Many Issuers were at the GFOA Annual Conference last week, so we will focus on a few key items discussed there, namely our friend – the MCDC Initiative – and Fraud Enforcement.
Remember to sign up for the IRS Webcast: QSCBs on June 18, 2015 – see link in Out & About!
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
Issuers and SEC go head to head on the MCDC at GFOA Conference
At last week’s national GFOA conference, issuers shared just how costly complying with the MCDC initiative was…both in dollars AND time.
But hey, participating in the MCDC Initiative was voluntary…right?
Here are the stats:
- Issuers spent $2,000 to $18,000 to do their reviews
- 79% of issuers had to hire outside consultants
- Issuers spent between 25 and 250 hours responding to the questionnaire
- 65% of issuers self-reported violations
- 69% of issuers responding felt the initiative was mandatory vs. voluntary
So, what do you think?
Ben Watkins, director of Florida’s division of bond finance and chair of the GFOA debt committee went head to head with LeeAnn Gaunt, chief of the SEC’s enforcement division municipal securities and public pensions division during a panel debate on Tuesday, with the following highlights!
Remember Disclosure USA before EMMA was born?
Watkins sure did – as well as these items:
- “There was nothing either voluntary or cooperative about the initiative”
- He labeled the MCDC “an abuse of power” by the SEC
- Issuers had to dig through mountains of data provided by their underwriters
- Some potential issues were pre-EMMA – i.e. the inaccurate Disclosure USA system
SEC’s Guant rebutted with force…and a question.
She asked if issuers were REALLY thinking about their disclosure obligations when they attested in their official statements that they were materially in compliance…or were they “sloppy” in their program oversight?
So…how would you answer that question…honestly? 
Gaunt’s position and responses:
- Watkins’ points were “red herrings”
- “The enforcement division is here to prosecute historical violations of securities laws”
- SEC needs to enforce the laws – not tailor its actions for convenience
- If the issuer records were not adequately maintained, “How is that my problem?”
Bond Counsel also weighed in on the Initiative…
Dave Sanchez, a former SEC muni lawyer now at Sidley Austin in CA, said, “Did it accomplish bang for the buck? I think, honestly, it did,” he said. “Behavior is changing,” adding, “That’s a positive thing.”
John McNally, partner at Hawkins Delafield and Wood shared:
The Tower Amendment – added in the 1970s, prevented the SEC from requiring issuers to file reports with the agency (directly or indirectly) prior to bond issues. The MCDC arose because the SEC cannot regulate issuers but they regulate underwriters under 15c2-12.
So, how did your MCDC Initiative Review efforts and cost compare?
[Editor’s Note: As we all know, last year was pretty much a blur for issuers who were wading through a decade’s worth of records (or lack thereof) as well as trying to decipher how best to answer the questions – especially the materiality threshold. Also, did you see the MSRBs report? The link is next.]
The MSRBs Report on Continuing Disclosure – Delays but Increased Focus
Although we listed it last week, here the link again to the MSRBs Timing of Annual Financial Disclosures by Issuers of Municipal Securities. The data tables are fascinating!
Quickly, here’s some key stats:
Average time to file the annual report after FYE:
- in 2014 – 448 days
- in 2013 – 342 days
According to the report, “The significantly higher average number of days in 2014 compared to earlier years coincides with a significant increase in the number of audited financial statement submissions to EMMA in the second half of the year.”
What about those “overdue reports?”
It was also noted that overdue annual report submissions increased “sharply” after the MCDC Initiative was announced. I’ll just bet they did!
- Before the MCDC: 115,000
- After the MCDC: 145,000
So, whether issuers think the MCDC was voluntary or not, the numbers show that the impact it had on compliance submissions – although delayed, was noticeably improved.
[Editor’s Note: You can see additional data in the report for other analyses, such as filing of reports more than a year past due. As a side note, the most commonly reported violations for issuers were not disclosing the ratings downgrades for bond insurers as well as late material event notice filings. That first one rings a bell with me!]
