Whoever said that Bonds might get boring?? NOT A CHANCE! It’s been a BUSY week in the Muni Market, that’s for sure. On deck: SECs FY14 record-setting $4.1B in Enforcement, IRS audits College, plus MCDC and Subsidy Updates…
CURRENT EVENTS
~GET USED TO HEARING ABOUT THE SEC~
SEC Trumpets Record Enforcement Year (BB 10/16/14)
As a follow-up to the ThinkAdvisors.com article Debbie posted last Thursday for fellow members who have also joined us on the Issuer 2 Issuer LinkedIn Group, the Bond Buyer shared the following high points regarding the SEC’s continued enforcement action – including municipal bond cases.
According to the article – for fiscal year ended 9/30/2014, the SEC filed a record 755 enforcement actions, and obtained orders totaling $4.16 billion in disgorgement and penalties. This is up 10% for enforcement actions and up 22.4% or $760 million in disgorgement and penalties from last year’s statistics. OUCH!
In a recent release, SEC chair Mary Jo White said, “Aggressive enforcement…remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets.”
Andrew Ceresney, Director of Enforcement at the SEC, also said, “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement cases”.
The SEC had several “firsts” this past year in the municipal market affecting municipal issuers, including:
- First emergency action stopping a municipal bond sale – citing that an issuer failed to disclose the misuse of bond funds from a prior issuance (Harvey, IL)
- First for the MCDC Initiative – designed to encourage issuers (and brokers) to voluntarily self-report their continuing disclosure missteps or violations. The first settlement under the MCDC was with a California School District (Kings Canyon) for charges of misleading bond investors.
Ex-SEC Lawyer Warns of Anti-Corruption Ramp-Up (BB 10/16/14)
Former SEC commission lawyer Peter Chan, who recently left the SEC to join a large law firm in Chicago, warned that “the commission will be aggressively pursuing civil litigation against public officials whose actions mislead the public or their fellow officials with respect to the muni securities market.”
He also stated “One of the things you can see is a ramped-up anti-corruption effort by the SEC through civil enforcement action”. This may include any benefits such as perks or gifts you may receive from your financing team to persuade your decision making choices as municipal issuers.
The SEC’s thought processes in these cases will be two-fold: 1) were such benefits received fully disclosed? If not, then 2) had they been disclosed, would that knowledge have been material? If the answer to that is yes, then you can expect SEC action.
Bottom line of this article states that “if the benefits are something you wouldn’t want the world to know about, it could be a problem” for you.
Two key take-aways:
- Be Aware: Should fellow bond issuers and conduit borrowers expect more activity from the SEC in the coming year? Absolutely.
- Be Proactive: Please review and update your continuing disclosure procedures regularly.
~IRS NEWS~
IRS Auditing Bonds for College in Indiana (BB 10/16/14)
The IRS is auditing economic development revenue bonds issued by St. Joseph County, IN in 2007 for the Corporation of St. Mary’s College, the non-profit borrower.
The borrower disclosed the audit in an event notice on EMMA on 10/13/14.
Per the IRS notice, the main purpose of the audit is to “ascertain the compliance of the bonds with the federal tax requirements applicable to qualified 501(c)(3) bonds.” Additionally, the notice stated that “they had no reason to believe there are any tax-law violations at this time”, according to the borrower.
The audit covers roughly $37.95 million in bonds issued by the County for the College in 2007 and is a combination of new money, plus advance & current refundings. Some of the bonds have since matured.
If you have bonds similar to these, you may want to pay attention to this audit in the news.
In other IRS News…Subsidy Cut Update:
As a follow up to our discussion in last week’s Monday Muni Minutes, the IRS has posted the subsidy cut effects of the sequestration for filers of Form 8038-CP on their website.
These subsidy reductions apply to the following bonds:
- Build America Bonds
- Qualified School Construction Bonds
- Qualified Zone Academy Bonds
- New Clean Renewable Energy Bonds, and
- Qualified Energy Conservation Bonds
OUT & ABOUT
In other MCDC News…Advisory Update
December 1st and the issuer deadline for self-reporting under the MCDC Initiative keeps inching closer.
We found a great article, which may be of interest to you. On October 14th, Katten Muchin Roseman, LLP, published The SEC’s MCDC Initiative: Where To Go From Here .
In our humble opinion, this advisory piece is exceptionally well written, clear and thoughtfully articulated. It reinforces many of the same points Ingrid shared with you in her MCDC Checklist, as well as provides some “what happens next” insights for us, as issuers, to consider.
This link will also be available in our e-research library under the Disclosure/MCDC tab for later viewing.
Conferences being held in October and November:
Later this Week: For Healthcare and Higher Ed:
Healthcare and Higher Education Super Conference (Oct 26th-28th, New York, NY)
In November: 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, our focus narrows on the seventh line of our puzzle – Laws.
