Disclosure 101 Securities Law Disclosure Duties of State

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Disclosure 101: Securities Law Disclosure Duties of State Agencies Fredric A. (Rick) Weber Carol

Disclosure 101: Securities Law Disclosure Duties of State Agencies Fredric A. (Rick) Weber Carol (C. D. ) Polumbo Norton Rose Fulbright US LLP Fulbright Tower, Suite 5100 1301 Mc. Kinney Houston, Texas 77010 Tel: 713. 651. 3628 Email: fredric. weber@nortonrosefulbright. com Mc. Call, Parkhurst & Horton L. L. P. 600 Congress Avenue, Suite 1800 Austin, Texas 78705 Tel: 512. 478. 3805 Email: cpolumbo@mphlegal. com February 16, 2016

Overview I. How do corporate and governmental disclosure regimes compare? II. When are an

Overview I. How do corporate and governmental disclosure regimes compare? II. When are an agency’s statements “in connection with the purchase or sale of securities”? III. What are an agency’s disclosure duties? IV. What happens if an agency’s duties are breached? V. How can an agency reduce its exposure? 2 Disclosure 101

I. How do corporate and governmental disclosure regimes compare? 3 Disclosure 101

I. How do corporate and governmental disclosure regimes compare? 3 Disclosure 101

Differences in Federal Regulatory Regimes Ø Ø 4 Corporate Disclosure Regime: Ø Line item

Differences in Federal Regulatory Regimes Ø Ø 4 Corporate Disclosure Regime: Ø Line item registration statements in primary offerings Ø Annual, quarterly, and ad hoc current reports filed on EDGAR Ø Regulation FD and insider trading State and Local Government Disclosure Regime: Ø Tower Amendment: no registration or mandated disclosure in primary offerings Ø Annual reports and ad hoc event notices filed on EMMA under continuing disclosure agreement (CDA) Ø No meaningful insider trading liability Disclosure 101

Common Feature: Anti-fraud Provisions Ø Ø 5 Disclosure 101 Rule 10 b-5: In making

Common Feature: Anti-fraud Provisions Ø Ø 5 Disclosure 101 Rule 10 b-5: In making statements “in connection with the purchase or sale of securities, ” do not: Ø Make a misstatement of material fact or Ø Omit a material fact that makes what is said misleading Analogy: Hippocratic oath: do no harm

Issuer vs Underwriter Responsibility Corporate: Ø Issuer has absolute responsibility for its bad disclosure

Issuer vs Underwriter Responsibility Corporate: Ø Issuer has absolute responsibility for its bad disclosure Ø Underwriters are responsible if they did not perform “due diligence” in checking disclosure (negligence) Ø Governmental: Ø Both issuer and underwriter are responsible for bad disclosure if negligent or worse Ø Nonetheless, issuers have primary responsibility 6 Disclosure 101

II. When are an agency’s statements “in connection with the purchase or sale of

II. When are an agency’s statements “in connection with the purchase or sale of securities”? 7 Disclosure 101

“In Connection with the Purchase or Sale of Securities” Ø Statements: Duty of care

“In Connection with the Purchase or Sale of Securities” Ø Statements: Duty of care extends to: Ø Statements made in issuing bonds Ø Continuing disclosure information filed on EMMA Ø Other released information “that is reasonably expected to reach investors and the trading markets” Ø Intent: Care required even for statements: Ø Intended for legislators or citizens, rather than investors, or Ø Made after bonds are sold 8 Disclosure 101

Agency Statements Subject to Scrutiny Ø Primary Offering Disclosure: Bond offering documents Ø Agencies:

Agency Statements Subject to Scrutiny Ø Primary Offering Disclosure: Bond offering documents Ø Agencies: Notice of Sale, if any, Official Statement, and investor presentations Ø Comptroller: Annual Plan Descriptions for Texas College Savings Plan and Lone Star 529 Plan Ø Comptroller: Bond Appendix in agency GO or GR-backed offerings Ø TEA: PSF descriptions in school district offerings Ø Continuing disclosure: Filings on EMMA Ø Annual reports under CDA (e. g. , CAFR) Ø Voluntary filings (quarterly updates) Ø Event notices Ø Other: Statements readily accessible to investors, for example: Ø Ø Ø 9 Website Reports to the Legislature, LBB, or BRB Publications, e. g. , Comptroller’s Fiscal Notes Press releases Meetings or speeches covered by media Disclosure 101

III. 10 Disclosure 101 What are an agency’s disclosure duties?

III. 10 Disclosure 101 What are an agency’s disclosure duties?

Disclosure Duties: Ø Care: Exercise due care not to: Ø Make a material misstatement

Disclosure Duties: Ø Care: Exercise due care not to: Ø Make a material misstatement of fact that could be relied on by investors or Ø Make a misleading statement (due to the omission of a material fact) that could be relied on by investors Ø Supervision: Act in good faith to attempt to prevent material misstatements and omissions by employees 11 Disclosure 101

