In today’s edition: Issuer Sues over Failed IRS Audit, SEC Approves MA Oversight, NABL Views on Issuer Participation in the MCDC, plus Several New Learning Resources…
CURRENT EVENTS
Virgin Islands Sues Buchanan, Bank of America over 2006 Bonds (BB, October 23, 2014)
The Government of the Virgin Islands and the VI Public Finance Authority filed suit last week against their former bond counsel and financial advisor, after the IRS declared that more than $80 million of their 2006 Bonds did not qualify for tax-exempt status.
The issuer alleges they were provided negligent advice by their bond counsel and FA, plus ten other yet-to-be-named defendants in the deal, regarding refunding 1999 Bonds which were used as working capital. Additionally, the bonds were issued as tax exempt based on the conclusion that the government was operating under a deficit – under audit, the IRS determined there was a cash surplus in several years preceding the bond issuance, as well as having a projected surplus the following year.
Counsel for the plaintiff asserts that the governmental issuer relied heavily on their counsel and FAs advice due to lack of sophisticated financing knowledge, but the defendant bond counsel maintains that their fiduciary duties will be upheld in the US Courts. No comment was provided by BofA as the FA..
After negotiation, GVI and VIPFA settled for $13.6 million to resolve the dispute and maintain the tax exempt status of the bonds with the IRS.
World Trade Center Tower Rides a Muni Bond Revival (WSJ Online, October 21, 2014)
Possibly sometime this week, developer Larry Silverstein is planning to sell $1.6 billion in tax exempt bonds to finance 3 World Trade Center, a 1,170 foot tall, 2.5 million square foot tower.
The Bonds, which can be issued as tax-exempt due to congressional approval for the site’s rebuilding, could be issued in the 5 to 6% range, which is still less than normal construction funding. While investors are seeking yield, a risk factor to be measured by investors is that the property is only 20% occupied in a market which is still struggling to recover.
Such vacancy makes traditional bank lending impractical, but Silverstein invested $50 million of equity. In recent weeks, bond managers have toured the site, walking by the nearly completed 4 World Trade Center as well as the fully leased 7 World Trade Center (2006), both build by Silverstein.
SEC Approves MSRB Rule G-44 on Supervisory and Compliance Obligations of Municipal Advisors, and Amendments to MSRB Rules G-8 and G-9 (MSRB, Regulatory Notice 10/24/14)
In Notice #2014-19, published on Friday, the MSRB announced that, on October 23, 2014, the SEC had approved the first dedicated rule regarding the supervision and oversight of municipal advisors, Rule G-44, for Supervision and Compliance Requirements for Municipal Advisors.
Key areas addressed in G-44 include:
- Implementing and maintaining a supervisory system
- Implementing compliance processes
- Designating a Chief Compliance Officer (COO)
- Annual certifications
- Certain exceptions for federally-regulated banks
Additionally, for the upcoming fiscal year, the MSRB has identified the four current priorities of focus:
- Municipal Advisor Regulation
- Price Transparency
- Municipal Entity Protection
- Rule Rationalization
~In other SEC Enforcement News~
BDA: Crack Down on MAs Acting as Placement Agents (BB, Oct. 20, 2014)
Just prior to the SEC’s approval of the MSRBs Rule –G-44 on Friday, the Broker Dealer Association had requested that the SEC address what appeared to be non-dealer MAs crossing the line for securities laws and MSRB rules in providing certain placement services for bonds.
At issue are alternative funding methods, such as private placements, whereby the issuer sells their bonds to a bank or a select number of investors, rather than make them available in a public offering.
OUT & ABOUT
On the MCDC Initiative: Here are two more advisory resources issued last week from the National Association of Bond Lawyers (NABL) and Chapman and Cutler LLP (Chapman also links to earlier advisory alerts):
The NABL’s Viewpoints Summary on Self-Reporting under the MCDC Initiative
Chapman’s MCDC Initiative Self-Reporting Deadline Approaches for Issuers and Obligated Persons
High Points from the Healthcare and Higher Education Super Conference in New York
“Identifying Value: Raising Capital in a Changing Market”
Last week, issuers, bond counsel, rating agencies, bankers and other key municipal finance professionals in healthcare and higher education met for 1 ½ days to talk about the economic & market climate, as well as the challenges they are facing…and their solutions.
