In this week’s news-packed edition, we will explore a possible precedent-setting “1st” in the Stockton case, a neat graph on MCDC & compliance filings, transparency enhancements and SEC settlement actions…
CURRENT EVENTS
Texas AG Settles with RBC over MUD Fee Collusion (Bond Buyer, Friday, 10/3/14)
It was quiet this week from an issuer or bond borrower perspective. One article from the Bond Buyer I found interesting, related to underwriters and municipal advisor collusion activity.
RBC Capital Markets has been told to provide $900,000 in restitution to 63 Municipal Utility Districts (MUDs) involving anti-competitive practices with Rathmann and Associates involving underwriting fees charged to MUDs.
According to the Bond Buyer, financial advisor Rathmann allegedly agreed to use RBC as lead underwriter for his clients and secure a fee of 1.25% of the bond sale proceeds. During the time period in question “RBC was appointed as lead underwriter in 112 of 115 negotiated deals involving Rathmann’s company, according to the settlement.”
As you prepare for any major bond financing, make sure your Municipal Advisor (MA) is working for you and only you. Good questions to ask about your MA are:
- Does your MA work for an independent firm or are they affiliated with a firm that also underwrites municipal bonds?
- If your MA is not independent, what assures you that he/she is not deal trading?
- Is the amount of compensation received affiliated to the biased financing option?
- Have you worked with your FA to develop an estimate or compare the difference in issuance costs for a stand-alone bond issue versus the use of your statewide bond pool, if available?
- Is your MA registered with the SEC and MSRB?
More information is available by GFOA regarding selecting and managing an MA. Remember the MA’s job is to work for you by looking out for your best interests only.
Barclay’s Pays $15 Million to Settle SEC Charges (Bond Buyer, 9/23/14)
Barclay’s has been fined $15 million for inadequate internal compliance and continuing disclosure related to its acquisition of Lehman’s advisory segment in 2008. At the heart of the settlement:
- Policies and procedures had material weaknesses and deficiencies
- Failure to keep required books and records to prevent violations of securities laws
- Failure to adopt an appropriate internal compliance system
- Executing 1,500 advisory transactions without required disclosures or client consent
- Charged 2,785 advisory clients fees and commissions which were inconsistent with disclosure to clients
- Underreported assets under management at 3/31/11 by $754 million
- The violations resulted in $3.1 million additional revenue
- The firm has made restitution to the affected clients
Without admitting or denying the charges, Barclay’s agreed to be censured and cease and desist from committing further such violations.
OUT AND ABOUT
CalPERs Not Strictly Protected in Stockton (Jefferson County) Bankruptcy (LA Times, Wed, Oct 1, 2014)
Remember one of the key take aways from our piece on Orrick’s “Changing Landscape of Municipal Bankruptcy” webinar from last week’s issue – the part about pensions and unfunded OPEBs?
In the first such decision of its kind, US Bankruptcy Judge Christopher Klein ruled on 10/2 that pension amounts due to CalPERs were not exempt from “haircuts”, stating that federal bankruptcy law supersedes CA pension laws.
$15 million is owed to the State’s pension fund, so the impact of this decision is significant for Stockton’s retirees as well as its current employees. If a mass exodus ensues, city services and safety could be adversely impacted.
It also clearly raises the precedent question – and what impact, if any, this decision will have for other struggling municipalities. The City, CalPERs, other creditors, and unions each made compelling statements.
MCDC Spikes Disclosure Filings; CA and NY Focus on Muni Transparency (Lumesis.com, Sept 29, 2014)
Based on the Lumesis DIVER analysis of MSRB data since April, their graph shows continuing disclosure filings have spiked by more than 12,000, as measured from the same point in time last year.
The increase in filings has been concentrated in the “Annual/Audited Financial Report” and “Failure to File” categories, clearly indicating the impact of the MCDC Initiative. Filings are expected to stay elevated through December 1st, as underwriters and issuers work to take advantage of the leniency offered through the Initiative.
Interestingly, as a follow up to our transparency puzzle topic last week, the California Controller’s Office announced a new website where the public can access financial data from 58 counties and 450 cities within the state.
New York also released 2013 data on their Fiscal Stress Monitoring System where municipalities receive a “fiscal score” based on 7 to 10 variables.
Additionally, in what we believe is another “1st”, the State of Louisiana just adopted legislation for annual audit reviews of continuing disclosure and compliance practices of their political subdivisions.
These enhanced tools, laws and data availability should promote increased transparency, accuracy and trust regarding the state of governmental finances.