When is a Fact “Material? ” Ø Misstated facts: if “there is a substantial

When is a Fact “Material? ” Ø Misstated facts: if “there is a substantial likelihood that an investor would consider it important to an investment decision. ” Ø Omitted fact: if “there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. ” Ø Future Events: depends on the relative probability and magnitude of the event. 12 Disclosure 101

IV. 13 Disclosure 101 What happens if an agency’s duties are breached?

IV. 13 Disclosure 101 What happens if an agency’s duties are breached?

Context: Increased SEC Focus on Municipal Securities Market Ø Enforcement: Recent increase in enforcement

Context: Increased SEC Focus on Municipal Securities Market Ø Enforcement: Recent increase in enforcement actions, including against three states and MCDC initiative. Ø Legislative: SEC 2012 municipal market report advocates direct regulatory authority over issuers. Ø Regulatory: SEC and MSRB regulations (required by Dodd-Frank) targeting advisors and intermediaries, but affecting issuers. 14 Disclosure 101

State Liability for Material Misstatements and Omissions Ø Private actions: Investors (and underwriters) may

State Liability for Material Misstatements and Omissions Ø Private actions: Investors (and underwriters) may recover damages from State, if misstatement or omission is reckless or intentionally deceptive. Ø SEC enforcement: SEC may bring an administrative or judicial enforcement action for negligent misstatements and omissions in primary offerings or reckless statements between offerings. 15 Disclosure 101

Enforcement Actions Against States Ø SEC enforcement actions: Ø In the Matter of State

Enforcement Actions Against States Ø SEC enforcement actions: Ø In the Matter of State of New Jersey (August 18, 2010) Ø In the Matter of State of Illinois (March 11, 2013) Ø In the Matter of State of Kansas (August 11, 2014) Ø Violations and dispositions: Ø Bond offering documents left false impression that state pension systems were adequately funded Ø Settled with cease-and-desist orders, taking into account subsequently adopted policies and procedures, training, and engagement of disclosure counsel 16 Disclosure 101

Officer and Staff Liability for Material Misstatements and Omissions SEC may bring enforcement action

Officer and Staff Liability for Material Misstatements and Omissions SEC may bring enforcement action against state officers and employees who: Ø Direct Statements: negligently or intentionally make the statements themselves (in speeches, press releases, etc. ) or provide them for use in a statement by the State, or Ø Controlling Persons: “control” staff who make misstatements or omissions, unless the controlling person acted in good faith and did not induce the misstatements or omissions, or Ø Aiding and Abetting: knowingly or recklessly aid or abet the misstatement or omission. 17 Disclosure 101

Enforcement Actions Against Officials Ø SEC v. Michael Uberuaga et al. (settled October 27,

Enforcement Actions Against Officials Ø SEC v. Michael Uberuaga et al. (settled October 27, 2010) Ø Civil action brought against former San Diego city officials: manager, treasurer, deputy manager and auditor/comptroller Ø Based on reckless execution of certifications of the accuracy of CAFR or bond offering documents Ø Settled for $25, 000 civil penalty per official ($5, 000 for one) in addition to defense costs and reputation loss Ø SEC v. Burtka (settled November 6, 2014) Ø Civil action brought against former mayor of City of Allen Park, Michigan Ø Based on joint and several liability (as controlling person) for misstatements made by city in bond offering documents Ø Settled for $10, 000 civil penalty, bar from future bond offering participation, and injunction against future violations Ø SEC v. Miami, 581 Fed. Appx. 757 (11 th Cir. 2014) Ø No qualified governmental officer immunity from SEC enforcement action Ø U. S. Supreme Court denied certiorari 18 Disclosure 101

Forward-Looking Statements Forecasts and other forward-looking statements are not actionable, even if not realized,

Forward-Looking Statements Forecasts and other forward-looking statements are not actionable, even if not realized, if they are: Ø Good faith: made in good faith and honestly believed, Ø Reasonable: based on reasonable assumptions, and Ø Risk factors: accompanied by a description of substantial risks to realizing forecasted results. 19 Disclosure 101

Enforcement Action Based on Forward. Looking Statements Ø In the Matter of the City

Enforcement Action Based on Forward. Looking Statements Ø In the Matter of the City of Harrisburg, Pennsylvania (May 6, 2013) Ø Administrative action against city based on misleading statements by mayor regarding financial prospects of city enterprise when accurate information was not available Ø Settled with cease-and-desist order 20 Disclosure 101

V. How can an agency reduce its exposure? 21 Disclosure 101

V. How can an agency reduce its exposure? 21 Disclosure 101

Best Practices SEC enforcement actions, settlement terms, and commentary advocate: Ø Disclosure policies and

Best Practices SEC enforcement actions, settlement terms, and commentary advocate: Ø Disclosure policies and procedures, including for responding to investor inquiries Ø Regular training of supervisors and affected staff Ø Seeking expert advice as warranted Ø Continuously updating disclosure practices 22 Disclosure 101

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