Chapter 6. Securities Laws Pertaining to Municipal Debt
Municipal bonds, notes, certificates of participation, and similar obligations sold to investors (“municipal securities”) are generally subject to federal and state securities laws.105 While generally exempt from the registration requirements of the federal Securities Act of 1933 (the “1933 Act”) and the California Corporations Code, they are subject to securities law disclosure rules, commonly referred to as “anti fraud rules.” Public agencies issuing municipal securities must ensure that prospective investors are provided the information they need to make an informed investment decision. A municipal issuer may rely upon the assistance of professionals to prepare disclosure documents and perform the underlying analyses that support statements made in these documents. The primary responsibility, however, for the accuracy of the information provided to investors is the public agency’s. As the U.S. Securities and Exchange Commission (SEC) made clear in its action against the City of Miami in 2003, the public agency “does not discharge this obligation by the employment of [professionals]. Municipal issuers have an affirmative obligation to know the contents of their securities disclosure documents, including their financial statements.”106 Governing board members, officers, and staff can be held personally accountable for violation of the SEC anti fraud rules.
Other participants in municipal debt offerings are also subject to securities law requirements. See Section 6.2, Roles and Responsibilities of Other Financing Participants. These requirements may condition an issuer’s access to the public capital markets on the underwriters’ ability to comply, thereby indirectly regulating public agency borrowers. Underwriters of municipal debt, for example, are required to obtain from “obligated persons” a commitment to provide continuing disclosure to the market. See Section 6.1.3, Secondary Market Disclosure.
The SEC has in recent years, moreover, taken an increasing interest in the municipal securities market and the activities of municipal issuers, advisors, and dealers. As a result, public agencies and their officials are at risk of sanctions, including monetary fines, for violations of securities laws. See Section 6.1.4, SEC Enforcement Actions.
In a public offering, the disclosure vehicle is generally an Official Statement (OS). The OS describes the terms of the debt, provides information on the public agency borrower and its financial condition, discloses other risks, and includes other information likely to be of interest to investors. The OS is generally delivered to prospective investors in preliminary form as a Preliminary Official Statement (POS) in advance of the formal offering.
STANDARDS OF PERFORMANCE FOR PROFESSIONAL SERVICE PROVIDERS –
The relationship between the issuer and members of the financing team, including underwriters, municipal advisors, and attorneys, is subject to various legal and administrative standards. The Municipal Securities Rulemaking Board (MSRB) regulates both underwriters and municipal advisors that bring municipal securities to the market. MSRB Rule G-17, known as the “fair dealing” rule, sets out specific requirements the underwriter must comply with when communicating and working with municipal issuers. Rule G-17 requires underwriters to deal fairly with municipal issuers and investors at all times.107 However, the underwriter maintains an “arm’s length” relationship with the issuer (See Section 6.2.1, Municipal Advisors and Underwriters). This means that they are on opposite sides of the transaction and the underwriter may make decisions that are in the underwriter’s best interests rather than the issuer’s.
As of June 23, 2016, municipal advisors are required to follow the standards of conduct in MSRB Rule G-42 on Duties of Non Solicitor Municipal Advisors. Subject to MSRB Rule G-42, the municipal advisor is a fiduciary and owes the public agency a duty of care and a duty of loyalty. As a consequence, the municipal advisor must place the interests of the issuer above its own.
Attorneys, subject to the professional responsibility standards of their license, must pursue the best interests of their clients in the case of municipal securities, the public agency within the limits of the law and the attorneys must disclose conflicts of interest or causes that would keep them from doing so.