15 TH ANNUAL PRE-CONFERENCE AT THE BOND BUYER CA PUBLIC FINANCE - - PowerPoint PPT Presentation

15TH ANNUAL PRE-CONFERENCE AT THE BOND BUYER CA PUBLIC FINANCE CONFERENCE THE RELATIONSHIP BETWEEN ISSUERS AND THEIR CONSULTANTS IN THE POST-DODD-FRANK ERA

September 20, 2016

RECENT ENFORCEMENT ACTIONS AGAINST ISSUERS AND PUBLIC OFFICIALS

Session one

SESSIONONE

Presented by Robert Doty, President and Proprietor, AGFS, Annapolis, MD Elaine Greenberg, Partner, Greenberg & Taurig

EXP XPANDING M G MUNICIPAL S SECURITIES E ENFOR FORCEMENT Profound

• und Chang

nges es f for I Issuer uers & & Offici cial als

Prese sente ted t d to California D Debt & & Investm stment A t Adviso sory y Commissi ssion Bond

• nd B

Buy uyer Califor

• rnia Pre-Confer

eren ence ce September 20, 20, 2016 2016

3

SEC SEC NON-MCDC ENF NFORCEMENT S SINC NCE EARLY 2013 2013

4

• NON

ON-MCDC ENF NFORCEMENT A ACTI TIONS (3 (3 ½ Year ears) AGAIN AINST—

• 18

18 Sta tate or Local cal Gover ernmental E l Enti titie ies

• 16

16 Loca cal O l Officia icials

• Include

des 4 4 Act ctio ions Pendi ding g Again ainst 6 6 Local G cal Gover ernmental l Enti tities & & 6 6 Offici icials ls

5

• CONTRAS

AST: : IN N 14 14 YE YEARS F FROM 1999 T 1999 THR HROUGH 2012 2012—

• 11

11 Sta tate or Local cal Gover ernmental E l Enti titie ies

• 10

10 Loca cal O l Officia icials

6

SIN SINCE EAR EARLY 2 2013

• Two S

Sta tates es—Illin inois is & & Kan ansa sas (No (Not F Fir irst st—New Jer ersey in in 2010 2010, Add Ha dd Hawaii ii an and M Min innesota A Afte ter MCDC)

• Stat

ate A Agency cy—Rhode Isla sland C Commer erce C Corp. (f (formerly, E Eco conomic ic Develo elopment Commis issio ion) (in (in progress) ss) (No (Not F Fir irst—Massachusetts T Turnpik ike in in 2003, 2003, After er MCDC, 1 10 State A e Agencies cies)

7

COM OMMISSION ON GOI GOING TO O FEDE DERAL DI DISTRICT CT CO COURT MOR ORE OFT OFTEN (As Opposed ed t to A Admin inis istrativ ive P e Proceed ceedin ings) Will ill Lose se S Some, B But A t Also lso Will ill Produce C e Court Decisi ecisions as P as Prec eceden ent More e Rem emedies es in in Feder ederal Court (e. e.g., Contr trol Per erson L Lia iabil bilit ity, Inju junctio ions, Emergency Relie elief to to Halt O Halt Ongoing C g Condu duct) To

• Date, Qui

Quite Suc uccessfu ful

8

NOTABLE “ “FIRST STS” & OTHER ER D DEVEL ELOPMEN PMENTS

9

FIRST ST T TIME: E: Emergen ency I Inju junct ction A Agai ainst Issu ssuer To Ha Halt lt Bond

• nd Of

Offering in n Prog

• gress

(C (City ity o

• f Har

Harvey, I Illin llinois) (P (Paci cific G Gen enes esis, Un Under derwriter er, in in 2001 2001)

10

FIRST ST T TIME: E: Prohib ibitio ions Again ainst Issu ssuers Issu ssuing B g Bonds ds in in Futu ture (With thout t Sati tisf sfyi ying C g Conditi tions P s Precede dent) t) UNO UNO C Char arter S School Ne Netw twork—5 Y Year ears; Cond

• ndition
• ns: Poli

lici cies, Train ainin ing, Res espo ponsible O e Offici icial, & & More City o ity of Har Harvey, I Illin llinois—3 Y 3 Year ears; Cond

• ndition
• n: Inde

depende dent D Disc isclo losure Counsel Allen llen P Par ark, M Mic ichig igan—2 Y Year ears; Cond

• ndition
• ns: Disc

isclosure o

• f Order

er, C Cer ertif tific icatio ion Afte ter C Consu sult ltation with ith Disc isclo losure C Counse sel

11

FIRST ST T TIME: E: Civil P ivil Pen enal alties A Agai ainst Issu ssuers (G (Greater Wen enatchee, Wash ashingt gton, R Regio gional l Even ents C Cen enter ter Publi lic Faci acili litie ies Distr istrict—$20, 20,000; 000; Also lso Oper perator of Cen enter ter an and d Its ts Pres esiden ent—$10, $10,00 000 E 0 Each) (W (Wes estla lands Water D Distr istrict—$125, 125,000) 000)

