Let’s continue our MCDC Focus with taking a look at what our friends – our bond & tax counsel have to say…here’s to the Legal View!
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
MCDC Settlements – The Attorney View
Over the last few weeks, we have covered the MCDC from the perspective of the Issuer and Underwriter…now it’s time to hear from our legal friends – and get the “attorney view.”
One of the big questions…was there even a disclosure problem?
Over the last year or so, there has been much discussion, confusion, consternation and, at times, flat out anger regarding the MCDC Initiative.
When the SEC issued its “risk alert” in 2012 regarding continuing disclosure omissions which were “material”, bond lawyers recognized the significance…
“There were arguments by the industry that the SEC sent its message when it did the risk alert in 2012,” said Elaine Greenberg, a partner at Orrick, Herrington & Sutcliffe in Washington.
To help frame the discussion, here is how the Supreme Court defines “material”…
Material = something a reasonable investor would want to know before making an investment decision.
While the SEC repeatedly declined to clarify what material meant for purposes of the MCDC self-disclosure, here are some key insights into what attorneys gleaned from the actual settlements announced on June 18th:
Some key “material” points in the settlements:
- Citations were from events back to 2010, but also included 2013 and 2014 transactions
- Citations occurred for events AFTER the 2012 SEC risk alert
- Financial documents filed 14 days late
- Filings as little as two weeks late can be deemed material
- Financial documents were not filed at all
- This is one that we can bank on for more scrutiny
- Failure to file an event notice for a rating change was NOT listed
- Ratings changes should not be dismissed as being immaterial
- Only four competitive deals were cited, which was a bit of a surprise
- The SEC had indicated concern about reduced due diligence for these deals in their alert
So…has “the problem” been identified and fixed?
Another lawyer, who declined to be named, thinks these examples make the point that problems still exist – even after the risk alert was issued. “It’s almost a refutation,” the lawyer said. “It’s a rebuttal to those who said ‘much ado about nothing.'”
I’d also suggest that $9.3 million in fines on the first round of enforcement is a pretty big nothing.
Here are two thoughtful comments…with a simple and sage solution.
Robert Feyer, another partner at Orrick suggested that we, as issuers, should not set our compliance materiality compass by what the settlements contained. “The message continues to be that the best thing to do is comply,” he said.
John McNally, a partner at Hawkins, Delafield and Wood in Washington deftly summed up the muni market feeling regarding the MCDC and offered a clear and sage solution – skip determining if it’s material and just report it.
“Although we all would have appreciated further guidance as our clients considered whether to self-report under the MCDC Initiative, now that the self-reporting process has been completed, and issuers and underwriters made their determinations whether to self-report… if there were to be a new failure to comply with a continuing disclosure agreement, the prudent course would be simply to disclose such failure without regard to where it may lie on the materiality spectrum,” he said.
Sage advice indeed…thanks John!
One thing is for certain: No matter how you felt about the process, the end result was most certainly effective – as 65% of issuers spent between 25 and 250 hours reviewing their bonds and then self-reported violations in their offering documents.
I’d say that was pretty material – both in terms of focus and results.
As you continue to work on your continuing disclosure program while in the hustle and bustle of quarter and possibly year end in the next few days, let’s keep the words of our legal friends in mind…
[Editor’s Note: The market expects more settlements for underwriters – and even issuers to be forthcoming – let’s keep sharing our knowledge of what works. Remember, together, we can make post issuance compliance better and more effective for everyone.]
OUT & ABOUT
Conferences: Starts Tomorrow!
The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015 InterContinental Chicago Magnificent Mile, Chicago, IL
Resources:
NEW! Webinar: MCDC – What Comes Next for Muni Underwriters
Date: Tuesday, July 21, 2015
Time: 12:00 PM Eastern Daylight Time
Bond Site:
Munivestor.com
Check out the “muni deal of the week”…and look at it from the bondholder’s perspective.
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!)
Safety First – California’s ABAG Embezzlement is Driving Change
It’s tough to read about events like the $1.3 million embezzlement that occurred at the Association of Bay Area Governments (ABAG) whereby a long-time, trusted executive appears to have stolen public funds for personal benefit.
As a follow up from our article on February 9, California Treasurer John Chiang quickly developed The Task Force on Bond Accountability (TFBA) to recommend best practices and guidelines on using state and local bond proceeds. California is taking it on at the state level.
Personally, I think this is an amazing idea…
Yes, I say that, even at the risk of making some of my small, special district friends a little grumpy with me right now. In the long run, I think oversight support at the state level will provide more 
structure, clarity and even make your job of bond compliance easier.
And frankly, I’d rather have you a bit grumpy with me about oversight support than staring at an audit notice – and flat out not being prepared for it.
Been there, done that…you don’t want the t-shirt. Trust me on this one.
Here are some high points of why this came about and next steps:
- CA State’s Senate Committee on Governance & Finance oversight report, released in May
- State Controller Betty Yee’s Audit revealed egregious errors in June
- See the press release and the audit results
- Recommend practices to ensure bonds are used for legal and intended purposes
- See TFBA’s mission statement
Yee commented, “Crucial internal control standards were not adequately followed at ABAG in its oversight of the authority,” she said in a statement. “Local governments must protect public money by ensuring that those who authorize spending are not the same people who write the checks.”
Even though California and a few other states are really taking the lead on municipal oversight within their own borders, there is no guarantee that future embezzlements will not occur.
The TFBA vice chair Jay Goldstone warned, “I am not sure you can prevent it,” he said. “If someone is really set on trying to circumvent the system, and they have a clear understanding of the system, they will find ways around it.”
Unfortunately, that is true. We just hope such fraud becomes less likely…and a lot harder to accomplish…at taxpayer expense.
[Editor’s Note: Again, I think more states should follow California’s lead with developing state-level oversight on municipal bond use best practices. I, for one, would be thrilled to engage my “in the trenches” expertise in this regard.]
Worrisome Political Subdivision Technical Ruling not Retroactive
Back in January, we shared about the years-long audit challenges that Village Center Community Development District (CDD) in Florida was facing on many of its project bonds when the IRS issued a worrisome Technical Advise Memorandum or TAM ruling in 2013 – one that caused quite a stir in the entire bond community as well.
The TAM declared that the CDD was not a qualified “political subdivision” and therefore could not issue tax-exempt bonds for its projects…projects dating from 1993 to June 2004.
That was a big deal…
Well, the chief counsel for the IRS just caused a collective sigh of relief…the TAM won’t be retroactive. Whew!
However, CDD is not out of the woods yet. If you recall, this issue is regarding bonds which are still under IRS audit.
So, while the TAM ruling is favorable regarding its status as a political subdivision for the bonds under audit, it still has to overcome the taxable private activity bond or PABs question on its recreation facility bonds.
So the saga continues…
[Editor’s Note: You can check out the earlier MMM article on CDD here. It should also be noted that the TAM did not specify whether CDD would be barred from issuing tax-exempt bonds going forward. If you have questions regarding your status as a political subdivision, please reach out to your bond and tax counsel.]
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
I hope all of you who are in the throes of year-end have a productive and smooth week!
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
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Remember, invite your issuer friends to join us on Issuer 2 Issuer and to get their free online training, PIC Basics! Also, the YouTube video is done for PIC Essentials – The Audit Proven Blueprint, so it should be released this week – Yeah!
P.P.S Want a one-click way to get faster information? If you are on LinkedIn, you can get access to breaking muni news articles as well as interesting compliance tips and resources, posted by us during the week. Join our private Group Page, and follow us on our Company Page.