1. GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM ©2013 Greenberg Traurig, LLP. All rights reserved. Application of the Federal Securities Laws to Disclosures Made by Municipal Securities Issuers Michael Cafiso|cafisom@gtlaw.com| 602.445.8451

2. Greenberg Traurig, LLP | gtlaw.com APPLICATION OF THE FEDERAL SECURITIES LAWS BY THE SECURITIES EXCHANGE COMMISSION (“SEC”) TO DISCLOSURES MADE BY MUNICIPAL SECURITIES ISSUERS  Three principal contexts: 1.Primary disclosure  Official statement prepared by an issuer in connection with a new offering of securities to the public Examples:  March 2013 – State of Illinois (for actions in 2005)  Charged the State with securities fraud for misleading municipal bond investors about the State’s approach to funding its pension obligations  State disclosed pension holidays and other legislative amendments; did not disclose the effect of those changes on the contribution schedule and ability to meet pension obligations  SEC issued an order instituting settled administrative proceedings against the State 2

3. Greenberg Traurig, LLP | gtlaw.com  July 2013 – City of Miami, Florida (for actions starting in 2007)  Charged the City and former budget director with securities fraud in connection with several municipal bond offerings and other disclosures made to investors  False and misleading statements and omissions about certain interfund transfers in three offerings totaling $153.5 million; also included false and misleading information in the City’s fiscal year 2007 and 2008 CAFRs  Violated SEC cease-and-desist order that was entered against the City in 2003 based on similar misconduct. Civil monetary penalties against both the official and the City 2.Secondary market disclosures  Rule 15c2-12, promulgated under the federal Securities Act of 1934, applies to underwriters and does not apply to issuers  Underwriters cannot offer an issuer’s securities unless they have reasonably determined that the issuer will provide the required secondary market disclosures  Continuing disclosure agreement – issuer will provide specified annual financial information (audited financial statements and update the type of information in official statement) and make disclosure regarding certain specified events 3

4. Greenberg Traurig, LLP | gtlaw.com Example:  July 2013 – West Clark Community Schools (Indiana) (for actions in 2007)  Charged the District and its underwriter with securities fraud for falsely stating in an official statement that the District was in compliance with its continuing disclosure obligations, when in fact it had not made any continuing disclosure filings in the years preceding the bond issue  Charged the issuer with violation of Rule 10b-5 (scienter-based) as well as Section 17(a)(2) (negligence-based). Use of the scienter- based charge underscores serious nature of the violation. See discussion below 3.Releases or statements by an issuer or its officials that are reasonably expected to reach investors and the trading markets  Websites, rating agency presentations, press releases, public statements by issuer officials and responses by issuer officials to inquiries from the public 4

5. Greenberg Traurig, LLP | gtlaw.com Example (first ever of its kind):  May 2013 – City of Harrisburg, Pennsylvania  Charged the City with securities fraud for misleading public statements in the City’s budget report, annual and mid-year financial statements, and a state of the City address, while its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated  As part of the Harrisburg settlement, SEC released a 21(a) Report. Three key points: 1.Public officials should be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors, and should understand that these public statements, if they are materially misleading or omit material information, can lead to potential liability under the antifraud provisions of the federal securities laws 2.Because statements are evaluated for antifraud purposes in light of the circumstances in which they are made, the lack of other disclosures by the municipal entity may increase the risk that municipal officials’ public statements may be misleading or may omit material information 5

6. Greenberg Traurig, LLP | gtlaw.com 3.In light of this potential liability, public officials who make public statements concerning the municipal issuer should consider taking steps to reduce the risk of misleading investors. Such steps include adopting policies and procedures that are reasonably designed to result in accurate, timely, and complete public disclosures; identifying those persons involved in the disclosure process; evaluating other public disclosures that the municipal securities issuer has made, including financial information and other statements, prior to public dissemination; and assuring that responsible individuals receive adequate training about their obligations under the federal securities laws 6

7. Greenberg Traurig, LLP | gtlaw.com  Remember, there is no general obligation to disclose all material information. The disclosure requirements only apply when in a primary offering period or if a specified material event set forth in a continuing disclosure agreement has occurred  Although municipal securities are exempt from registration, the antifraud provisions of the federal securities laws do apply in all three of the contexts described above. Rule 10b-5 of the 1934 Act “unlawful for any person … to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ….”  Actions for violations of Rule 10b-5  SEC can bring an administrative action (before an administrative law judge of SEC), a civil action in federal court, or can refer a case to the Department of Justice for criminal proceedings  SEC can also issue a report pursuant to Section 21(a) of the 1934 Act 7

8. Greenberg Traurig, LLP | gtlaw.com  SEC has to demonstrate under Rule 10b-5  That there was a materially misleading misstatement or omission,  Such misleading misstatement or omission was made or omitted with scienter (fraudulent intent or recklessness) “Recklessness” = “an extreme departure from the standards of ordinary care and which presents a danger of misleading [investors] that is either known to the defendant or is so obvious that the actor must have been aware of it.”  such misleading misstatement or omission was made in connection with the purchase or sale of a security  SEC may also bring an action against an issuer under Sections 17(a)(2) or 17(a)(3) of the federal Securities Act of 1933. For purposes of such actions, SEC must simply show negligence instead of scienter 8

9. Greenberg Traurig, LLP | gtlaw.com  A private plaintiff can also seek damages under Rule 10b-5  In addition to the three elements of any SEC action, must also show damages and reliance on the misleading disclosure  As described above, SEC can bring specific types of enforcement actions, such as administrative or civil actions or a criminal referral to the Justice Department. In the context of municipal securities, SEC can bring such enforcement actions against  The governmental issuer of the securities,  Individual members of the legislative body of the issuer (has never happened-yet),  Government officials and employees  Third parties, such as underwriters, financial advisors, and bond counsel 9

10. Greenberg Traurig, LLP | gtlaw.com  Trends  Taken together, I think [two recent SEC actions – Harrisburg and Victorville] make an additional point worth stressing. Although cities and municipal issuers are distinct legal entities, in fact they act through individuals. And they meet their primary and continuing disclosure obligations under state and federal law through the conduct of public officials. So when we find material misstatements or omissions by public officials in connection with municipal securities, WE CAN, SHOULD, AND WILL TAKE ACTION TO HOLD THE APPROPRIATE PUBLIC OFFICIALS ACCOUNTABLE. (emphasis added) May 2013 SEC Commissioner Gallagher  City of South Miami has a population of 11,000 and West Clark Community Schools has a staff of 400 and a student population of 4,500. Both were the subject of recent SEC actions – size and sophistication have not made a difference.  Recent actions by SEC directly or indirectly relate to the absence of disclosure practices and procedures. Remedial measures involving retention of a consultant over a multi-year period to prepare such practices and procedures and report on their implementation has been a factor in SEC’s agreements to settle cases 10