12

FIRST ST T TIME: E: SEC W Won in in Distr istric ict & & Appe ppell llate C Courts on Issu ssue

• f
• f

Qualif ifie ied Immunit ity o

• f Public O

ic Officials ials Basi asis: S SEC See eekin ing Inju junction & & Civil ivil Penalty vs

• vs. D

Dam amages (S (SEC v

• v. Miam

iami’s B Budg dget D Dir irect ector)

13

FIRST ST T TIME: E: Bar ars A Again ainst O Offici icial als—No Fut

• Future B

Bond

• nd Issues

Includes T Two Mayo ayors (O (One Stil till S l Sitt itting—Can’t C Cer erti tify Bond d Disc isclo losures) Include des Bar ars A Again ainst Work in in Indu dustry

14

FIRST ST T TIME: E: Bar ars A Again ainst O Offici icial als

• City

ty of

• f Harvey, Il

Illinoi nois— Sitti tting ng Mayor

• r &

& For

• rmer Com
• mptroller
• City

ty of

• f Al

Allen n Park, Michi higan— For

• rmer Mayor
• r &

& City ty M Mana nager

• Rhod

Rhode I Island nd E Econom

• nomic D

Development nt Commissi sion—For

• rmer Executi

tive Director tor & Deputy uty D Director tor

• Uni

nite ted Neighborhoo hood Organi nization

• n of
• f

Chicago go—Form rmer C er CEO

15

FIRST ST T TIME: E: Civil ivil Pen enal alties Agai ainst Sta tate A Agen ency O Officia icials (E (Exec ecutive D e Dir irect ector an and d Depu puty Dir irec ector o

• f Rhode

Islan and C Commer erce ce Commis ission—$25, 25,000 E 000 Each)

16

INCRE REAS ASED U USE OF CIVIL IL PENAL ALTIE IES AGAIN AINST OFFIC ICIAL IALS $180 $180,000 00 A Again ainst 8 8 Officia icials

• City

ty of

• f Harvey, Il

Illinoi nois—Sitti tting ng M Mayor—$1 $10, 0,000 00 For

• rmer Com
• mptrol
• ller—$30

30,00 000 ( 0 (plus d disgorgem emen ent & inter eres est)

• City

ty of

• f Al

Allen n Park, Michi higan—Forme mer Mayor—$10,000

• Wes

estlan ands Water er D District— Gen ener eral al Man anager er/Gen ener eral C Counsel—$50,000 For

• rmer As

Assista tant nt G Gene neral M Mana nager—$20, 20,000 000

• Rhod

Rhode I Island nd E Econom

• nomic D

Development nt C Com

• mmission
• n—

Forme mer Execu ecutive Direct ctor—$25, 25,00 000 Former Deputy uty D Director tor—$25,000

• Uni

nite ted Neighborhoo hood O Organi nization

• n—Forme

mer C CEO—$1 $10, 0,000 00

17

CONTRAS RAST: Prio ior 15 5 Year ears— 5 5 Officia icials (in (in tw two acti actions) $8 $85, 5,000 (P (Primaril ily S San an D Die iego Officia icials)

18

LAR ARGEST C CIV IVIL PEN PENALTY TO DATE A E AGAINST ISSUER R OFFICIAL IAL—$50, $50,000 000 Double P le Prio ior Hig Highest (W (Wes estla lands, C Calif alifornia ia, W Water Distr istrict)

19

FIRST ST T TIME: E:

BI BIG D DEAL AL

“Contr trol l Per erson” L Lia iabil bility f for I Issu ssuer Offici icial als (Joint & & Several w with ith Prim imary V Vio iola lator)

• Mayo

ayors o

• f—

Har Harvey, Illin llinois Allen llen P Par ark, M Mic ichig igan

• Shi

hift ft i in n Bur urden of

• f Proof
• of
• SEC Need O

Need Only P ly Prove Contr trol, No Not K t Knowle ledg dge

• Par

artic icip ipation in in Frau aud Un Unnec ecessary

20

CONTRO ROL P PERS RSON LIABI BILIT ITY:

• To Esta

stablis ish Succ ccessful D l Def efen ense, “Cont

• ntrol P

Person

• ns” Mus

ust P Prove—  “Good Good F Faith” —and nd—  Did No id Not t “Dir irec ectly or I Indir directly” Indu duce ce Acti ction of Prim imar ary V Vio iola lator

21

CONTRO ROL P PERS RSON LIABI BILIT ITY:

• Po

Poses Sign ignif ific icant Ne New R w Risk isks for Community L Leader eaders—Mayors, s, Boar ard C Chair airs

• Abso

bsolu lute “ “Contr trol” l” No Not t Requ equir ired

• Def

efen ense M e May y Requ equir ire Exercise se o

• f Oversi

sigh ght t to to E Evid vidence “ “Good Faith aith”

• If Poli

licie ies/Proce cedures Ado dopted d & & Imple lemented, M May y Be e Helpf Helpful

22

FIRST ST T TIME: E:

