other members of the public wish to speak? moving on to the consent calendar, previously, 10.1, not to 10.2, p to s have been severed, and seeing that no member of the public has asked for another to be severed -- president nolan: all in favor, say aye. all opposed? and we want to thank one person for coming. ms. boomer, next item. secretary boomer: can we call item 11 together? ok, item number 11, a discussion of the disclosure in due diligence. >> a set of bonds. this presentation this afternoon

is going to be done by sean tierney, who is the council from a firm, and the reason this is very important is because we have to make a pledge to the bondholders that we are disclosing all of the mta issues in our document so that their bondholders feel comfortable that we're being honest and forthright about our information, so the two gentlemen are going to walk through the legal requirements of this so you are fully aware of the implications of the bond issuance. we will turn that over. who goes first? mr. blake will go first. president nolan: good afternoon. >> i will take a moment here. i have some preliminary

comments first. commissioner, chair, the responsibilities imposed on the federal securities law on officials in connection of the authorization of debt in the capital market. i also want to thank another person for making this happen today. it is timely. i am mark blake, and i am a deputy city attorney. today, we are very pleasant -- pleased to have sean tierney from a law firm here, a national leader in this area. mr. tierney has an expensive -- extensive resume and the gray hairs to share for it and is an expert in the area of securities law. the law firm is also currently serving as disclosure counsel for the city and its principal adviser to the city and its

general fund department for securities law questions. our presentation today is in some sense part one of the board municipal securities disclosures training. this board has indicated will soon consider the issuance of bonds to achieve certain financial objectives for the s.f. mta, and we will review many of the same principles that we discussed today when that matter is taken up. the overview today concerns legal context in which the as 78 will borrow money from the capital markets -- in which the sfmta will borrow money from the capital markets. they are subject to provisions of the security law. when we offer bonds for purchase to investors, we are going to be deemed as speaking to the market. what this means in plain terms is that the city has potential

civil and criminal exposure would security laws. as well, the sfmta risks its reputation capital. of central relevance of us today is your responsibilities as board members in the chain of approval in the official statement. that is the document that will contain all of the materials, financial and operational information, that an investor will rely upon to make an informed investment decision. let me give you a little context. although municipal securities are not directly regulated by the united states securities and exchange commission, the sec does regulate the municipal market indirectly through its regulation of underwriters, broker-dealers, and other participants. it also does this by way of its

enforcement action and through public pronouncements. recently, the chair of the sec and certain of its commissioners have made an improvement to the securities disclosures packet for the court objected. in a july 15, 2009 s speech, the chairman, mary schapiro, stated more needed to be done to put disclosure of securities on par with the disclosure of corporate. i plan to work to request enhanced sec authority with respect to municipal securities disclosures so that investors in munis have the full complement of information they deserve about their investments. her comments were immediately followed by a more pointed speech on october 29 by commissioner walter entitled "regulation of municipal securities markets, investors

are not second-class citizens," where she states investors deserve the same level of high quality disclosure protection in the municipal market as they currently get in the corporate market and should not have to be forced to rely on good faith voluntary disclosure, and as an added benefit, i believe that improved municipal disclosure will give taxpayers a better idea of what their elected representatives are doing with their tax dollars. since then, there has been a steady drumbeat by the sec and others about perceived shortfalls associated with municipal securities disclosure practices. in the recent dodd-frank wall street consumer protection act, included in that legislation was the creation of an office of municipal securities that will report directly to the chair of the sec, and so what this makes clear is that the sec -- that

congress is becoming increasingly receptive to increased regulation by the sec and that more is certain to follow. to that end, staff, the city attorney's office, and outside disclosure council have established a process to assure the representation and the statements and the bishops' statement is accurate and not misleading. fair or not, the fcc reviews the boards as the final and responsible gatekeepers, so with that, we will go to slide one. the following presentation, we will address the applicable securities law. what is the law here? next, we will look at what the board will approve when it authorized the issuance of bonds, and finally, we will provide guidance to the board in terms of discharging, steps you

can take to discharge or legal responsibilities -- your legal responsibilities. we will answer a question you are all going to ask and give you guidelines to get comfortable with that question. sean will not taking to the first part of a presentation which is about the applicable law here. thank you. president nolan: good afternoon, mr. tierney. >> thank you. i will go back to the documentation. a few opening remarks. i think we're going to familiarize you with the applicable laws and documents in the process. i think that maybe one takeaway piece of advice is as government officials, you are familiar with the requirements for transparency in almost every

aspect of what you do, so i think in many ways, disclosure is similar to that. the securities market, investors. i think some of the ultimate advice is probably to encourage you to promote the culture of the disclosure, the disclosure practices. i think as board members, that is my advice. having said that, we are going to died in to the actual law here. the first slide -- ok. we are going to discuss the different contexts in which disclosure issues arise and the laws apply. the standards that apply, and various enforcement actions that need to be taken by the sec and private investors. ok. thank you.

