i.3.2.3 Responsibilities of Elected and Appointed Officials

It is generally understood that elected officials have an ethical duty to the people they serve. This duty arises whether the official is elected, appointed, or a member of a governmental agency’s staff. This ethical duty has been refined by court rulings with respect to elected officials to include the concept of fiduciary duty and loyalty. In Noble v. City of Palo Alto the court ruled that an official is “bound to exercise the powers conferred upon him with disinterested skill, zeal and diligence and primarily for the benefit of the public.”17 The court’s wording conforms very closely to the concept of a fiduciary as expressed in rules adopted by the SEC. See, for example, MSRB Rule G-42 addressing the responsibilities of a municipal advisor providing advice to a municipal client who “is subject to a fiduciary duty that includes a duty of loyalty and a duty of care.”18^,19 Elsewhere, the court has characterized the duties of a fiduciary as an “affirmative duty of utmost good faith and full and fair disclosure of all material facts” as well as an affirmative obligation “to employ reasonable care to avoid misleading.”20

The anti fraud provisions and prohibitions against making untrue statements or omissions contained in the 1933 Act and the 1934 Act apply to elected and appointed officials as much as to the governmental agency they represent. As discussed above, the SEC’s attention to municipal securities has resulted in 16 enforcement actions against individuals between 2013 and 2016.21 Many of these have involved fines or prohibitions against officials participating in municipal transactions. In the City of Harvey, Illinois, for example, the SEC acted against a sitting mayor with allegations that the mayor was a control person and that he signed disclosure materials and bond closing certificates that misrepresented to bondholders the actual use of the bond proceeds. The mayor was fined $10,000 and barred from participating in future bond sales. As a result of this ruling, public agency officials holding leadership positions may be expected to prove their “good faith” and lack of “direct or indirect” inducement of actions of others that violate securities laws.22 The SEC action against the Westlands Water District and two of its managers focused on the misrepresentations and omissions of data in its marketing materials for the sale of refunding bonds in 2012. The OS provided misleading information on the district’s debt service coverage in prior years. It was misleading because the district failed to disclose that it had performed some “extraordinary accounting transactions” to achieve the coverage it had promised to maintain in prior bond offerings. The SEC issued a cease and desist order against the district, the district’s general manager, and its assistant general manager from committing or causing any future violations of Section 17(a) of the 1933 Act. In addition the SEC fined the district $125,000, the general manager $50,000, and the assistant general manager $20,000.23