AN ANOTHER BI R BIG DEAL AL

Iss ssuer Former C CEO F Fin ined ed an and B Bar arred fo for NO NOT R T Read eading Officia icial S Sta tatement He S He Sign igned ed OS Conta tain ined M d Mate terial M l Misst isstatements/ Omitted ed M Mater erial ial I Informatio ion Only ly Char arged ed w with ith Ne Neglig ligen ence No Not C t Char arged with ith K Knowle ledg dge o

• f Misr

isrepr presentations (C (CEO o

• f Un

Unite ited Neigh Neighborhood O d Organization of Chica icago)

23

FIRST ST T TIME: E: Acti ction A Again ainst Iss ssuer er f for Informatio ion o

• n Webs

bsit ite (NO (NOT O Offici icial l Sta tatement o

• r Conti

tinuing Disc isclo losure F Filin iling) Inf nfor

• rmation
• n on
• n Ge

Gene neral W Webpage (Not

• t I

Investor P Page) Includi ding g Mayor’s Polit litical al S Spee peech (A (Annual Sta tate o

• f City

ity—Poste sted o d on General Webpa page) (C (City ity o

• f Har

Harrisburg, P Pen ennsylvania)

24

HA HARRISBUR URG: Impl plic icatio ions for Disc isclosure R e Regardin ing Outs tstandi ding O Oblig ligations Once I ce Iss ssuer Spea eaks Abo bout O Oblig ligations, Must st Speak peak W With ithout M Mate terial l Missta tate tements o ts or O Omissi sions (e. e.g., on Website, in in Offici icial S l Sta tatements, Annual F Fin inan ancia ial I Information Filed iled at E t EMMA)

25

HA HARRISBUR URG: Illustr strate tes s Point T t That ALL LL Mate teria ial Oblig ligatio ions S Should ld B Be e Disc isclosed ed Including “Bank nk Loa Loans ns” Non

• n-Bank L

k Loans ns, ALL M Mate teria ial O Oblig ligatio ions (e (e.g., J Judgm dgments, Conti tingent L Lia iabili ilities, Contract actual L al Liabilit lities es)

26

FIRST ST T TIME: E: Acti ction A Again ainst Iss ssuer er w with ith Res espec ect to to Informatio ion in in Docu cuments Investo stors s Never S Saw Tax C x Certifications to B

• Bond
• nd Couns
• unsel

& & Pool B l Bond I Iss ssuer R Regardi ding g Priv ivate Use Use of Proje ject (C (City ity o

• f South M

Miam iami, Flo lorida ida)

27

SO SOUTH MIAM IAMI: Illu llustrates Importan ance o

• f Inter

ernal I l Issu ssuer Contr trols ls (F (Four Fin inan ance D Dir irect ectors—Not T Trained) Un Unso soph phistic icated ed I Issu ssuer— No No E Excu cuse Man any I y Iss ssuers Need P Need Professio ionals to to Assi ssist Compli pliance ce w with ith T Tax ax Rules les, Conti tinuing D Disc isclo losure & & Bond Doc

• cum

uments

28

FIRST ST T TIME: E: Ind ndependent C Conf

• nflicts M

Moni

• nitor
• r

(UNO (UNO C Char arte ter School Netw Network)

29

FIRST ST T TIME: E: Gover ernmental al Issu ssuer Alle lleged d to to Ha Have F Faile ailed to to D Disc isclo lose— Inf nfor

• rmation
• n R

Regarding Private C Cond

• ndui

uit B Bor

• rrower

In C n Credit Enha nhanc nced B Bond

• nd I

Issue (R (Rhode I e Isla sland C d Commerce Commissio ion—Pending) (T (Two O Officia icials Set ettled ed—Barred & & Civil P ivil Pen enal alties)

30

FIRST ST T TIME: E: Lia iabil ilit ity in in True P Priv ivate P Plac lacement (Un (Under er Sect ection 4(a) 4(a)(2) of Secu ecurit ities Act ct of 1933 1933) Bonds ds Offered/ d/Sold Solely t y to Sophisti sticate ted Investo stors Investm stment L t Letters Acti ction A Again ainst Sta tate Agen ency/Offic icials ls Plac lacement A Agen ent’s Motio tion to to D Dism ismis iss D Den enied ied (R (Rhode I e Isla sland C d Commerce Commissio ion—Pending) (T (Two O Officia icials Set ettled ed—Barred & & Civil P ivil Pen enal alties)

31

FIRST ST T TIME: E: Loc Local Issuer C Couns

• unsel

(W (Wes estla lands, C Calif alifornia ia, W Water Distr istrict & & Ram amapo, Ne New Y York)

32

FIRST ST T TIME: E: Acti ction A Again ainst Iss ssuer er A Alr lrea eady S Subje bject to to Cease ease-and-Desi sist st Order (C (City ity o

• f Miam

iami, i, F Flo lorid ida)

33

FIRST ST T TIME: E: Feder ederal Court T Trial an ial and d Jury V y Ver erdi dicts A Again ainst Iss ssuer an and d Issu ssuer Offici icial al (C (City ity o

• f Miam

iami, i, F Flo lorid ida)

