIES LAW DISCLOSURE RESPONSIBILITIES Preliminary Official Statement/Official Statement
The Preliminary Official Statement (distributed to investors prior to the sale of the Revenue Bonds) and the Official Statement (delivered to purchasers once final terms have been determined) are prepared in order to provide a reasonable investor with the information necessary to make an informed investment decision.
The Official Statement describes the terms of the San Francisco Public Utilities Commission’s (“SFPUC”) Revenue Bonds and the sources of repayment (i. e. water revenues, wastewater revenues or power enterprise revenues), and discloses information about the SFPUC and its operations and financial prospects germane to the ability of SFPUC to make timely payments of principal of and interest on the Revenue Bonds.
The Official Statement is not a “sales” document. The Official Statement is the SFPUC’s disclosure document, and the SFPUC will be solely responsible for the information contained in the Official Statement. Therefore, it is essential that the Official Statement not contain material misstatements or omissions. Investors understand that the SFPUC faces financial challenges; they simply want to know what the significant challenges are and how management is responding to such challenges.
Unlike securities issued by private companies, the SFPUC is not required to register its Revenue Bonds with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933 or submit a draft of its Official Statement to the SEC for review. However, the information contained in the Official Statement pertaining to the Revenue Bonds is subject to the “anti-fraud” rules under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The Preliminary Official Statement and the Official Statement are analogous to the preliminary and final prospectus in a registered public offering.
Inadequate disclosure can result in the imposition of civil and criminal penalties, investor lawsuits and an inability to access the capital markets for additional financing.
Prior to the distribution to investors of the Preliminary Official Statement and the Official Statement, the substantially final draft to be approved by the Commission will have been thoroughly and critically reviewed by SFPUC officers and staff (in consultation with the
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SFPUC’s professional advisors, including Disclosure Counsel) to reflect the most current material information available.
Commissioners’ Responsibilities
Commissioners have a legal responsibility to ensure that the SFPUC complies with all applicable securities laws and may be subject to personal civil and criminal penalties for failure to discharge such responsibility. Although governing boards may place reasonable reliance on staff, the SEC views governing boards as final “gatekeepers” with the responsibility to ensure that Official Statements that contain misleading misstatements or omissions are not released to the financial markets.
For a Commissioner’s reliance on SFPUC staff in the preparation of the Preliminary Official Statement and the Official Statement to be considered “reasonable,” a Commissioner should:
• Ensure that the SFPUC has established and followed adequate internal review procedures.
• Ensure that the SFPUC staff has engaged professionals to assist it (bond counsel, disclosure counsel, financial advisors) that are expert in the requirements of federal securities laws, and pronouncements and statements of the Securities and Exchange Commission.
• Review the draft Preliminary Official Statement, especially the presentation on matters about which Commission members have specific actual knowledge. • Be certain that the General Manager and Assistant General Manager, Business Services and Chief Financial Officer are aware of any matters important to the financial condition of the SFPUC of which Commission members have personal knowledge.
• Take steps to advise the General Manager, Assistant General Manager, Business Services and Chief Financial Officer or City Attorney promptly of any concern that significant risks to or concerns about the financial condition of the SFPUC are not fully and fairly described in the Preliminary Official Statement or that any of the information presented in the Preliminary Official Statement is untrue, incomplete or potentially misleading.
• Understand the key terms of the transaction being approved and make such inquiries of professionals and SFPUC staff as are necessary for such understanding, such as
-- How much debt is being incurred?
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-- How is the debt being structured (Fixed interest rates? Term? Debt service structure?)?
---Are there any particular risks associated with the issuance of the Revenue Bonds?
-- How will the Revenue Bonds be sold (i.e. competitive vs. negotiated)? -- What will the annual debt service burden be following the issuance of the Revenue Bonds?
-- Does the SFPUC have sufficient rates in place to repay the Revenue Bonds? -- How does this transaction relate to the SFPUC’s overall debt portfolio and capital improvement financing plan?
-- What commitments has the SFPUC undertaken after the issuance of the Revenue Bonds?
A Commissioner should not vote to approve the distribution of a Preliminary Official Statement and the sale of the Revenue Bonds unless and until the Commissioner has determined that the SFPUC will be able to fulfill all of the obligations it will undertake in connection with the Revenue Bonds (including, but not limited to, to make timely payments of principal and interest) and that the information in the Preliminary Official Statement and the Official Statement is accurate in all material respects and the Preliminary Official Statement and the Official Statement do not omit information necessary for investors to make an informed investment decision.