Welcome to your second edition of Monday Muni Minutes! It’s been a busy week for sure…
This week, we are going to chat about several follow up thoughts on MCDC – Five Days AFTER the underwriter’s reporting deadline. You’ll read a great high level overview of the Post Issuance Conference in Las Vegas, plus take a closer look at the 2nd piece of our compliance puzzle – Regulations. So grab your cup and we’ll get started….
CURRENT EVENTS
Follow up on the MCDC Initiative – Five Days AFTER…
The biggest news this week is about the large number of underwriters who voluntarily reported to the SEC regarding their findings where issuers failed to disclose noncompliance in their OS’s on their continuing disclosure agreements – which was due this past Wednesday, September 10th.
So…what does this mean now? It could mean your underwriter reported violations about you as an issuer. If you haven’t done so already, make sure you are in contact with them to determine 1) if they filed anything for your bonds, and 2) the next steps you, as the issuer, need to take before your SEC reporting deadline of December 1st.
Whether or not your underwriters filed any material misstatements with the SEC regarding your bonds, if you find a potential or material disclosure issue during your review, talk with your bond/tax counsel on what are the most appropriate steps for your organization to take. Also, feel free to drop us a line if you’d like to talk.
Here are a few key observations we have noted in discussions with issuers, underwriters and counsel over the last few weeks:
1) We have heard of virtually no issuers who have absolutely zero mistakes – whether not disclosing a bond insurer rating downgrade to something we consider more significant, like failing to file an annual report.
Even if you suspect your violations are only immaterial, the only way to know is to make sure you have done your review.
2) Current noncompliance missteps occurred largely due to a poor understanding of what the disclosure requirements were, errors due to lack of secondary review of the compliance work papers, combined with insufficient or outdated continuing disclosure procedures.
To avoid these same missteps in the future, outdated policies and procedures need to be updated and should be reviewed annually going forward. Another best practice is to have a secondary reviewer for your filings. If someone is filing on your behalf, make sure you review their work papers and filings. Even if you outsource your compliance reporting, you are ultimately responsible for the accuracy of the continuing disclosure on your bonds.
3) There has been considerable tension on underwriters to scrutinize and accurately report violations under the MCDC Initiative as they may face stiff penalties for failure to do so.
Issuers still have over 60 days until their filing deadline – and given the lack of clear guidance by the SEC on what is considered material, the potential for inconsistent reporting remains a risk. It is crucial to work with your underwriter.
If you haven’t done so already, conduct a thorough review of your disclosure requirements, your historical reporting activity and what has been disclosed in your Official Statements. Refer to the 14 Step MCDC Review Process Checklist to help guide you and always feel free to drop us a line.
The general understanding is the SEC will be comparing the underwriter and issuer filings against one another, and looking for inconsistencies. If inconsistencies are found, they may dive deeper into your disclosure practices. Therefore, we urge you to continue working closely with your underwriter and bond counsel regarding any of your remaining MCDC Initiative steps.
OUT AND ABOUT
This week, we wanted to share two great webinar resources – one, an “on demand” presentation and the other, which will be occurring live, on September 23rd. Both are hosted by the Bond Buyer and presented by Orrick. You can also find these links on the website at http://www.issuer2issuer.com.
Also, check out the great 30,000 foot overview of the Post Issuance Compliance Conference, held in Las Vegas last week.
On Demand – IRS Audits of Tax Exempt Bonds – What To Do When The IRS Comes Knocking at Your Door
(originally aired 7/23/14)
http://www.bondbuyer.com/webinars/-1063981-1.html
Live: September 23rd – The Changing Landscape of Municipal Bankruptcy
Tuesday, September 23, 2014 9:00 am
Pacific Daylight Time (San Francisco, GMT-07:00)
Register: http://www.bondbuyer.com/webinars/-1065275.1.html
The POST ISSUANCE COMPLIANCE CONFERENCE
The second annual Post-Issuance Compliance (PIC) Workshop conference was held last Thursday-Friday (Sept 11-12 in Las Vegas) hosted by BLX/Orrick, which was geared toward both governmental and 501(c)3 bond issuers, which is one of the better conferences I’ve seen.