Back in week 2, we shared several key sections of Code, which impact us as bond issuers. As I reviewed the articles above and pondered what to write this week, two short, but powerful quotes come to mind:
“Writing laws is easy, but governing is difficult.” – Leo Tolstoy, War & Peace
and then,
“Error of omission begets new rules.”Toba Beta, Master of Stupidity
Statutes (Laws) are generally enacted by a governing body, such as the legislature. Laws, as binding rules of conduct, are designed to regulate the actions of its citizenry – with associated penalties for either willful or negligent failure to comply.
If you take the MCDC Initiative as an example, it falls under Rule 15c2-12, which governs continuing disclosure for municipal securities reportable to the Municipal Securities Rulemaking Board. Both Rule 15c2-12 and the MSRB get their origin from the Securities Exchange Act of 1934.
Now, take a quick (just kidding) look at the SECs website. In addition to the SECs 34 Act, you will note these decades-old laws, which provided the framework for public finance and your bonds:
Securities Act of 1933
Trust Indenture Act of 1939 , and
Investment Company Act of 1940
Although these laws were designed broadly to protect the financial marketplace while remaining efficient, it proved difficult to govern all the players. Over time, omissions in reporting increased, oversight decreased, and in several cases, laws were ignored. Some say we got a little too comfortable during the good times, allowing financial chaos to quietly run rampant.
In the words of Tolstoy – governing is difficult.
After the market collapse in 2008, the resulting credit crunch and liquidity crisis led to further, expansive financial laws being created, namely the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).
Many thought this law primarily dealt with mortgages and what appeared to be predatory lending practices in the housing market. On closer inspection, this sweeping law impacted:
- Our banking partners – making letters of credit or other enhancements more expensive
- Added regulations to our swaps
- Regulating investment and municipal advisors
- Enhanced regulation and oversight of credit rating agencies
- Providing SEC and GAO authority for stronger enforcement under audits
- Established the Bureau of Consumer Financial Protection and Consumer Advisory Board
Talk about errors of omission begetting new rules! Professionally or personally – Dodd-Frank’s sweeping statutory brush impacts you in some way.
Let’s come squarely back to what you, as a bond issuer, want to focus on regarding your debt portfolio. If you have tax exempt bonds outstanding, you also have continuing disclosure and other post issuance compliance requirements to deal with – in many instances, it’s just piled on top of your “other duties as assigned”. Sound familiar? Yep – I’ve been there too.
That’s what Issuer 2 Issuer and the Monday Muni Minutes was designed for!
Key factors we have reviewed over the last several issues of Monday Muni Minutes:
- Form 8038 – a check-the-box means issuer attests to having an approved compliance policy AND attests to being in compliance with its provisions
- Beginning in 2012, the IRS TEB Division expressed concern regarding issuer’s compliance effectiveness
- In mid 2013, the SEC also announced its concern regarding the adequacy of continuing disclosure submissions via EMMA, as well as how well underwriters were monitoring and auditing the thousands of deals outstanding via the Continuing Disclosure Agreements with their issuers – this likely led to the MCDC Initiative and our December 1st deadline
We hope you found this segment helpful! Stay tuned – next week, we’ll explore the next item in our series – it’s line 8 of the puzzle –Standards.
In closing, I need your help. We have been providing you with hours of content for several weeks – specifically to help you succeed with MCDC and your bond compliance.
Why? Because we care about your well being and don’t want you to get busted… it’s time consuming and hurts…a lot.
Now, as much as we would love to tell you that everything is just sunshine and butterflies on the IRS and SEC enforcement front, it is simply not the case. We also can’t peek through the internet cable to say hi and make sure you are coming along OK with your bond compliance.
So…how are you doing with that? What MCDC questions or struggles would you like help with? There’s a little over a month left…Ingrid and I are just a quick e-mail, phone call or video chat away.
If you could do me this one simple favor – that would be great. It will take 15 seconds – literally.
Hit reply in your e-mail and let me know how you and your bonds binders are doing. As shared in the story of my own compliance journey, I’ve walked in those shoes for years – from sweating zero compliance to the elation of passing those hairy IRS audits…and everywhere in between.
So…which of these best describes you?
- If you are sitting chilly and your binders are golden – just say – hey, Deb – we’re good here. Say Hi to Oreo for me, OK?
- If you are working with someone and getting the help you need to meet your compliance – that’s great too. Say, Deb, we have help and should be fine – will call if we have a question – Hi Oreo!
- If you have gaps or questions and you want help – let us know what they are. Remember, as a licensed CPA, your questions are safe with me….and with Oreo too.
Thanks for taking those few seconds to ease our minds…
Have a great week!
To your compliance success,
Debbie
P.S. Let us know how you and your compliance program are doing, OK? To protect our site (and you) from auto-spammers getting access to anyone’s e-mails, please use one of the following response methods:
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