A legal liability theory the Securities and Exchange Commission's muni chief has suggested might apply to joint powers authority members has come under fire from at least two California JPAs, with an attorney for one of them calling the idea, at least when it comes to that state, "far-fetched."
The debate is important because JPAs are plentiful in California, and if a JPA member – such as a city or county – can be held liable as a "control person" for the actions of a JPA, that could have implications for JPA members across the state.
The SEC would have a hard time "proving even one, let alone all, of the requirements necessary for 'control person liability,'" one of the two JPAs, the California Municipal Finance Authority, said in a letter to the Contra Costa County Board of Supervisors.
The Aug. 24 letter, signed by CMFA Executive Director Edward Becker, urged the board to postpone considering resigning the county's membership in CMFA and in the other JPA, the California Statewide Communities Development Authority.
"Our attorneys are confident that the applicable legal standard makes clear that it is highly unlikely that such liability could be imposed on a member of a JPA," Becker said in CMFA's letter.
But while staff removed the item regarding the two JPAs from the board's Aug. 25 agenda after receiving public comments – including a letter from State Treasurer Fiona Ma – indicating opposition to the proposal, the board on Sept. 15 voted unanimously to terminate county membership in the two JPAs.
A staff report issued prior to the vote that recommended withdrawal from membership in the two JPAs said "the SEC has alluded to potential 'control person liability' of JPA member agencies for the conduct of the JPA pursuant to the Section 20a of the Securities Exchange Act of 1934."
The report referenced comments that Dave Sanchez, director of the SEC's Office of Municipal Securities, made regarding potential control person liability during The Bond Buyer California Public Finance conference in 2024.
"Municipal entities might also consider whether control person liability may be applicable to member agencies for inaccurate representations by the JPA about its finances, project approval process, operating structure or conflicts of interest," Sanchez said according to a text of his October 2024 remarks available on the SEC's website.
Control person liability "arises in situations whereby liability is shared between all persons who directly or indirectly control a person or entity that violated the Securities Act," the staff report said.
"In this context, the SEC appears to be suggesting that the member agencies of the conduit-issuer JPA may have such liability because those member agencies have the ability to direct or influence the actions of the conduit-issuer JPA," the report said.
OMS contacted the county on Sept. 30, 2025, "requesting a meeting to discuss the role that the county plays in the oversight of Joint Powers Authority (JPA) activities, specifically that of conduit-issuer JPAs," the staff report said.
"This follows several years of the OMS raising concerns regarding the oversight of JPAs by member agencies, such as cities and counties, given that bonds issued by conduit-issuer JPAs have some of the highest default rates in the country," the staff report said.
Additionally, "many of these JPAs have led the emergence of certain deal structures, including so-called 'workforce housing' deals, that have filed a high number of material event notices that may suggest potential economic difficulties or future defaults," according to the staff report.
"Based on the evolution of concerns regarding the structure of conduit-issuer JPAs, as well as more focused remarks by the SEC regarding the application of Securities Act liability provisions to member agencies of conduit-issuer JPAs, staff recommends that the Board of Supervisors terminate the county's membership in CSCDA effective immediately and terminate its membership in CMFA," the staff report said.
However, CMFA's letter said that for control person liability to apply to the county, the SEC would have to prove that the county "controls" CFMA in its bond sale process and that the JPA committed a securities law violation. In addition, the SEC would have to overcome the county's "good faith defense," provided for in the law, by demonstrating that the county didn't act in good faith or demonstrating that the county directly induced the acts that constitute the securities law violation, the letter said.
The county doesn't "control" CMFA's bond issuance process, the letter said.
"While a majority of its members can control the CMFA indirectly, the only control an individual member can exert over the CMFA bond issuance process is to veto the bond issue in the first place," Becker's letter said, adding that "CMFA controls the process entirely from there."
With regard to the SEC having to prove a securities law violation by CMFA itself in order to impose control person liability on a CMFA member, the letter said that, as a municipal issuer, CMFA is exempt from most securities law requirements.
"The primary exception is the requirement not to defraud investors in its bond disclosure," Becker's letter said. "In over 1,000 bond issues, the CMFA has never been accused of a securities law violation."
The difficulty the SEC would have in proving even just one – let alone all – of the requirements needed for control person liability "likely explains why the SEC has raised this argument in a municipal bond enforcement action only once, to our knowledge," CMFA's letter said, adding that in 2015 the SEC claimed that the mayor of Allen Park, Michigan, was liable as a control person for Allen Park's alleged securities violations.
"Without admitting liability, the city and the mayor settled with the SEC, meaning this case is not binding legal precedent," CMFA's letter said. "However, the mayor of a city clearly has more control over the city than the county or any other member of CMFA has over the CMFA. Membership in the CMFA is structurally very different from the situation in Allen Park."
In an Aug. 24 letter to Contra Costa County board members and the county administrator, CSCDA Executive Director Felicia Williams said there was "no need for the county to withdraw from CSCDA as the county incurs no risks or liabilities as a member." Williams' letter referenced an attached letter from Roger Davis, a partner at Orrick, Herrington & Sutcliffe LLP.
"Some personnel" of the SEC "have made informal comments, at conferences and other forums, suggesting that members of a JPA have responsibility to provide oversight of the governing board of the JPA and its operations," Davis said in the attached letter.
"At least insofar as California JPAs are concerned, such suggestion runs afoul of the character of JPAs as a separate legal entity and how they are governed under California law," his letter said.
All JPAs in California are created under the California Joint Exercise of Powers Act, which "authorizes two or more public agencies to enter into an agreement to jointly exercise any powers common to the contracting parties or provided by the act," the attorney's letter said.
The act doesn't give members any oversight responsibilities "and, in entering into the agreement, members did not reserve any such rights or responsibilities to themselves," the letter said.
Consequently, "there does not seem to be a legal basis for SEC's suggestion, at least with respect to these California JPAs, that members have such an oversight responsibility," Davis said in the letter.
"This means that any suggestion that such members have 'control person liability' is even more far-fetched," the Orrick attorney said in the letter.
Still, it appears that other issuers are thinking about the topic of control person liability.
An Aug. 12 official statement for bonds issued by the California Enterprise Development Authority noted as a risk factor that the SEC, on at least one occasion, "has suggested that city and county members of conduit issuer joint powers authorities could incur 'controlling person' liability for inaccurate representations about finances, project approval process, operating structure or conflicts of interest."
The SEC's role is to protect investors, CSCDA's Williams said in comments to The Bond Buyer Tuesday.
"This 'theory' could put investors of billions of dollars of California project bonds at risk," she said. "We are hoping for some engagement or clarification from the SEC so we can work together to identify any concerns."
