City Council - Special Meeting

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Appreciate everybody being here today. Uh, I'm going to go ahead and call this uh, meeting to order. Could we have a roll call, please? Putin, EPS, Chapman, Gil, yes. Hampton, here. Weaguer Williams

okay thank you thank you for that roll call uh the mayor and the mayor pro Tim won't be able to be here today uh they had some prior responsibilities they had to take care of uh there is an order of business that we have to take care of Tim please pursuant to our council policy 16 when the mayor mayor pro Tim are not here the uh most senior council member calls the meeting to order That that was Councilman Hampton. That's been done. So, at this point though, uh the council that's here needs to make a motion to elect a fellow council member to preside over the meeting. Could I get a motion, please? So moved. What was motion? What was the motion?

The motion is that you step in as acting chairman for this meeting. Okay. Thank you. Have a second. We have a second and vote, please. Hon Gell certainly Hampton yes weer yes Williams yes

okay thank you and that motion passed unanimously uh with that uh we'll go ahead and uh go to item number one receive training from the city's disclosure council on the city's disclosure responsibilities related to the city's issuance of bonds and etc. Under the federal securities law, including securities and exchange commission guidance for council members, overview of disclosure procedures and disclosure standards and distinction between liability of the city and liability of the individual council member. U Brian Garzion

Garzion Brian Garzion, sorry, sorry about that, Brian. Brian Garzion will be speaking for us, but I'm going to hand it over to Tim. Please, Tim. Thank you, uh, Councilman Hampton. Uh, just before we begin, so the audience and and council members will be aware, we we have a council policy 29, which is municipal dis uh, securities disclosure policy. And and that policy requires every two years that we have training for staff and for the council. Uh, this morning, uh, staff had its training and so this afternoon is is training for the council. And and why this is important is because the city as as as as a governing body, we we issue geo bonds uh that voters approve and those geo bonds are placed on the market and investors have a chance to purchase those bonds and as part of that process there's there's disclosure responsibilities when when we go on the market and and staff works to to adhere to those responsibilities, but also there's responsibilities for the governing body too. And so Brian Garzion is our disclosure counsel. Uh he's out of Washington DC and he's going to be giving a presentation this afternoon to the council on on our disclosure policy and how it affects uh the the elected officials. So at this time I'd introduce uh Brian Brian Garcia.

Thanks. Thanks Tim. Thank you everyone for being here today. So, you know, as Tim mentioned, you what we're going to do here is we're going to go through this slide presentation and set forth disclosure responsibilities uh under the federal securities laws. Um this um presentation sets forth at least, you know, initially just a reminder of what the key city disclosures are. uh when the when the city is um either entering the market to sell bonds such as the preliminary and final official statements and then some other uh what what we'll call secondary market uh disclosures that happen periodically throughout the year while the bonds are outstanding. Those would be the audited financial statements of the city and certain annual reports and material event notices that are required to be posted on on a periodic basis based on a contract called the continuing disclosure agreement. Um each of those items I just mentioned are filed on a um a website that collects municipal securities data uh that's called EMA um and that's a national um document repository uh that that houses all of this information um and that's part of the continuing disclosure agreement will require posting on on that website. Um some other documents there listed um speak of closing documents and other presentations. Those may be used for purposes of selling the bonds, but they're not

posted on that document website that I mentioned. So speaking of uh the official statement, the official statement is the document that the city will use to sell bonds to investors. And as Tim mentioned, those are often prepared in connection with the city's general obligation bonds. Um and those documents are prepared by the city and then provided to investors. um an investor needs that information um to decide whether or not to buy the city's bonds. And in that document will be a comprehens comprehensive presentation of all factors that could affect the ability or willingness of the city to pay principal and interest on the bonds when due. So as we put together the document, we know what it has in it. It's all the information. It talks about the bonds, what is the security for those bonds, how will they be repaid. It has in it all this information about the city, um the financial condition of the city, some information about the demographics of the city, um other budgetary information about the city. So that all that information is compiled into the official statement. So who's involved in in in in putting it together? Um the city council will approve the official statement. The mayor signs the official statement and the disclosure working group which consists of individuals that we were talking with this morning uh approves the form and the content of the official statement. city management and staff. Again, part

