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1 NEWPORT BEACH I RENO I SACRAMENTO I SAN DIEGO I S AN FRANCISCO I SANTA BARBARA I SANTA MONICA Prepared by:
Brian Forbath
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
949.725.4000 P
949.725.4100 F
www.sycr.com
Municipalities in the SEC’s Crosshairs:
Disclosure Responsibilities and Best
Practices in an Era of Heightened Scrutiny
Public Statements by City Officials
Generally, no requirement to speak.
When a municipality elects to “speak to the market,” it must be accurate and complete.
Examples of public statements:
• Preliminary official statements and official statements; • Continuing disclosure filings;
• ACFRs;
• Press releases and public statements by officials, such as State of the City addresses.
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2 Indirect Regulation by the SEC
Municipal issuers are subject to the SEC’s antifraud rules even though they do not have to register securities and are exempt from the SEC’s periodic reporting requirements.
“When a municipal issuer releases information to the public that is reasonably expected to reach investors and the
trading markets, such disclosure is subject to the antifraud provisions.” (SEC 2012 Report on Municipal Issuers)
“The fact that [statements] are not published for purposes of informing the securities markets does not alter the
mandate that they not violate antifraud proscriptions.” (March 1994 Statement of the Commission Regarding
Disclosure Obligations of Municipal Securities and Others) Privileged and Confidential3
Securities Violations Under Rule 10b-5
Rule 10b-5: It shall be 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, in connection with the
purchase or sale of any security.
Intentional or reckless act is required.
Under Section 17(a) of the Securities Act, the SEC can charge securities fraud under a negligence standard (“knew or should have known”).
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3 The Question of Materiality
The materiality standard remains opaque, but it is clear that the SEC staff’s bar for materiality is very low.
Materiality is defined as:
• a substantial likelihood that a reasonable
bond investor would consider it important
in making an investment decision; or
• viewed by a reasonable investor as having significantly altered the “total mix” of available information.
In practice, SEC staff takes a subjective, hindsight view of materiality.
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Reliance on Professional Services
SEC in its Orange County Report underscored the obligations of public officials to review Preliminary Official Statements, as public officials have a different perspective and a different knowledge base than members of the financing team
Issuers and principals are ultimately accountable for the accuracy of statements of fact about the issuer and cannot delegate this responsibility.
In the event of a misstatement, reliance on advice of professionals will only serve as a defense under limited circumstances. Presence of counsel does not equate to advice of counsel (a defense requiring a privilege waiver): SEC generally requires a direct request for advice on a particular disclosure topic.
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4 SEC Enforcement Actions
Municipalities Securities and Public Pensions Unit
SEC expects nearly strict liability for compliance. Recent cases have sought:
• Financial penalties;
• Individual accountability (control person liability); • Parallel criminal charges;
• Admission of wrongdoing;
• Public statements outside of offering materials or continuing disclosures.
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SEC Investigations – An Inside Look
An investigation is NOT a litigation;
Broad document subpoenas;
Team of lawyers and accountants with no
automatic protections offered by a court;
No designated timeline or budget;
Personal subpoenas issued to officials and
staff;
Cooperation and credibility are paramount.
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5 SEC Settlements
Terms of settlement may take numerous forms:
• Generally “neither admit nor deny;”
• Cease and Desist Order;
• Financial penalty and/or disgorgement;
• Industry bar for individuals;
• Compliance undertakings (including consultants and
monitors);
• Cooperation against others under investigation;
• Future disclosure obligations.
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