34

“REAS ASONAB ABLE” RELIAN IANCE ON PROFESSIO IONAL ALS Four Fact actors Appli plied b by y Courts:

• Comple

plete Disc isclo losure to to P Professional R Regardin ing Issu ssue

• Seekin

ing P Profes essio ional al Advic ice a e as to Appropria iaten enes ess of Conduct ct (P (Partic icipa patio ion in in Tran ansactio ion I Inad adequate)

• Rece

eceipt pt of Advic vice th that C Condu duct Is A s Appr ppropriate (No (Not M Mer erel ely Ne Negative A Assu ssurance)

• Relia

eliance o

• n A

Advic vice in in Good d Fait aith Miam iami Jury V Ver erdi dict Found d No None o e of th the e Fact actors P Pres esent

35

FIRST ST T TIME: E: Anno nnoun unced I Int ntention

• n t

to

• Coor
• ordinate with

h Just stice ce Depar artment (C (City ity o

• f Ram

amapo, Ne New York) (C (Crim imin inal A l Acti ction I Include des L Local cal Counsel) l)

36

PEN PENDING C COURT CASE ASES: (S (SEC S Seek eeking B g Broad ad Rem emedie ies Agai ainst Iss ssuer ers & & Offic icia ials) City o ity of Miam iami & & Former Budg dget Dir irec ector Southern C Calif alifornia L a Logis gistics Air irport A Auth thority, , City o ity of Vict ictorvill lle, & & Ass ssis istan ant City ity Man anager Rhode I e Islan and C Commer erce ce Commis ission (F (Formerly, R Rhode de E Eco conomic ic Develo elopment Commis ission) (F (Former E Execu ecutiv ive D Dir irect ector & & Former er D Depu puty ty D Dir irect ector Settl ttled) d) (Asse sserting g Governmenta tal R Respo ponsi sibi bility ty for Private te B Borrower Inf nfor

• rmation
• n i

in n Credit E Enha nhanc nced Bond

• nd Issue)

City ity of Ram amapo, Ne New Y York, R Ram amapo po Local cal Devel elopmen ent Corp. p., Town Supervi viso sor/Presi side dent t of Developm pment t Corp., Town Atto ttorney, former E Execu ecutive Dir irect ctor of Devel elopment Corporati tion/Assi ssista stant T t Town A Atto torney, & & Town’s s Deputy y Fin inan ance ce Dir irect ector

37

COMMON PRO PROBLEM ARE AREAS:

• Overly

ly O Optim imistic I ic Information R Regar ardin ing Economic c Developm pment t Projects ts— (e. e.g., Wen enatchee E Events C Cen ente ter, Alle llen P Par ark M Movie vie S Stu tudio, Ram amapo B Base aseball ll S Stad tadiu ium, Rhode Isla sland EDC Priv ivate Onlin line Gam ame Compa pany, Har Harvey Ho Holid liday I Inn)

• Assu

ssumpt ptions & & Oth ther er I Informatio ion S Suppo pporting P Proje jections & & Exper pert Repo ports— (W (Wen enatchee E Even ents C Cen enter ter, P Publi lic Healt c Health Trust)

38

COMMON PRO PROBLEM ARE AREAS:

• Stal

tale I Informatio ion (A (Alle llen P Par ark, P Publi lic Heal Health T Trust)

• Conf
• nflicts of
• f Int

nterest (UNO (UNO C Char arte ter School Netw Network, Har Harvey)

• Insufficien

cient Inter ernal al C Controls ls (S (South M Mia iami, P Public lic Healt Health Trust)

• Misle

islead ading R Risk isk Fac actors (R (Rhode I e Isla sland C d Commerce Commissio ion)

39

MAJ AJOR SEC SEC O OUTCOMES: (MCDC & CDC & N Non-MCDC CDC) Lar arge e Nu Numbers o

• f Iss

ssuer ers A Ado doptin ing Policies cies & & Proced cedures es & & Staf taff T Train aining Vir irtual ally All ll Un Under derwriters (96% (96% o

• f Bonds)

Req equir ired to to Empl ploy Consu sultan ants R Regardin ing Due Diligen ence P e Pract ctices ices Conditio ion of MCDC Settlem lemen ents Achie ieved ed a Re-Focuse sed R d Revi view w of Marketwi twide de P Practi tices by I y Iss ssuer ers & Un & Under derwriters

40

ISSU SUER P POLICIES & S & PROCED EDURES: ES: Pote tential to l to Beco ecome M Mar arket Prac actice ce Cont

• ntrol
• l Persons Might

ht P Poi

• int

nt to

• Adop
• ption
• n

as E as Evide vidence o

• f “Good F

Fait aith” Grea eater R Risk isk in in Enforce cemen ent, If No Not t Implemented ed BU BUT, I If Adopt, pt, BETTER FOLL FOLLOW

41

ISSU SUER P POLICIES & S & PROCED EDURES: ES: Man any I y Iss ssuers Need P Need Professio ionals to to Assi ssist BUT I UT Issu ssuers A Are e Res espo ponsible e for Officia ial S l Statem emen ents Offici icial als W Who Sign ign M MUS UST Rea ead an and d Un Under derstand