of the training that we did this morning, they will be providing the information needed to draft the document. And then there'll be third parties involved, financial advisors, bond council, underwriters, if there are underwriters on a deal, uh their council and disclosure council as well. So, you know, you know, now that we're, you know, we're we're giving this presentation this afternoon to the city council and, you know, what what goes into a city council action with respect to an official statement. So, you know, a typical city bond ordinance will say something to the effect that uh the the official statement pertaining to the bonds uh is hereby approved. Um so you know when doing that the city council is deeming the the official statement to be um hereby approved you know in in the content attached to the ordinance. Um essentially what that means is that the official statement is true and correct as of its date um and does not have any untrue or misleading information included in there. Um what that means for purposes of of the official statement is that the document that you all see um and approve um is what ends up being sent to the investors. Now, there may be a situation where um the official statement has some information that needs to be filled in, some pricing information, some information about um the interest rates or a bond yield, that stuff that may come in after um council approves it. But that um those are things that we we call pricing data. um that comes in as of the pricing date

which will often happen after the approval of the official statement. So just a little overview of the training. We're going to talk about the basis for approval of official statements, the SEC's guidance for council members. Uh we'll talk about the disclosure procedures and the disclosure training. Um and then we'll distinguish the liability of the city uh with respect to uh information included in the official statement and the liability of the council members themselves. Then we'll briefly get into disclosure standards and defense to liability. So the SEC and and please uh if anybody has any questions as I go, please please feel free to jump in. Um the SEC has uh some limited jurisdiction in the municipal securities arena. Um securities before they're sold um would need to be registered with the SEC. Uh and that applies to all securities unless there is an exemption. Uh municipal securities have one of those exemptions. So the the whole securities registration regime doesn't apply, but what does apply is this concept of anti-fraud provisions. Uh and we'll get into a little bit of that in a moment. Um what is regulated more directly is um the activities of the broker dealers or underwriters and certain advisors. Um, so that that's something to keep in mind that the SEC has direct regulation over certain participants in a deal, but they don't have that direct regulation

authority over the issuer uh such as the city itself. Um, this is this slide sort of refers back to what we talked about in the beginning. Um the disclosure contexts mean um sort of when this disclosure is made, right? Primary disclosure is when the bonds are first sold. That's the preliminary and final official statement when you're speaking to the investor presenting the uh the bonds to be sold, the project that they will projects that they will be supporting, and they'll make a decision on whether or not they want to buy those bonds. The secondary market or secondary disclosure concept is while the bonds are outstanding things that the city agrees to provide on an ongoing basis and those would be the continuing disclosure agreements uh entered into pursuant to rule 15 C212 which we'll talk about later. Um and any voluntary filings that there's there's there's no uh limitation as to voluntary filings. So if the sea decides that there's something that the market should consider uh it can do that away from any requirement. And then there's this concept of uh information that is reasonably expected to reach investors. That's sort of the SEC's catchall for lots of different statements that could be made by the city or its officials. Rule 15 C12. This is a rule that is regulating underwriters directly. Um, and those underwriters who are being regulated by this will pass this some of this regulation on to issuers um through

a contract. And that is um where where you'll enter into the continuing disclosure agreement. Um, and that allows the broker dealers to comply with this rule. Essentially what what the underwriters are required to do is determine that the city will provide that um annual information and notice events where all the bonds are outstanding. Um the concern would be um if the city were not to comply with its ongoing continuing disclosure obligations, underwriters may not be able to uh reach a reasonable determination for future bond offerings. So the ongoing compliance with respect to the the continuing disclosure agreements is very important for purposes of maintaining access to the capital markets.

Question. Sure.

With the uh Councilman Waguer here. Um with regard to the audits, you made mention of the audits and their impact on the issuing of the bonds. How great of a role does that play? Just so we understand. Yeah, I mean it's it's it's a piece of information that is um attached to the most recent audit would be attached to the official statement um and considered by uh investors when making a decision to buy to buy a bond. Um, so in terms I'm

so a current a current audit will get you a higher interest rate than a audit that would be behind. Correct. Um, well no I mean I think it would have the opposite. I mean so interest rates you know from the city's perspective you want the lowest you can get. Um so it kind of works in the opposite way. Yeah, you're you're you're h having a current audit and being um up to date on continuing disclosure would theoretically have um would theoretically have a uh the an effect to lower the the city's interest rates for borrowing. Thank you.

