Relevant Laws: Securities Laws

January 28, 2015 by Enzo Incandela, Associate | James M. Snyder, Partner
Adherence to federal and state laws is a required component of any bond issuance for the borrowing to be binding and legally valid. Below is a sampling of current laws governing the borrowing activities of school districts.

1. Rule 10b-5. Rule 10b-5 of the Securities Exchange Act of 1934 (the “Rule 10b-5”), states that:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any national securities exchange,
(a) To employ and device, scheme or artifice to defraud.

(b) 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, or

(c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. §240.10b-5. 

Rule 10b-5 sets out the general statement of federal intent to protect investors against misleading statements or omissions of important facts in official statements or other documents pertaining to the bond issuance. Full disclosure for bond purposes means disclosure of all information material to investors. Recent SEC enforcement actions and a speech from an SEC commissioner indicate a vigorous enforcement initiative on bad disclosure practices targeting issuers and their officials. Issuers should adopt “best practices” to protect themselves and their officials from antifraud provisions including, but not limited to, hiring of disclosure counsel, which is a law firm typically representing the issuer on disclosure issues, and the adoption of effective disclosure policies and procedures that ensure appropriate disclosure. Based on recent enforcement actions against big and small issuers (ranging from large states to small local municipalities), claiming “small unsophisticated issuer” as a defense may not be viable.

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