District Debt and Securities Laws in 2017:More or Less Regulation when Financing

Infrastructure?

John A. Eckstein, Esq.

Special District Association of Colorado

Keystone, Colorado

September 14, 2017

Fairfield and Woods, P.C.• An 83 year-old full-service Denver

law firm emphasizing M&A transactions and finance, tax, securities and business law, real estate, litigation and dispute resolution, and wealth management/ estate planning

• “A client is a friend with a problem.” - Chuck Beise (long-time F&W lawyer)

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I. General Introduction to Securities Regulation

• Federal statutes and State statutes – securities laws differ federal to state and state to state

• Securities Act of 1933 – registered offerings / exemptions / disclosures

• Securities Exchange Act of 1934 - created SEC and regulates trading in securities / broker dealer registration / exchange registration / disclosures

• Investment Advisors Act of 1940 - IA registrations and disclosures

• Investment Company Act of 1940 - IC registrations and disclosures

• Trust Indenture Act of 1939 - Regulates trustees of debt securities

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II. Definition of a “Security”

“any note, . . . bond, debenture, evidence of indebtedness, . . . or . . . in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, . . . receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing” [Section 2(a)(1) of 1933 Act]

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III. Background Regarding Municipal Obligations and Federal Securities Law

• Municipal securities exempt from registration requirements pursuant to Section 3(a)(2) of the Securities Act of 1933 and Sections 3(a)(12)(A) and 12 of Securities Exchange Act of 1934

• Why exempt (per Congress in 1933)?(1) Abuses in corporate securities offerings do not exist in

municipal securities offerings(2) Purchasers of municipal securities are sophisticated or

institutional inventors who do not need broad protections(3) There are “constitutional difficulties” in applying federal law to

municipal issues(4) Regulation would impair the ability of municipalities to borrow

• How true are these conclusions in 2017?

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IV. Background (continued)• Municipal securities offerings are subject to anti-fraud

provisions (Section 17 (a)) of the Securities Act of 1933 and negligence alone is sufficient for liability

• Municipal securities offerings are subject to anti-fraud provisions (Section 10(b)) of the Securities Exchange Act of 1934 and intentional/ knowing/ reckless scienter is necessary for liability

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V. Basic Municipal Bond Transaction

$ Bondproceedsfrom sale

Bonds, notes,or otherfinancial

obligations

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Bondholder(s)

Issuer (Special District)

VI. Bond Transaction (continued)• Special district issues bonds to finance (or

refinance) capital improvements-

• Purchasers of bonds generally include:– Banks or other financial institutions who purchase

bonds for their own benefit (private placements);– Underwriters who purchase bonds for resale to

others (private placements or public offerings)

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VII. Persons Involved In A Bond Issue

• Underwriter– Buys bonds from issuer

and resells to investors– Works with the issuer to

structure financing (negotiated sales)

– Markets the bonds• Municipal Advisor

– Independent from underwriter

– Assists issuer in evaluating funding sources/preparing RFTs for underwriter/counsel

– Assists in preparing Notice of Sale for public sales

• Bond Counsel– Law firm specializing in

municipal law and tax law– Drafts legal documents– Issues opinion that bonds

are validly issued and exempt from state and federal tax

• Disclosure Counsel– Law firm specializing in

federal securities law– Assists the issuer in

preparation of Official Statement

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VIII. Special Considerations For Municipal Issuers

• Municipal Securities Rulemaking Board (1975) (regulating municipal brokers and dealers)

• Tower Amendment (1975)“(1) Neither the SEC nor the Board is authorized . . . to require any issuer of municipal securities, directly or individually through a purchaser or prospective purchaser of securities from the issuer, to file with the SEC or the Board prior to the sale of such securities by the issuer any application, report or document in connection with the issuance, sale or distribution of such securities.”

• SEC Rule 15c2-12 (1989) (required underwriters to obtain, review and distribute to investors copies of issuer disclosure documents (amended and expanded in 1994, 2008, 2010)

• EMMA filings required effective July 1, 2009

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IX. Dodd Frank Wall Street Reform And Consumer Protection Act (eff. 7/21/10)

• Added municipal advisor registration, standards and duties

• Added municipal securities dealer regulation• Reconstituted the MSRB, added powers to

regulate municipal advisors, and directed the MSRB to protect municipal entities

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X. Bond Issuers as Victims versus Bond Issuersas Perpetrators

• Section 979 of Dodd-Frank Wall Street Reform and Consumer Protection Law (2010) established SEC’s Office of Municipal Securities “to administer the rules of the Commission with respect to the practices of municipal securities brokers and dealers, municipal securities advisors, municipal securities investors, and municipalsecurities issuers ….”