Um yeah. Um, so there's, you know, in terms of we, you know, the rule 15 C212 talks about the continuing disclosure obligations of of the city. Um, and we talked about how that would uh translate from what is in the official statement to something that's provided on an ongoing basis. A disclosure standard is conceptually something that applies whenever the city speaks to the market. Um that could be with the primary offering document of the preliminary official statement or it could be through continuing disclosure filings as well. And what this disclosure standard is is telling us rule 105 is the one that folks here uh are most familiar with. Um, and this has to do with um making it unlawful for any person to make an untrue statement or omit to state a material fact whenever they're selling a a security. essentially you must be providing true statements and you can't omit something that was uh you know a material fact necessary to make the statements in the document not misleading. So essentially what you're talking about here is making sure that whenever you're using a document for purposes of speaking to the market that it has true statements and doesn't omit uh material information. Um what is material? That is something that is uh derived from case law uh through SEC enforcement actions.

um something is deemed material if there's a substantial likelihood that a reasonable investor will consider it important to an investment decision. It's a lot of words uh for for for something as as brief as quoteunquote material. Um but essentially it can be boiled down to would the investor want to know this before decided to buy the bonds. And that is not always the easiest thing to point out uh in advance. It has to be something that you examine under the facts and circumstances of that particular issuer and particular matter that you're considering. If the SEC does bring an action, um they can bring it against the issuer itself. they can bring it against individual members of the city council. That one is uh what I would call theoretical. We have no um examples of that to date, but it is a theoretical possibility. Um the SEC could bring an action against government officials and third parties. So if we're looking at this slide, the first bullet and the third and fourth bullet, we have several examples that we can point to where the SEC brought actions against those individuals. With respect to members of city council, we haven't had one of those. We have had one example where the SEC uh provided some guidance on how members of a governing body can protect themselves. and we're going to get into that in a few slides. Um, just as a brief overview of what a litigation could be from the SEC side,

it could bring an administrative proceeding. That is um what most of their cases are. Um those are uh quasi civil proceedings. So, uh, the first two sub bullets there, administrative and civil pick up, you know, 90% of the SEC's litigation. They can bring criminal actions. Those would be brought by the Department of Justice after a referral from the SEC. There's also a theoretical possibility of private plaintiff actions, but they are very rare and infrequent. So if there were to be a U SEC enforcement action, it's going to be one of these items here on this slide. You were a 10v5 action under uh the 1934 acts. The SEC has to prove intent or recklessness there. Harder for them to prove those. So most often the SEC brings section 17 um actions under the 1933 act. Those um referred to here as A2 and A3. All the SEC has to show there is negligence. It's a much lower standard and it's it's it's much easier for the SEC to succeed in those proceedings. So most of the cases are 17 A23 negligence cases. But as I mentioned, we have one SEC matter to draw from when it comes to guidance from members of a governing body. And this had to do with the Orange County um Orange County, California case from from several years ago now, 1996 or we're pushing uh 30

years. The Orange County case involved essentially um a bankruptcy for the county and it was a um a source of uh lots of market turmoil at the time and the SEC focused very very closely on who knew what and when. Um the Orange County report that came out after the uh investigation was over uh basically said, "Well, while we're not taking any action against the members of the governing body, here's some useful guidance on how to protect yourselves." So even though uh that case did not result in any charges against the members of the governing body, Orange County is often cited to this day um as the uh you know the the main piece of authoritative guidance on how to really steer clear of the SEC when it comes to matters or members of the legislative body. Um, Orange County report told us in in two places that the the it reminded us public official may not authorize disclosure that it knows to be false. Alluding back to what we talked about in the beginning city bond ordinance says, you know, the the that the city council is approving hereby approving disclosure the official statement. So, you can't authorize something that you know is is false. Okay, that's that's pretty pretty clear, right? Um, but you may not authorize disclosure while recklessly disregarding facts that indicate there is a risk that the disclosure may be misleading. That's a