42

ISSU SUER P POLICIES & S & PROCED EDURES: ES: SEC Oft Often A n Accepts Li Light hter S Sanc nction

• ns

for Car arele eless, Ne Neglig ligen ent I Iss ssuers (S (Sec ection 17(a 17(a)(2) & & (3) o (3) of Secu ecurities Act ct of 1933) 1933) IF IF Issuer ers O Offer to Implem lemen ent P Polic icies ies & & Proced cedures es, Design esignate R Resp esponsib ible le Officia icials, & & Train ain S Staf taff

43

NEXT S STEPS EPS (MCDC) CDC) Pote tential A l Actio ctions A Again ainst No Non-Self elf-Repo porti ting I g Issu suers & s & Underwr write ters Pote tential A l Actio ctions A Again ainst Iss ssuer Officia icials & & Indiv dividu dual l Un Underwriter Office icers Poten ential ial Actions A Against P Profes essio ionals als If So, S San anctio ions L Lik ikely ely To Be e More e Sever ere

44

THE THE MARKET’S FUTU UTURE Regulation b by Enforcement (as (as Well as ell as Through gh R Rule le 15c2 15c2-12) 12) Tower r Amendment Irrelevant nt Legis gisla lativ ive T Trad ade-Off in in th the e 1970 1970s

45

THE THE END ND

46

THE ROLE OF REGULATORS AND RULE-MAKERS IN THE MARKET: THE CARROT AND THE STICK

SESSION TWO

Moderator: Ritta McLaughlin, Chief Education Officer, MSRB Monique Winkler, Assistant Director, Enforcement/Public Finance, SEC Todd Mitchell, Group Manager, Office of Tax Exempt Bonds, IRS David A. Vaudt, Chairman, GASB Leslie Norwood, Managing Director and Associate General Counsel, SIFMA

MORNING BREAK 10:15 AM – 10:30 AM

MUNICIPAL ADVISORS: NEW STANDARDS AND RESPONSIBILITIES

Session Three

Moderator: Susan Gaffney, Executive Director, National Association of Municipal Advisors Dave Sanchez, Senior Counsel, Norton Rose Fulbright US LLP David Leifer, Senior Managing Director, KNN Public Finance Terry L. Maas, Managing Director, HillTop Securities, Inc.

Session Overview

 Implementation MSRB Rule G-42 and Other Rules Governing

Municipal Advisors

 Issuers and Municipal Advisor Regulations  Interacting with MAs in the Current Regulatory Environment  Impact On Other Professionals

MA Regulations and Issuers

 MAs Have a Federal Fiduciary Duty to Client

 Duty of Care  Duty of Loyalty

 MAs Must Be Registered with the SEC and MSRB  MAs Must Meet Qualification Standards by September 2017

(Series 50)

 MAs Must Document the Relationship with Client and Scope of

Services

 MAs Must Disclose Conflicts of Interest to Client  MAs Must Consider Financing Recommendations for Issuers in

Light of Whether the Financing is Suitable for the Client

 MAs May Send Client/Issuer More “Paperwork” To Meet Their

Compliance Obligations

MA Regulations and Issuers

 Client/Issuer Should Make Sure MA is Registered with SEC

and MSRB

 Client/Issuer Should Make Sure (by 9/17) That MA Has

Passed Series 50 Exam

 Client/Issuer Should Negotiate The Scope of Services for MA  Client/Issuer Should Be Receptive to Receiving Information

From MAs, and Review Conflict of Interest Disclosures

 Client/Issuer Has No SEC/MSRB Regulatory Obligations To

Sign Any Documents From MAs or Use MAs in a Transaction

 Practically Speaking, Issuers May Have/May Be Asked to

Sign Contract with MAs Regarding Services to be Rendered In Order for MAs to be in Compliance with MSRB Rule G-42

MA Rule: Highlights

 Regulatory Framework Over Municipal Advisors

 Fiduciary Duty  Other Rulemaking Similar to Broker/Dealer Rules

 Only Municipal Advisors May Give Advice to a Client/Issuer

Unless Certain Exceptions Apply

 Responding to an RFP  Client/Issuer Hires MA and Produces an IRMA Letter  Underwriter Has Been Hired (with some limitation)

 IRMA Letters: The Good, The Bad, and the Ugly  Interacting With Other Professionals  MA Duties  Going Forward

Putting Policies Into Practice

 Differences Between “Independent” MAs & Broker/Dealer MAs  Roles of MAs  What Has Changed In Client Interactions Since the Regulations?  What Will Change In Client Interactions Since the Regulations?  The Development and Use of “G-42 Letters”  The Development and Use of “IRMA Letters”  What Are Conflicts of Interest and Why Do They Matter to

Clients?

 What Does “Suitability" Mean For Actual Clients?  Tiered Approach Depending on Client

Putting Policies Into Practice

 MA’s Role When Helping Client/Issuer Select and Work With

Other Professionals

 MA’s Role in Bank Loan Transactions  Bond Ballot Initiatives and MAs

The Rules of the Rule!