interestingly, the sec has no direct jurisdiction over governmental entities in the same sense it does over private companies. private companies have to file a registration statement with the sec and are subject to detailed regulations that tell them exactly what they are supposed to disclose. in the municipal securities area, the primary lot you are subject to are the antifraud provisions. there is no detailed guidance, but you are still subject to the basic requirement of telling the truth and the whole truth to investors. however, the sec does have jurisdiction over the underwriters, the investment bankers who underwrite your bonds, and they have over the last decade or two exercised more specific control over municipal underwriting and

issuance by way of this jurisdiction. so, for example, the rules that require the underwriters to enter into an agreement with you that provides for certain types of ongoing disclosure and practices, you are subject to indirectly. so it is good to start with the idea of what is disclosure, when does it arise, when should you be thinking about whether the federal securities laws might be an issue. this breaks it down into three categories. the primary disclosure, that is what we are doing with now, doing more first bond issue, so we are drafting what is called an official statement with staff and professionals. that will go out to investors,

both as the bonds are being marketed, with everything material about the bonds and yourselves, and then a final official statement its printed after the bonds are priced. that is basically the final record of all of the material information about the bond issue, and you will be familiar with that probably more than you would like by that time. secondary market disclosure, this is an example of the indirect jurisdiction i mentioned. once a year, you will have to file an annual report. that will be in the repositories that are available for investors in the secondary market. you also have to file notices of certain material information, if something bad happened with response to your bonds. you would have to make that known to investors. there are specific events, the

most obvious would be default, a tax, if there was an issue with tax exemption, that would require a filing, and so on. and finally, the area that can present some gray areas is other types of communications. the federal securities laws apply whenever your communications might reach investors, and so anything from a press release, a discussion with a rating agency, material that is on your website, official reports that are produced regularly by the city, they are all potentially subject to the securities laws in a sense that investors look to them for information and rely on them, look at them possibly, and look at them in the context of about winning your bonds.

ok. so as i mentioned at the outset, there is one primary rule that applies from which sprouts all of the other details and obligations, and that is the anti-fraud provisions. the standard is defined in 10- b5. it is a pretty short standard, according to bob today, and when it comes down to is disclosing material facts and not omitting material facts. basically, tell the truth and tell everything that you should that an investor would want to know. as a principle, it is pretty straightforward. the challenge can be in the details and trying to figure out

how to put together good disclosure. a key issue of that is what is material. a lot of times we get asked, "how do we know what is material?" it is not a scientific process, but what the courts have made clear, and you should look at it from the perspective of the investor, not from your own perspective, in essence of what you consider to be material. "oh, this should not matter" or "this should not matter." that is where our most difficult discussions and judgment calls and frankly hard work in trying to draft things that are clear, not overly concerned, causing concerns, but getting for the

the things we think could be material. ok, so there is three ways that the s.c.c. carries out enforcement actions -- the sec carries out enforcement actions. unreasonable basis, where they take you to court, an issuer or other participants come to court for a civil charge. and on the criminal bases, where they bring in the department of justice. then it is also possible for others to bring causes of action. if they feel they have been harmed by buying the bonds, they can also bring claim.

ok, so, who are the enforcement actions against? basically, they have touched on everyone who has been involved in the bond issue. you know, the issue were -- the issuer, the individual board members, government officials and employees and all the third party professionals. they have all had charges and been written about in the reports and chastised and so on and so forth. to this date, no individual board members have been held liable. the orange county board did approve a settlement, and it was speculated that in san diego, there might be action against individual board members, but to date, no individual board

members. very few public officials have been held individually responsible, but there has been some of that in san diego. >> [inaudible] director heinicke. [laughter] director heinicke: certainly not. [laughter] that is what we will avoid. if you listen closely, hopefully. >> ok. i am going to touch on just a few of the major recent enforcement actions. i think it is useful just to kind of bring it home. you are probably familiar with these as they occurred. we are going to touch on the orange county, the city of san diego and the state of new

jersey, which is the most recent one. as you recall, orange county -- i mean, they ended up going bankrupt, so it was quite a mess. all the bonds, i think, were paid in full. some of the payments may have been delayed, but in some sense, the conclusion of the story was that everyone did eventually get paid. however, at the time, the county was running basically a significant part of its budget off of a derivative scheme, or they were investing in very dangerous investments that were working to generate a lot of revenues -- risky investments. all well and good except that none of it was disclosed. so really, that is what got them in trouble.