little messier um of a standard. Um, so we have to probably focus a little bit more on that second bullet than the first. to what is what is acting recklessly. So the the Orange County report told us that public officials ha if they have knowledge of facts bringing into question the issuer's ability to repay securities you they have to they have to raise them if if if if you don't raise them then that could be evidence of acting recklessly. Um also another another example was failing to take steps appropriate under the circumstances to prevent the information um that that that to prevent the OS from being distributed with that false and misleading information in it. So if they know something is is incorrect in the official statement, they have to take steps to to prevent that document from getting out. So, um it's it's essentially a two-prong test of do you know something and have you raised it? Um and then if you haven't, that's when we run want a foul of the guidance here. So the the guidance that they gave us, the SEC gave us in the Orange County report was, you know, if it what can we do? Essentially, we we don't we everyone would be in agreement that we don't we're not trying to act recklessly. So what can we do? um the steps that you can take to become familiar becoming familiar with the disclosure documents and then questioning the issuers the officials employees and other agents

about the disclosure of certain facts. So essentially becoming familiar with the document before it's mailed before it's approved and then asking the the financial staff can you can you uh elaborate on certain items in the document and how you were to reach those conclusions. So the reality is that the city council needs to have some alternatives. um they can read the official statement as a whole and get get familiar with it, comfortable with it, ask questions if they need to, or they can establish reasonable reliance on the financial staff, um the folks that we mentioned earlier who received the training this morning. Um, you have to, not withstanding establishing that reasonable reliance, you have to make sure the city council could be aware of something that the financial staff is not aware of. And if that is the case, they should, you know, there should be some discussion about how to raise certain issues with the financial staff or the disclosure working group in order to make sure that those matters are flushed out. Um and then what we're going to talk about next is this reasonable reliance concept and how that can be implemented and that's the disclosure process and the disclosure policies and procedures. Um, what one one of the things that we'll want to stress here is that the disclosure process is meant or the disclosure policy, excuse me, are meant to establish this reasonable reliance on the staff and the folks who do the leg

work to in preparing the official statement. So that's the policies and procedures that we have in place or the city has in place establishes the disclosure working group and it creates created this position called the disclosure coordinator and the disclosure working group is listed there uh this this this second to last bullet supervisor of financial services uh has been eliminated. So that's uh no longer a member of the working group and we're going to revise the policies to reflect that. One of the one of the things that the policies mandate is the training for city staff and council. It's it's conducted conducted every other year. Um part of the policy is this appendix A which lists a variety of disclosure documents and and and that's meant to be a broad definition so that this whole universe of disclosure documents is reviewed by the disclosure working group on a regular basis before those items are either published or provided to investors. There's also an annual review of effectiveness of the policy and that's meant to make sure that the policies that you have are being followed and if they aren't, if there's something that's not working, those can be revised. Um, the worst case scenario would be you have policies, something goes wrong, the SEC looks at your policies and say, "Why didn't you do these things?" you know, that's sort of a um, you know, probably that's a bad fact that you wouldn't want to have. So, the idea of an annual review is to make sure that

what you have works for you and that you're following them. So for city council they can act you should be thinking of you know certain oversight questions when you're providing that approval of an official statement those questions here on this slide you know you ask yourself you know am I satisfied that the process followed in preparing the document um are reasonably designed to produce accurate reliable information. Do I have reasonable basis to have confidence in the integrity and competence of those members of the working group of the disclosure working group? Do you know of anything that would that would cause you to have any questions about the accuracy of the disclosure? Um if there you know any risk that the disclosure is um you know misleading. Um and are there Are there any red flags? So, you know, certain things like labor negotiations, litigation, pension funding, those are all examples of things that have come up in SEC enforcement actions. Um that sometimes city council may know or know about um developments in those areas before the working group does. And if there is something like that um have you raised it with the working group. So in summary um you know one of the things just to take you know as a takeaway is remembering that there are various context of disclosure. It could be the primary offering document and it could be continuing disclosure documents filed

annually or periodically. They could be voluntary filings and they could even be certain certifications uh relied upon by tax uh bond council for tax exemption purposes. just, you know, recognizing the the how how varied the um disclosure context can be. Brian,

yep. U one of the council members asked me a question on on your presentation about uh what we're talking about uh about disclosing information and is that the lack of dis you know failing to disclose information or disclosing too much information. and when we're talking about so I'm I'm posing that he asked me to pose that question to you.