BABs Issuers…Next up: BABs-Light (Less Risk – Less Subsidy)
Many of our issuer members are BABs issuers…and had to deal with the headache of the sequestration impacts on their bond subsidies. Although it was an unintended consequence, it still packed a painful whomp on our budgets…and patience.
Welcome the BONDS Act…
Twin bills, one in the Senate (S. 1515) by Sen. Edward Markey and one in the House (H.R. 2676) by Rep Richard Neal introduce “Bolstering Our Nation’s Deficient Structures Act of 2015”, or the BONDS Act.
If passed, BONDS would drop the subsidy by 1% – from 33% to 32%, with further reductions each year until it reached 28% in 2019.
But, will it pass?
With crumbling infrastructure and President Obama’s push for bonding that incorporates P3s, namely the America Fast Forward Bonds, we can expect to see significantly more push in this area.
“During the Great Recession, when we were facing dire times, the Build America Bonds program was there to create jobs and economic opportunity,” Neal said in a news release.
Rep Neal stated the following:
“The surest way to jumpstart our economy is investing in our infrastructure. Programs like these put Americans back to work immediately and make long-term investments in our future by updating our schools, roads, bridges, and hospitals. I was proud to support the Build America Bonds program then, and I continue to support this highly successive program now.”
[Editor’s Note: There will be much more on this topic – with the Highway Trust Fund woes only two months away again, there will be renewed efforts to bring this type of “job-creating” financing from the drawing board to reality.]
OUT & ABOUT
IRS Webcast:
Qualified School Construction Bonds – QSCBs
June 18, 2015. Register Here
Conferences:
The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015 InterContinental Chicago Magnificent Mile, Chicago, IL
Resources:
Check out the “muni deal of the week”…and look at it from the bondholder’s perspectiv
On-Demand Post Issuance Compliance Training for Issuers
“Compliance Basics” – a Free, 3-part video training, plus the Monday Muni Minutes
On-Demand Webinar
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
The Bad Guys Lose –Appeal from Bid- Riggers Could be Impactful – And Here’s Why
Three shysters who thought they could get their GIC bid-rigging convictions overturned due to the “statute of limitations” got a really rude awakening…which should serve as a far-reaching heads-up to would-be “neer-do-wells” in the future.
Here’s what went down.
UBS AG Bankers Peter Ghavami, Michael Welty and Gary Heinz were found guilty in 2012 of a broad scheme of bid manipulation regarding guaranteed investment contracts or GICs from
2001-2006. They claimed their convictions were illegal as the timeline to prosecute them was only five years and that they were not prosecuted until a year after the time had expired
Oh, but not so fast there Mr fraudsters…
In this case, the fraud involved banks/financial institutions. Therefore, the prosecution claims the statute of limitations is actually 10 years, not five. The defendants argued that their fraud involved issuers, not banks – and in fact – that the banks (including UBS) were “active participants in the fraud.”
As one of the IRS audits I had the “great pleasure of dealing with” related to bid-rigging, this does not set well with me at all. The great news is the judge agreed with the prosecutor.
Score 1 for the good guys – us!
Now, let’s take this one step farther. Anthony Sabino, a defense attorney in NY and a St John’s University Law Professor said, “Its far greater significance is to the financial community.”
The moral of the story is…become a fraudster…and you will pay.
“Based upon this ruling, if you transmit anything fraudulent that has anything more than a trivial effect upon a bank and its business, you are subject to a statute of limitations more than twice the norm. That’s a pretty powerful weapon to use against the bad guys in the financial world,” he said.
[Editor’s Note: As a note, this broad bid-rigging prosecution involved more than just UBS bankers. It also involved CDR Financial Products Douglas Goldberg and Daniel Naeh, as well as Bank of America’s Douglas Lee Campbell and Phillip Murphy.]
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
Chat soon!
As always, your comments are welcome…scroll down and let us know what you think about any of the articles!
To your compliance success,
Debbie
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