p. post-issuance tax compliance p. fgfoa webinar “bond market updates: continuing disclosure,...
TRANSCRIPT
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FGFOA Webinar
“Bond Market Updates: Continuing Disclosure, Private Use, Record Retention and other Post-Issuance
Compliance”
May 19, 2015
Presented By: Erik Dingwall
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Erik DingwallMay 21, 2015
CONTINUING DISCLOSURE
BLX Group LLC 4010 West Boy Scout Blvd.
Suite 280 Tampa, FL 33607 ph: 813-872-6147 fax: 813-872-7295www.blxgroup.com
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WHAT IS MUNICIPAL CONTINUING DISCLOSURE?
S.E.C. Rule 15c2-12
• Requires two types of disclosures
‒ annual reporting of financial information and operating data (including the audited financial statements)
‒ material events
• Type of financial and operating data to be disclosedvaries according to bond issue type
• Type of financial and operating data to be discloseddetermined at the time the bonds are issued
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RULE 15C2-12 (JULY 1995)
• Underwriter (broker/dealer) required to get a written commitment from Obligated Person
• Commitment to disclose annual financial information or operating data generally of the type included in the OS including audited financial statements
• Provide notices of eleven material events and failure to file
• Continuing Disclosure Agreement/Certificate
• Bonds cannot be purchased or sold without this commitment
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RULE 15C2-12 (DECEMBER 2010 AMENDMENTS)
• Elimination of the VRDO Exemption
• Additional Event Notices added to original 11 Events
• Timing for submitting Event Notices - Certain notices to be filed no later than ten (10) business days following the occurrence of the event.
• Filing with Respect to Adverse Tax Events - The Amendment revises this provision to include adverse tax opinions, the issuance by the IRS of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security.
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LISTED EVENTS
Events that require notification within ten (10) business days
• Principal and interest payment delinquencies
• Unscheduled draws on reserve
• Unscheduled draws on credit enhancement
• Substitution of credit or liquidity provider or failure to perform
• Adverse tax opinion, the issuance by the IRS of proposed or final determination of taxability, adverse tax opinions, or Notices of Proposed Issue (IRS Form 5701-TEB)
• Defeasances
• Rating changes
• Tender offers
• Bankruptcy, insolvency, receivership, or similar event of an obligated person
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LISTED EVENTS
Events that require notification, if material
• Nonpayment related defaults
• Modification to bondholder rights
• Optional, contingent or unscheduled bond calls
• Release, substitution or sale of property securing repayment of bonds
• Merger, consolidation, acquisition, or sale of all or substantially all of the assets of an obligated person, other than in the ordinary course of business, and the entry into or termination of an agreement to undertake such action
• Appointment of a successor trustee or change in name of a trustee
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Continuing Disclosure Requirements
Pre - MCDC• In August 2010 in Release No. 34-62184A, the SEC clarified and reinforced
its view of the obligation of an underwriter to consider the obligated person’s record of compliance with prior continuing disclosure undertakings (“CDU”) when recommending a security
• The SEC has made it clear that the underwriter cannot rely solely on representations by an issuer or obligated person as to its compliance with continuing disclosure
• The underwriter must conduct its own investigation and make an independent judgment concerning the issuer’s compliance (look back is 5 years)
• Failures discovered by the underwriter may be disclosed in the official statement for the new bond issue
• Failures in compliance may result in a written policy assigning key personnel or retention of an outside consultant to assist in the preparation of annual reports and event notices
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Continuing Disclosure Requirements
Overview of MCDC• In March 2014, SEC announced its Municipal Continuing Disclosure
Cooperation Initiative (“MCDC”) program
• voluntary program to self-report instances of material misstatements made in official statements regarding an issuer’s prior compliance with continuing disclosure undertakings
• Available to issuers, obligors and underwriters
• Deadline to self-report has past
• September 10, 2014 for underwriters
• December 1, 2014 for issuers and obligors
• Favorable settlement terms for entities – known penalties
• Penalties are related to entities - Individuals are not protected under MCDC
• Scope of MCDC review entailed reviewing statements made in official statements issued within the past 5 years and determining if such statements regarding the issuer’s prior 5 year continuing disclosure compliance contained an material misstatement
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Continuing Disclosure Requirements
Overview of MCDC• Review continuing disclosure filings to determine CDA compliance
• Many issuers, obligors and underwriter’s retained third parties to assist in the review process
• Process of reviewing prior compliance uncovered numerous instances of failures (late filings, missing event notices, etc.)