As issuers seek capital in the midst of the new SEC rules, the ACA and college ratings standards which could impact financial aid dollars, the emphasis honed in on providing clear “value” to the investor, while being proactive, nimble and prudent. Both sectors are keenly aware of the diverse challenges which lie ahead as these new regulations take effect.
Financing tools, M&A’s, P3 partnerships, comprehensive risk management, managing real estate assets and new opportunities in the green energy space fueled roundtable and networking discussions.
Conferences/Events for the rest of 2014:
In November: 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, lets tie in the eighth line of our puzzle – Standards.
First, we’ll look at a couple new standards, why I believe they came about, as well as provide you some links to interesting agency resources for further information. Sound good? OK, let’s get started…
Standards (and for purposes of discussion, regulatory standards), are benchmarks promulgated by a regulatory agency to enforce provisions of legislation. So…what’s the first thing that comes to mind when you think of the word “standards”?
For me, it’s this: What impact, if any, does this [new standard] have on my job & processes?
We are all keenly aware of how the IRS, SEC, GAO and MSRB are steadily increasing bond compliance and enforcement efforts – many which have been highlighted in Current Events and Out & About above.
In researching these new standards to keep you informed, I try to wrap my brain around each agency’s focus points and how they contribute to our bond compliance program improvement efforts.
As an example, on October 24th, the SEC approved the MSRB’s new standard, Rule G-44, for Supervision and Compliance Requirements for Municipal Advisors . As shared last week, The Dodd-Frank Wall Street Reform and Consumer Protection Act, mandated the MSRB enhance oversight in this area.
To begin, let’s connect how the impact of Dodd-Frank directly relates to our bonds: Of the roughly $3.7 trillion in tax-exempt bonds which are currently outstanding, approximately 75% of those are held by retail investors (i.e. consumers) either as individual bonds or as part of their mutual fund holdings.
Here’s why that matters to us…
Remember the volatility in the market crash of 2007-2009? Investors saw daily triple-digits swings (up and down) in the market. We also had the whole auction rate securities segment liquidity freeze. The phones rang off the hook. Whether you were an investor, an officer managing your agency investments, the CFO or a public entity board member answering frustrated investor calls – there did not seem to be anywhere safe to go.
Many stood by, helplessly watching their liquidity, investment income, net worth (and, in some cases, their plans to retire) bounce all over the place…and they became angry. The most notable event was on September, 29, 2008, where a crippling one day drop in the DJIA stunned the world, with a nearly 780 point freefall.
Dramatic events like this, whether one time or part of a more systemic challenge, rippled across the entire investment market. They directly affected legislation and drove these new standards and regulations which now impact our bonds…and our workflows.
The IRS, SEC and MSRB have already announced enhanced enforcement efforts in 2015. Their increased use of technology, analytics, questionnaires and inter-agency sharing of their databases will be instrumental in achieving these goals. As such, we need to be diligent in cross-checking our submissions.
In closing, here’s several informative agency and client advisory resource links for you:
General Accounting Office (GAO)
Municipal Securities – Options for Improving Continuing Disclosure (CD)
Link on the right side of this page provide both a 1 page summary and the full report options for the CD report
Generally Accepted Government Auditing Standards – Overview of the Yellow Book
For municipalities who are audited under these standards
Municipal Securities Rulemaking Board (MSRB)
MSRB Education Center Main Page
Videos and other multimedia: understanding the market, investing, issuing and monitoring investments
MSRB – Issuers and Continuing Disclosure
More multimedia specifically on disclosing information on our bonds!
Other Advisory Resources
Vermont Municipal Bond Bank – a State Approach to PIC Securities
Litigation Matters: Recent MCDC Examples by Mintz Levin
I hope you found this segment helpful! Stay tuned – next week, we’ll dive into another really hot topic area – its line 9 of the puzzle –Policies.
Have a great week!
To your compliance success,
Debbie
P.S. Thanks to everyone who answered my e-mail about the Muni Minutes deliverability snafu. We truly appreciate your prompt feedback! We are in the process of moving our mail service as well as adjusting our homepage interface to help our members on Internet Explorer 8 better access the site’s functionality.
P.P.S. What is your biggest question or frustration on policies and procedures? Drop me a line in the comments below or via e-mail, and I’ll focus on answering them as part of next week’s puzzle!
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