Informative topics included:
- Elements and benefits of an effective PIC program – including discussions on written policies and procedures, the IRS’s focus on PIC matters (for both issuers and conduit borrowers) – and why you should care
- Private business use (PBU) overview on key items you need to know including how to help identify and measure PBU including good examples with intuitive ways learned to analyze and calculated PBU as well as tips on how you should communicate this activity within your organization
- Identification and correction of tax violations, including remedial action through bond defeasance reallocation methods or through the IRS’s Voluntary Closing Agreement Program (VCAP)
- What’s new with the IRS including current audit focus areas, what issuers/borrowers should be prepared to provide in response to an audit, and the process involved in the event of an audit
- The new Municipal Advisor Rule and the Independent Registered Municipal Advisors (IRMA’s)
- Two informative bond borrower perspectives on their PIC programs, including presentations from University of Hawaii and Cedar-Sinai Medical Center
- Continuing disclosure and the MCDC Initiative including healthy dialogues, perspectives and questions between issuers, conduit issuers, and borrows as well as Orrick and BLX team members
- And my favorite topic, arbitrage compliance with all the interesting tax law nuances (although maybe not your favorite)
If I had to choose the most important aspects to take away from the conference, it would be these three things:
1) That we issuers/borrowers are ultimately responsible for complying with our bond proceeds reporting requirements, and not the consultants we hire.
2) We are responsible for ensuring that our compliance work, as well as that of our consultants, is accurate, reputable and meets our bond covenants.
3) We need to stay informed and educated – in order to effectively meet items 1 and 2.
Overall the PIC conference was very educational and a nice opportunity to meet with fellow issuers, conduit issuers and borrowers and share what works and doesn’t work with our PIC programs. A definite two thumbs up.
P.S. If you know of any good training opportunities for fellow bond issuers or borrowers, please send us a line. We are always looking for PIC educational training to share with others. Thanks!
SOLVING THE COMPLIANCE PUZZLE
Debbie just loves 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, we 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 take a closer look at the second line of our puzzle – Regulations.
Let’s face it…I don’t know many of us who just jump up and down with excitement when we hear new IRS or SEC regulations are coming, right?
It’s more like taking your youngster to the dentist for the first time or watching from the auto repair shop lobby as the technician who is working on your car suddenly calls two more techs over. They all disappear under the hood for several minutes, then reappear, shaking their heads sadly. Yeah…it’s that “oh this is not going to be good news” feeling.
We are right there with you. Regulations, even the simple ones, can be complicated. Then you have those really awesome ones that say, “shall abide by all of the foregoing except as described in Section x.1(c),” – then you have to stop …go look up that section first…then come back and re-read it again. Are you with me?
Seriously, when it comes to looking at the newest final Regs impacting your bonds as well as to keep an eye what’s being proposed, you will want to go to this handy IRS site, Tax-Exempt Bonds, Treasury Regulations .
Now, one of the foremost Internal Revenue Code Regs for guidance on issuing tax-exempt bonds is 26 U.S. Code Section 103. This section also goes into a brief description of certain exclusions related to private activity bonds under Section 141, and arbitrage bonds under Section 148.
Generally, near the top of page 1 of your Official Statement, you will find an opinion statement from your Bond Counsel which reads something like this – “based upon…and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986″ [Bold added for emphasis]
For guidance governing Municipal Continuing Disclosure, we look to SEC Code 15c2-12. You will note that, in your bond transcripts, you have a binding Continuing Disclosure Agreement between you, as the issuer, and the underwriters who sold the bonds on your behalf. Here again, we attest that we will uphold our covenant and pledge to monitor and timely disclose any of the material events and items listed therein.
When you have multiple bond issues outstanding and, as a result, more than one valid Continuing Disclosure Agreement (CDA) –possibly with differing due dates for items – you need to carefully cross-check each to make sure you are meeting the one with the most stringent timeline. Issuing newer bonds or even adopting a more modern Master Trust Indenture does not necessarily negate older reporting requirements. Check to be sure.
As you can see, although we just touched briefly on a few Regs, there are significant incentives to protect the tax exempt status of your bonds. Beyond saving possibly millions of dollars in interest expense cost every year, a robust post issuance compliance program provides greater transparency and stronger public trust. On top of that, you get peace of mind.
A few final thoughts to help you with regards to Regulations – have a strong, working relationship with highly qualified bond counsel, your underwriter, and – if applicable – your financial advisor. Be realistic about what you do (and do not) know – ask questions of fellow issuers and other experts – as needed – and focus on the critical compliance areas first.
Stay tuned for next week – we will chat about line 3 of the puzzle – Terms.
We hope this information was helpful! If so, please share with fellow issuers and invite them to join us too.
Have a great week!
To your compliance success,
Debbie
P.S. As always, we welcome your comments and suggestions! To help us provide the most valuable content in the Muni Minutes and on the blog, please do us a favor and answer the following question in the comments box below:
Q: What is your biggest area of frustration right now, as it relates to your post issuance compliance program, and why?