Sure. Sure. So, I mean, I think um for the most part, we're talking about um not disclosing um where there's an absence of disclo disclosure. um those types of areas when there is enforcement action, the SEC is is much uh has a has a much easier job when something happens and they hold up an official statement or a disclosure document and say, "Look, you didn't mention this thing at all." Um it you know in that same vein you there can be a scenario and I don't I'm not thinking of one off the top of my head from an enforcement action but at least a theoretical concept could be that there's too much information in here and the investor is just inundated with information and actually as a result of that is unable to really focus on the key items it needs to focus on when detering whether or not to purchase a bond. So, um you know, I think I wouldn't want to say that, you know, the the standard should be disclose everything under the sun. Um because there could be a you know the concept of having too much information could result in um not having a focused enough document for an investor. But mo most of the time a you know the vast majority of the time we're dealing with um disclosure issues that have arisen from lack of disclosure. Um on this slide u just a summary of the standards. Again we're dealing with

materiality. If something isn't material it's clearly not material. it's not an issue um because what we're dealing with is materially misleading information or material material omissions from a document. So if there is a determination that this is so minor that it doesn't warrant disclosure that's fine. Um, so just something to keep in mind. It isn't everything. It has to have there is a standard. Materiality is the standard, but it's just not a bright line test where I can tell you this is always material and this is never material. It has to be under the facts and circumstances. But if something is determined to not be material, there there really doesn't need to be anything in the document about it. Um the legal standard for the SEC is to in order to bring an action they're going to have to prove one of these three negligence, recklessness or intent. Most of the cases I me as I mentioned are negligence CA cases because that's a lot easier to prove. Recklessness and intent are similar um and they're harder. You know, there has to be most of the time those cases have to go to a judge or a jury for a factf finding of that type of level of um thought in terms of the recklessness or the intentional fraud. Um very infrequently those cases will have settlements when they're they're that high of a standard. The negligence cases oftentimes will start out as a complaint and a challenge by the defendant to say, "I didn't do anything wrong." And there'll be a settlement of the negligence standard uh under the negligence standard once they realize

that that it's fairly easy for the SEC to prevail. So what steps um can city council take? Uh the steps are you know what what steps did the city does the city have to approve uh and implement disclosure best practices. Um talk about the framework for council review and approval of disclosure documents. um the processes and guidelines estab to establish a defense to the charge of uh negligence or recklessness. Most mo like I said mo most often it would be a negligence defense that you know policies and procedures in and of themselves have been used as an example by the SEC in a variety of enforcement actions as defenses to the negligence charge. So in a couple of uh SEC enforcement actions there will be a settlement with let's say an underwriter and in the settlement papers there will be a discussion about why the issuer had not been charged or part of this settlement. In some in a few in a few instances that summary will say the issuer is not part of this proceeding because they had policies and procedures in place and that established their defense to a charge of negligence. So there there have been several um SEC enforcement actions with that fact pattern in it. That's the end of end end of the presentation. Um I'd be happy to take

any further questions that folks have. Okay. Is is there any questions further questions from from the council? Yeah, Brian, we want to thank you for taking your time to bring us this real important information. Uh it certainly is a meaningful and something that we'll we'll we'll really take to heart. I also want to thank any of the other people that had a part in bringing this information to us. Uh I know that it takes time to do this. Um uh the council does anyone else have any questions uh or comments? Okay. Uh go ahead, Tim.

Brian, just real quick, I want to again also thank you for the presentation this afternoon. I'd like to say to the council that uh the continuing disclosure obligation that the city has is something uh city staff takes very seriously u with with the council policy that Brian mentioned uh that that you have approved as a council. Uh we we certainly do our due diligence. Uh we we meet as necessary when we're doing these offerings. We go through the data each year. uh the working group meets when we have to do our continuing disclosure update obligations and and we we do that and and we take it extremely seriously. We have a uh continuing disclosure coordinator as Brian's mentioned that's Cindy Augustine. That's one of her main jobs is is to make sure our filings are done timely and and to work with uh Emma. Uh we'll work with DAC. That's another company that we hire that helps us with our filings. We also want to again thank Brian because he uh his law firm Hawkins Delfield this is one of the main things they do and they are one of the experts in this area and and he helps us when when we're doing uh reviewing preliminary official statements and when we have questions we will certainly reach out to him and and just so you know that we do take this very seriously.

Okay. Uh thanks again Brian and everybody else. Uh I need a motion to adjourn. Second. Second to call the role, please. Putin, Gil, yes. Hampton, yes. Weer, yes. Williams, yes. We stand a journ. Thank you everyone. Thank you, Brian. Byebye.