• SEC provided no guidance on what noncompliance would be considered “material”
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MCDC - PROBLEMS ENCOUNTERED
• Review process is not simple
• Multiple repositories
• Access to NRMSIRs
- underwriter have better access to NRMSIRs
- Obligors have the “evidence”
• DisclosureUSA.org limitations
• Bloomberg “upload” date vs. when actually received date (delay)
• CUSIP linking
• EMMA - archived documents
• Multiple annual report due dates
• Dissemination agents may not file timely
• Issuer filings do not clearly indicate if such represents the Issuer’s 15c2-12 continuing disclosure requirements (e.g. CAFRs)
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CONTINUING DISCLOSURE REQUIREMENTS
p. 12 What Can Issuers Do Today?• Develop Policies and Procedures
Responsible Individuals / Disclosure Team
Create a template/spreadsheet reflecting the following:
name of bond issue / CUSIPs outstanding
annual report / quarterly reporting due dates
financial information and operating to be provided
list of event notices
list of parties (trustee, insurer, rating agencies, etc.)
third-party data
review of EMMA after posting are made
Consider use of third-parties to assist in monitoring compliance
Utilize EMMA automated reminder system of approaching deadlines
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CONTINUING DISCLOSURE REQUIREMENTS
p. 13What Can Issuers Do Today?
• Voluntary Disclosures (work with counsel)• Consider whether to include information beyond what is specified in the
CDA If necessary to make what is filed not misleading. The SEC has
stated the 10b-5 requirement that disclosure be accurate and complete (i.e., do not omit any information if inclusion of such information would change the nature of what has been presented) applies to annual filings
If desirable to maintain favorable relationship with investors• Consider preparing a separate Annual Disclosure Report
follow template/checklist identify each item specified in CDA and/or identify location of each
item if referencing to another documents (i.e. audits, budgets, CAFRs, etc.)
easier for third-parties (bond counsel, underwriter’s counsel, underwriter, financial advisor, etc.) to determine compliance
Place CDA items at the end of the CAFR
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CONTINUING DISCLOSURE REQUIREMENTS
p. 14 What Can Issuers Do Today?• New Financings
Consider retaining a third-party to review prior 5 year continuing disclosure requirements thorough review process better at navigating through EMMA can assist underwriter with its obligations to review continuing
disclosure compliance (especially for competitive deals) efficient and cost effective
• Annual Historical Compliance Review Consider preparing an “annual historical compliance report”
identify possible failures and corrections of such failures less time/cost for review for new financings
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CONSEQUENCES OF FAILURE TO COMPLY
• Must disclose such failure in future Official Statements for the period of 5 years following the failure
• Suits or remedies may be brought by bondholders who claim they would have not bought, sold or held the security had the information been provided when agreed
• Misleading or omitted information may lead to securities fraud
• Including only the information specifically required under the continuing disclosure agreement may not be deemed sufficient to satisfy the requirement and could result in securities fraud under 10b-5
• Non-disclosure of events occurring between the end of the fiscal year and the filing date could result in securities fraud
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MARKET DEVELOPMENTS – SEC ENFORCEMENT
• Increased attention to continuing disclosure compliance
• SEC studies have identified inadequacies in municipal disclosure practices
• SEC enforcement division has launched a number of investigations with respect to disclosure
• For the first time, the SEC charged an issuer and underwriter with falsely stating to bondholders in an official statement that the issuer had been properly providing annual financial information and event notices in connection with a prior bond offering, when if fact, it had not
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Alan BondMay 21, 2015
POST-ISSUANCE TAX COMPLIANCE
BLX Group LLC 51 West 52nd Street New York, NY 10019 ph: 212-506-5200 fax: 212-506-5151www.blxgroup.com
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p. “Post-issuance tax compliance begins with the debt issuance process itself and provides for a continuing focus on investments of bond proceeds and use of bond-financed property. It will require identifying existing policies, the responsible people, the applicable procedures, and the affected population”
After the Bonds Are Issued Then What?