G-2: Standards of Professional Qualification G-3: Professional Qualification Requirements G-5: Disciplinary Actions G-8: Books and Records G-9: Preservation of Records G-17: Conduct of Municipal Securities and MA Activities G-23*: Activities of Financial Advisor (No Role Switching) G-24*: Use of Ownership Information Obtained in Fiduciary or Agency Capacity G-27*: Supervisory Obligations of Broker-Dealers G-32*: Disclosure of Primary Offering G-37*: Political Contributions G-38*: Solicitation of Municipal Securities Business G-42: Duties of MAs G-44: Supervisory and Compliance Obligations for Municipal Advisors

* Applies only to Dealer/MAs

Resources

CDIAC: MA Rule Resource Page

http://www.treasurer.ca.gov/cdiac/mmra/ma.asp

GFOA: Primer-Municipal Advisor Rulemaking and Issuers

http://gfoa.org/gfoa-primer-municipal-advisor-rulemaking-and-issuers

MSRB: Municipal Advisor Page

http://www.msrb.org/Regulated-Entities/Municipal-Advisor-News.aspx

JOIN CDIAC FOR LUNCH IN BALLROOM I Keynote Presentation: The Honorable John Chiang, CA State Treasurer

LUNCHEON 12:00PM – 12:45 PM

UNDERWRITERS AND BROKER/DEALERS: How Has The Regulatory Regime Changed for Underwriters in the Past Five Years?

Session Four

Moderator: Daniel Deaton, Partner, Nixon Peabody LLP Stephen Heaney, Director of Public Finance, Stifel Nicolaus & Company, Inc. Peg Henry, Deputy General Counsel, Stifel, Nicolaus & Company, Inc. Chris Mukai, Managing Director, Citi Andrew Sears, Executive Vice President and General Counsel, George K. Baum & Co.

PROTECTION OF INVESTORS

 Risk Alert (March 2012)

 What was the risk alert?

 “the [Examination Office of the SEC] has observed instances where municipal underwriters have

not maintained, nor did they require the creation and maintenance of, adequate written evidence that they complied with their due diligence obligations, including those under Rule 15c2-12 and applicable Commission interpretive guidance. Indeed, some firms have asserted that it is their specific policy not to maintain any due diligence records and have stated that ‘it is not industry practice” or that they are following advice from outside counsel.”

 Warned dealers that they need to maintain documentation that they have satisfied their due

diligence obligations.

 Why was this such a big deal?  What did it teach us?

 Importance of documentation.  Introduction of examinations as significant business risk concern.

PROTECTION OF INVESTORS

 Wenatchee Order (November 2013)

 What happened in Wenatchee?

 Financed project was a proposed minor league hockey arena.  Financing had fallen apart before.  Projections used in offering document had been questioned and then made to be more

• ptimistic at the request of the city.

 Banker was introduced to the transaction a mere weeks before it went to market and

performed minimal due diligence.

 Why is it important?

 Negligence based enforcement action against underwriter and banker  Applied the emphasis of negligence-based actions to dealers in addition issuers

 What did this teach us?

 The SEC will enforce the due diligence obligations of underwriters even where a bondholder

has not lost a single dollar.

 The SEC will enforce the due diligence obligations of underwriters not only when they act

recklessly but also if they do not show that they are being careful.

PROTECTION OF INVESTORS

 Recent Jury Verdict in City of Miami (September 2016)

 Recent jury verdict in the SEC’s action against the City of Miami

 Jury found that the City of Miami and its former budget director violated the Federal

antifraud laws because it executed a series of transfers from its Capital Projects Funds to its General Fund, which falsely inflated the General Fund balance and maintained $100 million in reserves in the General Fund, and ultimately led to more favorable ratings on its bond

• fferings.

 Jury also found that the City of Miami failed to disclose relevant facts and seek advice from

its auditing firm at the time.

 The SEC is using its enforcement authority to make fundamental changes in the

municipal securities market, and we live in a climate where the SEC does not hesitate to open enforcement actions against issuers and underwriters – even in circumstances where bondholders are not losing money and the bonds are highly rated.

PROTECTION OF INVESTORS

 MCDC Initiative (March 2014-December 2014-??)

 What happened?

 Do we even need to go into that?

 What did the dealers uncover about underwriter due diligence during the

MCDC Initiative?

 Revealed numerous instances where continuing disclosure due diligence was not conducted.  Revealed a lot of communication concerns between bankers and underwriter’s counsel.

 What did this teach underwriters?

 A lot of assumptions were being made.  Need for a more-systematic process for due diligence generally—not just continuing

disclosure (“canary in a coal mine”).

PROTECTION OF ISSUERS

 Rule G-17 Disclosures (August 2012)

 What are these disclosures?

 The MSRB provided an interpretation of its dealer fair dealing rule (Rule G-17) that

required underwriters to provide to issuers disclosures concerning role and responsibilities of the underwriters, their conflicts of interests and the material financial risks and financial characteristics of complex transactions they recommend.

