Disclosure Responsibilities Under the Federal Securities Laws Presentation to the
City of Hercules
Presented by:Vanessa Legbandt
Stradling Yocca Carlson & Rauth
Why Is Disclosure Necessary?
2 The City issues securities in the public capital markets Investors in municipal securities have rights under federal securities laws All “material” information must be disclosed
Federal Securities Acts
Securities Act of 1933 – Section 17(a)
Securities Exchange Act of 1934 – Rule 10b-5
Both 1933 Act and 1934 Act contain antifraud provisions, which apply to municipal securities 3 Federal Securities Acts
Section 17(a), in part: It shall be unlawful for any person in the offer and sale of securities. . . (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading . . ..
Rule 10b-5: “It shall be unlawful for any person in connection with the purchase or sale of any security . . . a) To employ any device, scheme or artifice to defraud, b) 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 . . . .” 4 The “Materiality” Standard
“[w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest.” Materiality is determined in context of all the facts and circumstances, but usually in hindsight Guidance comes primarily from court decisions and SEC enforcement cases 5 When Do Disclosure Rules Apply?
New offerings
Ongoing Continuing Disclosure
Annual Report under Rule 15c2-12
Rule 15c2-12 Material Event Notices
Any other circumstance where an Issuer is “speaking to the market” Speeches and presentations by senior staff and by elected officials Social Media
Website
Investor Communications
6 Official Statement
Official Statement is offering document to investors (equivalent to a prospectus) Must contain all material information for the particular bond sale Official Statement is the City’s document
Underwriters, municipal advisers and lawyers help develop the Official Statement but the City is ultimately responsible for content 7 What Should Be Disclosed?
Unlike corporate securities, there is no “line item” set of rules for what goes into an Official Statement Look at practices in the industry; recent developments
Important to maintain Attorney-Client privilege for sensitive issues Political sensitivity and confidentiality considerations are not exceptions to disclosure 8 Disclosure Process
Seek input from key officials
Empower staff at all levels
Disclosure Counsel helps pull information together and produces a draft Preliminary Official Statement (“POS”) Draft POS reviewed by City staff and Financing Team
City Council review and approval
9 Consequences of Bad Disclosure
10 SEC Active Whistleblower Program
SEC Investigation – fees for lawyers and consultants
Personal fines; Industry Bar
Reduced market access
May have to impose new procedures and oversight to settle SEC actions Rating Downgrades (triggers increased borrowing cost)
Questions?
Contact:
Vanessa S. Legbandt, Esq.
Stradling Yocca Carlson & Rauth
(949) 725-4073
[email protected]
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