i mean, the investments themselves did not help because they crashed. all those investments started to go south. but what they got in trouble with with the sec was not disclosing that they had these investment schemes and that the budgets were relying on revenues from these investments. the report that was produced really started the current trend of focusing on the issuer's responsibility for the official statement, the board pose irresponsibility. the sec took a pretty hard line on the responsibility of the board, and the public officials, to have done a better job. the standard, basically, was a

recklessness standard for liability which was -- well, let's go back for a second. it is a two-step standard. do you know information that is either not in the disclosure or is not accurately provided or described? the story. -- sorry. and then, was the disclosure authorized in a way that was reckless with respect to that information? in orange county, it is in a sense of the facts or bad facts, however you look at it. that there was this giant scheme that was risky that never got disclosed, said the sec decided that the board and all

the relevant officials had to have known about the. certainly the treasurer and assistant treasurer did, and they were carrying it out, but others, and had the knowledge and acted recklessly in not making sure that got into the disclosure documents. it is somewhat of an extreme case as far as the facts go, but it set forward sort of the contemporary version of what the standards are and how they would apply to you. ok, i think we did that. so -- no, that is fine. sorry. in the report, they did take the position that the board should become familiar with the disclosure documents, question

the officials that are responsible, employees, and basically create -- take steps to ensure disclosure. ok. so the next bad case study, so to speak, is a san diego, and mark is particularly an expert on that. he was brought in to help clean up that mess, as were we. but sort of happen again. it was a little bit different from orange county. it did not eventually lead to a bankruptcy, but it was similar in the sense that there was an elephant in the room that investors were not told about. in this case, the pension issues with san diego.

the big pension liabilities that were growing because of benefits and underfunding and so on. and really inadequate disclosure. so this went on for a couple of years without anyone fixing it. it went through the rating agencies and in continuing disclosure filings, so it permeated everything they did. it certainly appeared to be a pattern. the fcc concluded again that that recklessness standard has been met, that the evidence showed that they had knowledge of the material information and

folks acted recklessly about not getting it in. so at least there is some consistency. more on the legal standard -- i think we have gone over that period yes, i think i went over that also. there were a variety of actions. many of these and up in settlements, if not almost all of them. there was an initial settlement that included the city itself. there was a subsequent settlement where actual officials were found liable and had to pay monetary damages. i think $25,000.

so that was kind of a first. it was the first time that officials had financial penalties. i think what we start to get out of this that is a little more helpful, i think, in the normal situation, where there is not some obvious bad information that is being committed, is there is a stress in this report on having adequate disclosure of controls in trading. san diego was found not to have had adequate disclosure procedures at the time they committed these acts, but subsequently adopted procedures -- and mark can touch on that because he helped put in this whole regime. that was the way they started to mitigate -- become good citizens and work their way

through the settlement. that has become a theme since it is what we do as disclosure council, and we are part of the disclosure controls and training process. that is sort of where we come in and help you to come up with those procedures, and we have drafted procedures for the city that were recently adopted and helping this board with this process. quickly, just to close it out, and i will turn it back over to mark, most recent was in new jersey. that was in 2010. interesting in a few ways. again, it was pensions, so similar in that sense to san diego. it involved dozens of bond issues that were found to have an adequate pension disclosure. the things that were a bit different about it -- it is the

first eight to be subject to sec enforcement action. it was also found on the basis of negligence, which is a lower standard than recklessness. sell it seemed, by some of us in the area, that it might be a sign of the sec's more aggressive enforcement stance -- taking on a state, taking on things that were negligent, which is a lower standard. at the same time, they stressed the disclosure training procedures, noted that the state adopted procedures, hired outside disclosure council, took these steps after the fact, unfortunately, but as positive mitigating factors that helped them get a better settlement. so there is a pattern there. i mean, on the one hand, do not

permit obvious material things. those are hopefully exceptional cases, but at the same time, to have procedures, to have put in controls that helped create this culture, if you will, of good disclosure. so i think i will wrap it up with that and turned it back over. >> before we go to the official statement, a couple of comments about san diego. i was working for the city of san francisco, and that is where the action was. in our industry, there are events that shaped san diego, and this was one. first, san diego spent approximately $50 million on ve