 The interpretative notice also imposed specific requirements that underwriters deliver these

disclosures early in the transaction process (some are required earlier than others depending

• n the kind of disclosure).

 How did this impact underwriters?

 It has required dealers to implement compliance systems to ensure that these disclosures are

properly prepared and timely delivered on each transaction.

 It has increased the amount of paper work dealers send to issuers.  It has provided a needed structure to disclose to issuers material factors that affect them like

conflicts of interest and how risks associated with complex financings.

PROTECTION OF ISSUERS

 Municipal Advisor Rule (September 2013)

 What is the Rule and why did it matter for underwriters?

 The Final Rule the SEC adopted concerning municipal advisors created a “facts and circumstances”

test to define when a person becomes a “municipal advisor” for purposes of the brand new regulatory regime.

 If a person becomes a municipal advisor with respect to any transaction, that person will be

subjected to a host of rules including a fiduciary duty to municipal entities.

 The SEC was clear that a dealer could not be both a municipal advisor and an underwriter with

respect to any municipal securities transaction because it would constitute a breach of that fiduciary duty.

 Underwriters are required to find an exception to the Rule

 The effect of the Rule is that dealers need to secure an exemption for each transaction and make

sure they are not municipal advisors to municipal entities on any transaction or they cannot underwrite the transaction.

 Most underwriters looked to three exemptions: Underwriter exclusion, RFP exemption or the IRMA

exemption.

 What is the effect of the Rule on the relationships between issuers and

underwriters?

ISSUER PERSPECTIVE: HOW ARE THEY DOING IN THE WAKE OF ALL THIS CHANGE?

Session Five

Moderator: Jay M. Goldstone, Managing Director, MUFG and GFOA Debt Management Committee Technical Advisor Deborah Cherney, Deputy General Manager, Eastern Municipal Water District Scott P. Johnson, Partner, State and Local Government Advisory Services, Macias Gini & O’Connell LLP

67 | emwd.org

2016 CDIAC Pre-Conference Issuer Perspective: How Are They Doing in the Wake of All This Change?

Debby Cherney September 20, 2016

68 | emwd.org

Overview

• Established in 1950
• Riverside County, California
• High-growth area
• Arid climate
• 555 square-mile service area
• Service area population of 795,000
• Full service agency providing

water, wastewater and recycled water service: – 145,000 water connections – 237,000 sewer connections

• Serving seven cities and

unincorporated areas

Imported Water 46% Ground- water 12% Desalter 6% Recycled Water 36%

Calendar Year 2015 123,087 AF

Source: EMWD 2015 Urban Water Management Plan

69 | emwd.org

Fixed $451.0m Synthetic Fixed $101.7m SRF $99.4m Variable $248.4m

Utility Debt

• $900.4 million outstanding as of

9/15/2016

• Senior Debt Ratings: AA+/Aa2/AAA
• Subordinate Debt Ratings: AA/Aa3/AA+
• Fixed/Variable/SRF/Synthetically Fixed
• Significant efforts in last three years to
• ptimize portfolio -- refundings & new

money

Senior $198.4m Subordinate $702.0m

70 | emwd.org

Land Secured Debt – Community Facilities Districts

• 75 Community Facilities Districts

formed since 2001

• $184.3 million in debt outstanding

– 60 CFD Improvement Areas

• 14,987 existing developed parcels
• Average par of outstanding

individual CFDs: $3.9 million

• Average par of outstanding Marks

Roos pools: $33.4 million

• Refunding savings totaled $15.6

million since 2013

– Highest average parcel savings $663 per year

• Expected market activity:

approximately 5 new transactions per year

Marks Roos 2016A $39.4m Marks Roos 2015A $19.4m Marks Roos 2013A1/A2 $51.3m Marks Roos 2013B $23.3M Individual CFDs $50.9m

71 | emwd.org

During the Deals

• Engagement of Financing Team

– Financial Advisors – Underwriters – Bond & Disclosure Counsel – Special Tax Consultants (land secured financings)

• G-17 Letters / Acknowledgments
• Disclosure
• Due Diligence
• Market Communications

72 | emwd.org

Disclosure Practices & Due Diligence

• Entire Financing Team is involved
• Broad-based Review of OS/Appendix A

– Fresh review every time – Virtually all departments are involved in our utility financing disclosures – Ongoing training and awareness – For land secured transactions, incorporating developers into the conversation

• Developers increasingly hiring their own disclosure

experts

• Due diligence calls are broader, take longer and have

more participants

73 | emwd.org

Communications

• Consistency across channels:

– Investor Relations website – Board/Committee agenda packages (publicly available) – Rating Agency presentations – Investor roadshows – POS/OS

• Analyst/Investor inquiries
• Property owners

74 | emwd.org

Contact Information

Debby Cherney Deputy General Manager Phone Number (951) 928-6154 Email: cherneyd@emwd.org