Advisory Committee on Tax-Exempt and Governmental Entities
What is Post-Issuance Tax Compliance
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p. IRS Focus on Post-Issuance Tax Matters
• The average tax-exempt bond issue is outstanding for 25-30 years
• Issuers and conduit borrowers must comply with federal tax rules for the life of the original bonds and any refunding bonds
• Easy for foot faults and errors to occur or for borrowers to lack requisite records and detailed information to rebuff IRS in an audit challenging the tax-exempt status of bonds
Post-Issuance Compliance Overview
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Why is the IRS focused on post-issuance compliance?• IRS is looking to ensure that the federal subsidy provided by
the interest exclusion on tax-exempt bonds is properly applied• Interest exclusion cost to federal government estimated to be
approximately $200 billion in Fiscal Years 2008-2012
Post-Issuance Compliance Overview
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Why should you care about the IRS post-issuance compliance initiative?• Failure to comply with the federal tax requirements will
jeopardize the preferential tax status of those bonds• Defending tax-exempt status of bonds in an IRS audit is
expensive, stressful, and time consuming• Tarnish reputation in credit markets• Financial settlement to protect bondholders can be costly
Post-Issuance Compliance Overview
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Elements of an Effective Post-Issuance Compliance Program
1. Designation of tax compliance point person(s)2. Continuing education and training for individuals responsible for
post-issuance compliance3. Tracking and allocating the expenditure of bond proceeds4. Monitoring the investment income and arbitrage compliance
restriction5. Monitoring the use of bond financed property6. Periodic review of management contracts, other facility use
agreements, and research contracts by experts in tax matters 7. Addressing changes in use of bond financed property through
self-help remediation and VCAP8. Recordkeeping and retention policies and procedures 9. Periodic compliance reviews/ongoing communication with outside
tax specialists10. Written policy and procedures relating to post-issuance
compliance
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Policies and Procedures
Evolution of IRS Written Policy Inquiry• Compliance Check Questionnaires• IRS Form 8038-B – new issuance of BABs (Rev Jan 2010)• IRS Form 8038-TC – new issuance of Tax Credit Bonds (Rev
June 2010)• IRS Form 8038 – new issuance of Private Activity Bonds (Rev
April 2011)• IRS Form 8038-G – new issuance of Governmental Bonds (Rev
Sept 2011)• IRS Schedule K (for nonprofit organizations) – 2013 version has 3
separate questions• Questions regarding written procedures have become much more
explicit• Internal Revenue Manual provides that issuers and borrowers with
written post-issuance compliance policies and procedures will be given a more favorable settlement during VCAP
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Policies and Procedures
Do you have written policies/procedures in place?• When implemented?• Who is responsible?• Are they being reviewed annually to keep them relevant
Importance of Written Policies• Demonstrates taking post-issuance compliance responsibilities
seriously• Assigns responsibility for certain tasks and responsibilities to
specific individuals or departments• Provides you with a compliance framework in which to work• Memorializes processes and activities to aid in the event of staff
turnover• Reduces risk of IRS winning willful neglect case
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Policies and Procedures
What should be included in a Policy?• Designation of post-issuance tax compliance point
person(s)• Tax-exempt bond tax law compliance requirements
including:– Documentation– External counsel/advisors– Investments/role of trustee– Arbitrage and yield restriction– Private use of bond proceeds– Identification and correction of violations– Expenditures– Final allocations
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Policies and Procedures
What should be included in a Policy? (continued)• Record keeping requirements• Annual review and training• Frequency of internal compliance checks
Important to review annually and update as necessary
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Record Retention
What records must be maintained?• Documents related to the bond transaction (entire transcript)• Documents related to post-closing elections
‒ Bond Year Selection‒ Retro-Active or Selective Application of Regulations
• Documents evidencing any investment of bond proceeds‒ Trust Bank Statements‒ Internal Records (expenditure detail)
• Documents evidencing expenditure of bond proceeds• Use of bond financed property by public and private sources• Sources of payment or security for the bonds• Arbitrage Reporting – Rebate and Yield Restriction
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Record Retention
What records must be maintained? (continued)• Section 6001 of the Internal Revenue Code requires the
retention of records to support tax positions taken• If not supported, the IRS can draw its own conclusions based
upon the information presented• Records must be maintained by:
‒ Issuers‒ Conduit Borrowers‒ Bondholders
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Private Use Monitoring
Governmental Bond Requirements:• At least 90% of the proceeds of the bond issue must be
used for governmental purposes• The 90% requirement is increased to 95% in certain
circumstances. See Tax Certificate for details • Aggregate private use generally cannot exceed the lesser
of 90%, 95% or $15 million
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Private Use Monitoring
Basic Tax Analysis in Governmental Bond Financings • Are the bond financed assets used by members of the
general public?• Does a party other than a State or Local Government
agency or department have a “special legal entitlement” to use the bond financed assets?
