post-issuance compliance for bonds alaska government finance officers association november 17, 2015...
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Post-Issuance Compliancefor BondsAlaska Government Finance Officers Association
November 17, 2015
Marc Greenough, [email protected] Levesque, [email protected]
Tax Law
• Private Activity• Arbitrage
Private Activity
• Private use and private payment• 10% use of bond proceeds (5% unrelated)• Measured over life of bonds, with $15 million cap
Private Activity
• Building use generally measured by space• Equity may be allocated to private use• Management contracts must be qualified
Private Activity
• Ownership or unqualified management contract• Lease, preferential use or naming rights• Federal government or nonprofits
Private Activity
• General public use not in trade or business• Uniformly applied rate schedule• Qualified management contracts• Certain short-term and incidental use
Arbitrage
• Earnings on investment of bond proceeds
• Earnings on investment of certain restricted funds
• Rebate of excess earnings
Post-Issuance Compliance
IRS Form 8038-G
43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations (see instructions), check box . . . . ▶
44 If the issuer has established written procedures to monitor the requirements of section 148, check box . . . . ▶
Post-Issuance Compliance
• Designate officer to ensure continuity of attention
• Prevent or avoid violations
• Early discovery of potential violations
Post-Issuance Compliance
• Enables timely exercise of remedial action
• Waiver of 50% penalty on late rebate payment
• Favorable treatment under IRS VCAP
Post-Issuance Compliance: Private Activity
• Include in job description
• Educate users of property
• Ensure procedures can be used
• Implement timely and periodically
Post-Issuance Compliance: Arbitrage
• Spend bond proceeds first
• Deplete debt service fund annually
• Monitor debt service reserve funds
Post-Issuance Compliance: Arbitrage
Records to keep:• Bond transcript• Purchases and sales of
investments of bond proceeds and earnings on investments
• Expenditures of bond proceeds
Securities Law
• Rule 10b-5:
Full and fair disclosure
• Rule 15c2-12:
Official Statement
Continuing disclosure
Rule 10b-5
Unlawful, in connection with the purchase or sale of securities in interstate commerce, (a) to employ any 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.
Full and Fair Disclosure
• Speaking to the market• Release of information that may reasonably be
expected to reach investors
Full and Fair Disclosure
• Materiality: Objective standard• Substantial likelihood that, under all the circum-
stances, a fact would assume actual significance in the deliberations of a reasonable investor
Rule 15c2-12: New Issue Disclosure
•Applies to public offerings >$1 million•Prior to purchase, underwriter must obtain and review official statement
Official Statement
A document prepared by an issuer of municipal securities that sets forth information concerning the terms of the proposed issue of securities, including financial information or operating data concerning such issuer and those other entities, enterprises, funds, accounts, and other persons material to an evaluation of the securities.
Rule 15c2-12: Continuing Disclosure
•Applies to public offerings >$1 million•Underwriter must obtain undertaking to provide disclosure
•Annual disclosure of financial information and operating data
•Timely disclosure of listed events•Official statement must disclose past noncompliance with prior undertakings
Continuing Disclosure: EMMA
EMMA (emma.msrb.org) Is Your Friend
SEC Enforcement
• Increased initial and continuing disclosure• Protection of individual investors• Regulation of states as issuers• Enforcement in the absence of defaults
SEC Enforcement: Case Studies
• New Jersey
• Harrisburg
• South Miami
• West Clark
• Allen Park
Case Study: New Jersey
• No written policies for offering documents• Pension accounting not disclosed:
One-time use of mark-to-market and subsequent use of five-year smoothing
• From 2002 to 2007, UAAL grew to 100% of payroll
Case Study: Harrisburg
• Near bankrupt and under state receivership• No continuing disclosure: information vacuum• Statements in budget and financial reports
Case Study: South Miami
• Tax-exempt bond-financed public/private parking• Subsequent revisions to lease violated tax law• No procedures to ensure continuing compliance
Case Study: West Clark Community Schools
• OS: In compliance with prior 15c2-12 undertakings• No diligence to uncover noncompliance• Underwriter also charged
Case Study: Allen Park
• Mayor active proponent and “control person”• Project plans deteriorated prior to issuance• Outdated financial information in OS
Post-Issuance Compliance: Continuing Disclosure
• Avoid information silos• Make EMMA your friend• Ensure procedures
can be used• Consider including in audit• Investor website• Encourage periodic training
Post-Issuance Compliancefor Bonds
Alaska Government Finance Officers Association
November 17, 2015
Marc Greenough, [email protected] Levesque, [email protected]