2016 CDIAC Pre- Conference Issuer Perspective: How Are They Doing in the Wake of All This Change?

Presented by: Scott P Johnson, CPA, Partner

September 20, 2016

• Board and Management Involvement with Internal

Controls and Risk Management

• The Finance Officer’s Responsibilities
• GASB Reporting Requirements
• GFOA Best Practices – Continuing Disclosures
• Audit Procedures for Financial Audit Assertions
• Best Practices Example - San Jose Procedures

I Issuer Perspective

• Renewed focus of Board and Senior Management on Risk

Management/Oversight

• Risk Management Philosophy and Risk Appetite
• Understanding the Organization’s Risk Management

Practices

• Performing a Risk Assessment and Identify Key Risk

Factors

• Developing a Risk Mitigation Plan

Boar ard d and M d Manag nageme ement I nt Invol volvem vemen ent t with th Inte terna rnal l Cont ntro rols ls and R d Risk sk M Mana nagem gement ent

• Proper use of bond funds for capital purposes
• Projects listed, or “Like” projects allowed
• Account for proceeds and project expenditures
• Make debt service and related payments
• Establish controls to ensure proper use of

proceeds

• Coordinating of project payments or bond draws

with the Trustee

• Financial Statements and Continuing Disclosures

The F e Financ nance e Office fficer’s r’s Resp spons

• nsib

ibili ilitie ties

An Ove An Overview of

• f Rec

Recent GAS GASB Stat ateme ements nts

No. Title Issued Effective for Periods Beginning After 72 Fair Value Measurement and Application Feb 2015 J une 15, 2015 73 Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 J une 2015 J une 15, 2015 * 74 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans J une 2015 J une 15, 2016 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions J une 2015 J une 15, 2017 76 Hierarchy of Generally Accepted Accounting Principles for State and Local Governments J une 2015 J une 15, 2015 77 Tax Abatement Disclosures Aug 2015 December 15, 2015 78 Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans Dec 2015 December 15, 2015 79 Certain External Investment Pools and Pool Participants Dec 2015 J une 15, 2015 * 80 Blending Requirements for Certain Component Units – an amendment of GASB Statement No. 14 J an 2016 J une 15, 2016 81 Irrevocable Split-Interest Agreements Mar 2016 December 15, 2016 82 Pension Issues an amendment of GASB Statements No. 67, No. 68, and No. 73 Mar 2016 J une 15, 2016 * * Statement has multiple effective dates; earliest required date is presented above.

• Pension Disclosures – GASB 68
• Financial Reporting for other Post-

Employment Benefits – GASB 74 & 75

• Fair Value Measurement – GASB 72

Spec ecifi ific G c GASB SB Repo porti rting ng Requi quire remen ments ts

GFOA BEST PRACTICES:Con Contin tinuin uing Disclo sclosu sure re

• Principal and interest payment delinquencies
• Non-payment related defaults
• Unscheduled draws on debt service reserves reflecting

financial difficulties

• Unscheduled draws on credit enhancements reflect

financial difficulties

• Substitution of credit or liquidity providers, or their failure

to perform

• Adverse tax opinions or events affecting the tax-exempt

status of the security

• Modifications to rights of security holders

GFOA BEST PRACTICES:Con Contin tinuin uing Disclo sclosu sure re

• Bond calls and tender offers
• Defeasances or the termination of the rights and interests
• f bondholders under terms of the bond documents
• Release, substitution or sale of property securing

repayment of the securities

• Rating changes
• Bankruptcy, insolvency or receivership
• Merger, acquisition or sale of all issuer assets
• Appointment of successor trustee

Exis istin ting A g Audi dit t Proced

• cedur

ures C es Consi nsider dered ed for F r Financ nancial ial Audi dit t Assert ssertion ions

Review of Controls:

• Inquire with management regarding the monitoring

process for bond covenants.

• Process to ensure punctual payments set forth in the

bond payments schedule.

• Tracking system to ensure sufficient reserves set forth

in the bond agreement.

• Proper books of record and accounts.

Bes Best Pract actice ices E s Exampl ample-San SanJos Jose Proced

• cedur

ures es

• Annual Debt Report Publicly Issued and Posted on-line
• Continued disclosure and on-going monitoring to

determine updates

• Bond Projects Reimbursement Procedures

– Submittal by sponsoring department – Documentation reviewed by Treasury/Accounting – Finance Submits to Trustee for reimbursement – Funds received and posted to finance system in appropriate project/fund – Accounting reflected in financial statements and included in City’s Comprehensive Annual Financial Report (CAFR)

Bes Best Pract actice ices E s Exampl ample-San SanJos Jose Proced

• cedur

ures es

(Continue

• ntinued)

d)

• GO Bond Program

– Subject to Audit by External Auditors – Audit and Program Reports reviewed annually by Public Bond Oversight Committee at a public meeting – Oversight Committee report submitted to City Council

• SEC and IRS Audits

Disclaimer

The views expressed in this presentation are those

• f the presenter and do not reflect the official policy
• r position of CDIAC, the Bond Buyer or Macias Gini

& O’Connell LLP (MGO).

Ques estions? Let’ t’s Tal alk.

Completion of Post Evaluations General Conference Next Door at JW Marriott

CLOSE OF PROGRAM