• Private business use can arise under a management contract even if the assets serve the general public
• Use of bond financed assets by a charitable organization (e.g., a Section 501(c)(3) organization) will generally give rise to private business use
• Contracts with the federal government will generally give rise to private business use
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Examples:
• Lease of bond financed space to a for-profit entity
• Certain management contracts
• Naming rights
Private Use Monitoring
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Private Use Exceptions
Management Contract Guidelines – IRS Rev. Proc. 97-13 and IRS Notice 2014-67
• Provides framework for contracts with non-employees/outside providers for various services involving the use of bond financed property
– Considers term and fee structure
• Contracts with non-employees– Professional corporations– Cafeteria operations– Outsourcing of certain operations to third parties
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p. Short term use exceptions:• In certain circumstances, if < 100 days of use• In certain circumstances, if < 50 days of use
‒ Depends on user profile and terms of contract
Private Use Exceptions
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p. Incidental Contracts or Arrangements
• Small physical use of spaceATM, kiosks, vending machines, laundry
facilities
Cannot exceed 2.5% of proceeds or space of facility
• Contract for services supporting organization activities
Janitorial services
Equipment repair
Billing activities or similar services
Private Use Exceptions
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Examples of Potential Private Use of Bond-Financed Property
• Cafeteria Contracts• Gift Shops• Non-Employee Contracts • Outside Parties• Leases of Property• Food Court
• Starbucks• Certain Parking Agreements• Short-Term Use of Space
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p. Fundamentals
• Identify property financed by each issue of outstanding bonds• Was the original bond issue refunded? If so, by what bond
issue?• Who uses that space? How much space are they using and for
how long? Is there any private use?• Did you “allocate” equity to any portion of the facility?• What records support the allocation of bond proceeds and/or
equity to that facility?
How to Measure Private Use
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How to Measure Private Use
4 Primary Methods
• Square footage• Time of use• Time/space analysis• Revenues
Under the applicable tax regulations, the measurement of private use must be reasonable. Determining what method is most appropriate may require professional judgment.
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How to Measure Private Use
Private use identified at the time of issuance of the bonds
• Step 1: Quantify the expected private use• Option A: Contribute equity or other amounts to projects to
cover private use• Option B: Allocate private use to “bad money portion” of the
bond issue, if possible
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How to Measure Private Use
Monitoring private use after the bonds are issued:• Step 1: Review use of bond-financed projects and
applicable third party agreements annually• Step 2: Calculate private use per bond issue
‒ Establish that less than 10% of bond proceeds are privately used
‒ For the entire period that the bonds are outstanding
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p. Various “self-help” remedies are available in the event of the violations relating to:
• Limits of use of tax-exempt bond proceeds
• Investment of tax-exempt bond proceeds
• Use of bond financed assets
Identification and Correction of Violations
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p. Remedial actions include:
• Defeasance of a portion of the bonds
• Using the disposition proceeds from the sale of the bond financed asset for another qualified purpose
• VCAP – Voluntary Closing Agreement Program
Identification and Correction of Violations
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p. • Remove risk of non-compliance and associated hazards• Generate efficient and prompt response to any IRS
inquiry• Easy and cost-effective review process at time of
refunding• Identify remaining portion of bond proceeds allowed for
private use• Provide historic analysis of post-issuance compliance for
outstanding tax-exempt debt• Memorialize institutional memory in cases of staff
turnover
Benefits of an Effective Post-Issuance Compliance Program
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Erik Dingwall
BLX Group
813-872-6840
Contact Information
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