Conferences being held in October and November:
This Week: For our California Issuer friends:
The California Public Finance Conference (Oct 8th-10th, San Diego, CA)
For Healthcare and Higher Ed:
Healthcare and Higher Education Super Conference (Oct 26th-28th, New York, NY)
And another Hot Topic area, Transportation/P3s:
The Transportation Finance/P3 Conference (Nov 16th-18th, Arlington, VA)
SOLVING THE COMPLIANCE PUZZLE
I (Debbie Todd) just fell in love with this graphic as it so clearly and brilliantly represents the puzzling complexity we are dealing with, as issuers, in meeting our compliance needs. We also know that both the IRS and SEC are paying much closer attention to it these days – and that it is our obligation as issuers to understand (and have fully complied with) our respective bond covenants. As part of a 10 week series called Solving the Compliance Puzzle, I will focus on providing tips, insights and resources for one new line of our compliance puzzle.
So, are you ready?
Today, we are going to zoom in on the fifth line of our puzzle – Rules.
Remember hearing that word when we were kids? Mom would always remind us to: Brush our teeth, take our lunch to school, get our homework done on time, and….
Always remember to play by the rules.
Ahhh, those were the easy days…when all we had to do was obey the “kid rules”…right?
Then we grew up. We changed. The rules changed too. Playing by the rules also got a lot more complicated – and life became more hectic – in a hurry.
We had to think of the rules in the context of finances, work, communications, family, health & wellness, faster technology, increasing globalization & regulation, environmental impacts and even what was considered socially acceptable.
And that’s just the tip of the “life rules” iceberg. For now, we’ll look at rules in compliance & business.
Business rules are typically generated from inside the organization and are detailed in nature. They can be developed to execute high level strategies adopted by the Board or Executive Team, but new rules can also be prompted by regulations (week 2 of our puzzle), laws (week 7) or requirements (week 10).
At its core, business rules define key attributes and structure of the business. If we proactively adopt and consistently follow them, rules can become our play book for success by:
- Describing operations, policies and systems used
- Defining actions of people, processes and constraining behavior
- Helping the organization achieve its goals
- Minimizing costly mistakes and obstacles to growth
- Improving communications with key stakeholders
- Equipping us to comply with regulations, laws and other legal requirements
Now, what happens when a few (or many) people don’t want to follow the business rules? Or worse yet, when rules should be in place, but aren’t? Things can go from interesting – to downright pandemonium – in a hurry, right?
Let me share a quick professional story (which occurred after my first IRS audit)…
I was working on developing the initial compliance program documentation on a fairly complicated bond series. It was for a conduit borrower for bonds which were issued as part of a legislative action for a high profile program, with par well over $100 million.
While the bonds were originally being issued (about 8 years earlier), the conduit borrower underwent a complete computer system upgrade as well.
Fast forward 8 years: While pulling the project pieces together that I know would be required in the event of another audit, I noted gaps in certain series of invoices on top of missing several contracts.
When meeting with the payables teams as well as the facilities folks, I discovered that original invoices older than 7 years were destroyed, as per state records retention rules. Uh oh.
Additionally, some of the contracts had not been properly labeled, and were misfiled as operational as opposed to capital. The amount of bonds we needed to clear up was well over $30 million…WAY in excess of our 5% bad use bogie. Ouch.
So…we pulled trustee statements, bank records, budget binders, and spreadsheet microfiche from the earlier system and combed through boxes and boxes of old contracts to locate the documentation we needed to properly demonstrate how the bond proceeds were spent. It was a great team effort…
What could have prevented this unnecessary fire drill?
- Keeping abreast of regulations and laws impacting your bonds
- Adopting a proactive post issuance compliance policy and procedures
- Communicating with key stakeholders by bringing them into the compliance process – early
- Assuring that record retention for the life of the bonds are addressed in policies (AP & Contracts)
- Developing a PIC team and specific workflow system for bond documentation items
Hmmm…this list looks a lot like the “playbook for success” described earlier, doesn’t it?
Here’s the really sad part: What happened in my workplace story is not unique. We talk to underwriters, bond counsel and issuers all the time and hear that this same pattern still frequently exists today. Have you experienced this too? If so, were rules like #1-5 above put into place to prevent it from happening again? I hope so…
In closing, business rules, while we sometimes think they complicate our lives – in reality, provide key mechanisms so everyone in the group knows what’s expected, when it’s expected and assures processes and systems are working to achieve business goals (including compliance) effectively and efficiently.
And…just like brushing our teeth daily prevents cavities and gives us a beautiful smile, regularly brushing up on our post issuance compliance processes eliminates unnecessary stress because we have confidence knowing we are on top of our compliance game if and when our bonds are ever audited. Now that’s something to smile about!!!
We hope you found this segment helpful! Stay tuned – next week, we’ll explore the next item in our series – it’s line 6 of the puzzle –Guidelines.
If you found this information valuable, please share this newsletter with your issuer friends so they can benefit too. Thanks!
To your compliance success,
Debbie
P.S. As shared above, some significant and possibly precedent-setting muni events occurred this week. I would love to hear your thoughts on any of the content or something else you would like to see. It’s by first name only, so feel safe to drop us a quick line below in the comments, OK?
P.P.S. My Mom just called to ask if I’d eaten yet. Oops. Remember – take time for your lunch today, OK?