• LeeAnn Gaunt: since 2013 Chief of SEC’s Enforcement Division’s Public Finance Abuse Unit

• U.S. municipal bond market is $3.7 trillion in size; 75% of all municipal bonds are held by retail investors

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XI. Civil And Criminal Enforcement (2010 to 2017): Many “Firsts”

• SEC Division of Enforcement Public Finance Abuse Unit (established 2010)1) First imposition of civil penalties against municipal officials (San Diego, 2010)2) First civil action against a municipal issuer for failure to comply with 15c2-12

obligations (West Clark Community Schools, 2013)3) First charge of municipality for misleading statements outside of its securities

disclosure documents (Harrisburg, PA 2013)4) First bars on municipal officials from participating in further offerings (Allen

Park, MI 2014)5) First injunction filing to halt a bond offering (Harvey, IL 2014)6) First invocation of control person liability against a municipal official (Allen

Park 2014)7) First ever municipal bond criminal securities fraud charges against – public

official (Ramapo, NY 2016) (guilty plea, 2017)8) First ever federal jury trial against a municipality (Miami, FL 2016)9) First municipal issuer to admit wrongdoing in an SEC enforcement action

(Port Authority of NY and NJ 2017)

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XII. Municipalities Continuing Disclosure Cooperation Initiatives (2014-2016)

• 2014 – Announced favorable settlement terms for self-reporting violators of continuing disclosure agreements under Rule 15c1-12

• Underwriters (72) comprising 96% of market share for municipal underwriting settled (2015 and 2016)

• Issuers (71) settled (August 2016), including Boulder County, CO, State of Colorado, Thompson SD R2-5, required to establish written procedures and policies, have periodic training, update delinquent filings and certify compliance

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XIII. Where Is The SEC Today?

• No new enforcement actions against municipal issuers announced since December 2016

• Rule 15c2-12 new additional “event notices” proposed on March 1, 20171) Incurrence of a material financial

obligation or agreement to material covenants, events of defaults, remedies, priority rights, or similar terms

2) Occurrence of a default, event of acceleration, termination event, modification of terms or similar items which reflect financial difficulties

3) Compliance date would be three months after date of adoption

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XIV. Pronouncements For The Future

• Appointments of Commissioners and Division Chiefs• Dodd Frank rollback (“Financial CHOICE Act”) regarding

municipalitiesA. “Declawing” the Enforcement Division

1. Fewer administrative proceedings, removals to federal courts, changing standards of proof

2. Advance notice regarding “unlawful conduct”3. Loss of judicial deference4. Required coordinated investigations5. Limits on whistle blower awards

B. Move Office of Municipal Securities to Division of Trading and Markets

C. Approved by House June 8, 2017• Decreased SEC regulation and enforcement sua sponte

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Issues and Strategies Discussion

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Fairfield and Woods, P.C.John A. Eckstein – Director and Attorneyjeckstein@fwlaw.com303.894.4448

John A. Eckstein is the senior securities lawyer at Fairfield and Woods,P.C., an 84 year old full service Denver law firm, and leads itsinterdisciplinary securities compliance and regulatory group. He is theprincipal “cold review” partner for transaction and disclosuredocuments for all securities transactions, including municipal andspecial district bonds, notes and other government borrowinginstruments. Prior to joining this firm, he represented a large numberof special district and other issuers in Colorado and surrounding statesas special disclosure counsel. For several years he served as anationally recognized bond counsel and was a regular disclosurepanelist at the National Association of Bond Lawyers Bond AttorneysWorkshops in Chicago. He served as an adviser to the ColoradoSecurities Commissioner between 1988 and 1994 with regard toColorado’s adoption of several disclosure and registration laws forspecial district bonds. He has spoken extensively on the application bythe SEC of the 2010 Dodd Frank financial reform law to municipalfinance. Born and raised in eastern Iowa, he is married with two adultchildren and lives in Denver. He has practiced tax and securities lawfor over 40 years.

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Disclaimer

The information included in this presentation is for general informational purposes only, and is not intended to be relied upon as legal advice. Each financing is unique and depends upon its own facts. Should you require legal advice regarding a particular issue, we recommend that you consult with your district’s attorney.

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