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 investigations and lawyers defending city council members.

they were barred from entering the securities market. they did a series of private placements that cost them on the borrowing side of things, and, as john indicated, for the first time, staff members -- the sec imposed fines and penalties on staff members, again, ramping up in connection with my earlier comments, ramping up the pressure. there was a recent "wall street journal" article maybe two weeks ago with the sec indicated that for the first time that it was going to start proceeding negligence claims versus simply -- i think before, they had pretty aggressively gone after intentional or reckless behavior, but now, they have set up for the first time they are going to go after negligent behavior. my take from that is back -- is that the public sector is an easier target than the private sector. we have less resources to bring to bear to defend ourselves,

and, quite frankly, it was just not politically tolerable. i say that to say that we need to be politically mindful here, and we are trying to develop a delivered a process to make sure nothing happens. let's go quickly through the official statement. again, the official statement is a document by which the sfmta will solicit investors to lend money. it will reflect the official statements about the payment date interest rates call provisions, sources of repayment, the financial position of the mta and its operational constraints. it will also identify financial challenges that the mta faces. here is the big take away -- bad information is not bad. i think investors appreciate that all entities, all organizations face financial challenges, labor issues, fuel

constraints, whatever. what they want to know is how are you managing? they want statements that prove that you are managing your fiscal challenges. so this is the document, however, that in the chain of documents that you will receive -- you will get an indenture, a purchase contract, resolutions to review, but the official statement is the document that you should spend quite a bit of time on reviewing. next slide. so the guiding principles -- no misleading statements or omissions. pretty self-explanatory. we get into this debate a lot about whether this is a marketing document or a pre- litigation defense-oriented document. in my view, it can serve both purposes in addition to your financial statements, and i do not know what other reports that the sfmta produces, but this

will become a centerpiece to the investment market but also to your constituents about your activities and how well you are managing your challenges. finally, i would like to say in this regard, it is,sfmta -- it is the sfmta's document. this is your story. in reviewing it, make sure that it tells the tale that you want to reflect. basically, the document should contain actual, verifiable information in a clear and understandable manner. i think that is the key point. observation one -- the sec and investors have exquisite 20/20 hindsight. that means that that fact that you -- well, we do not need to

talk about that, that will be the key thing that a claim is made that should have been disclosed. we want to disclose everything without, obviously, burdening somebody in a blizzard of information. then, our decision point on whether to disclose or not to disclose -- well, look at observation one. remember, the sec can impose civil penalties and make recommendations to the doj. i did not mean to overemphasize that, but i do not mean to minimize it, either. my experience in san diego tells me that decent people that were trying to do the wrong thing had their careers ended by simply a lack of attention. i have been trying to carry that message here, and we will see

how it goes. in any event, this is the official statement. material information is what we will include. the investor is the centerpiece of this. we will tell our story. we will tell a story about what we are financing, risk factors associated with that. obviously, you could have a fall-off in mta revenues, but the big risk factor is seismic -- a calamity event. that is the real big one, at which held that, and our disclosure there runs across -- you know, is consistent across all of our enterprises to the city. so financial information, litigation. so what we would like you to do in reviewing the official statement is to the extent that you have knowledge in your capacity as board members about a particular area, per ruse that

area and make sure it comports with your understanding of events. so if it is always in trouble about whether you have to read the whole document, the document will be 100 or so pages, and, no, our guidance is you only have to read the relevant portions of that document, so we can -- we will walk you through -- when we approved a bond issue, we will walk you through the official statement, pointing out to the areas where we think board members might have a particular expertise. said the basic increase that should be laid out in your staff report and that you should be able to answer for yourself after reviewing the staff report and the official statement is -- what is the purpose of the bond issue? what is the source payment of the bonds? what are the risks that the source of payment may be

insufficient? are there any factors that could propose a material risk to the issuer's financial position? those are fundamental questions that every board member should be able to answer, and we want to create a record in the approval process that we have walked through those basic questions. those questions are kind of the floor and would probably regret any challenge of negligence or recklessness. and then here are other questions that you might ask, and this is just the starting point. there may be others. this is not an attempt to create an exhaustive list, but these are a start point. as well, we will agree to provide continuing disclosure to bondholders. that is, over the life of a bond issue, we will agree to provide financial and operational data

on an annual basis. at some level, you can rely on staff in that, but that is a piece of the process here. so here's the question that ultimately comes up -- "can i just rely and you folks?" that is the staff. in other words, you have not reviewed the documents presented to you. the answer is yes, you can rely on staff, but your alliance has to be reasonable. ok? and so one way of laying a foundation for reasonable reliance is to conduct some level of oversight -- either annually or every other year, to make sure that the disclosure process is the row, is efficient, has maintained some

level of internal controls, that your professionals are experienced in expertise and that there is a process that occurs for evaluating the work of professionals. so if you will put in place an oversight function, i think then, at least, you are in a better position of relying on staff, as i think you are entitled to do. one of the efficiencies here is that the sec has not made clear the extent to which a board member can discharge its responsibility, so they will never say that you have to read the whole document. they will not tell you specifically what you need to do because it is kind of a facts and circumstances test, so we struggle with the precise guidance, but i do think that if you conduct be said oversight, have sonali throughout how

rigorous process is -- if you conduct decent oversight, understanding foundational questions, and with respect to red flags, if you get a briefing on a significant issue, it is in the bond approval process. where did you folks describe that and outlined that? it is a red flag type of issue? the other thing is -- are there things that we may not know about as staff that you know about as board members that you should bring to our attention? that is the other area that you are solely responsible for, those things that you might have gotten a briefing on that, quite frankly, we would not know about. with that, i think i would