Transcript Issuer Disclosure Obligations

Securities Law and Tax Law
Compliance Relating to
Municipal Debt
Misty Taylor
Bryant Miller Olive
255 South Orange Avenue, Ste. 1350
Orlando, FL 32801
(407) 426-7001
[email protected]
Will Milford
Bryant Miller Olive
111 Riverside Ave., Ste. 200
Jacksonville, FL 32202
(904) 384-1264
[email protected]
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Issuers & Securities Law
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Issuer Disclosure
Obligations
 Preliminary and Final Official Statement (Primary Offering)
 Annual Continuing Disclosure Filings
 Periodic Notification of Material Events
GOVERNMENT FINANCE OFFICERS ASSOCIATION
What is the Official Statement?
 The document provided to potential bond
purchasers, wherein all material information
necessary for the purchaser to make an informed
decision to buy is disclosed.
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement – Key Points
 SEC has made it very clear – issuer is primarily liable
for content of its official statement
 “In authorizing the issuance of securities and related
disclosure documents, a public official may not authorize
disclosure that the official knows to be false; nor may a
public official authorize disclosure while recklessly
disregarding facts that indicate there is a risk that the
disclosure may be misleading”
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement – Key Points
 Purpose is to describe the debt, issuer, and sources of
repayment
 Disclose all material facts
 Rule 10b-5 Anti-fraud provisions
 Do not omit or misstate any material fact
 What is material?
 Important fact to investor in making a decision to purchase the
bonds
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement – Key Elements
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Description of bonds
Security & source of repayment
Estimated Sources & Uses
Project
Issuer
Risk Factors
Continuing Disclosure
 Concluding Information
 Tax matters
 Ratings
 Litigation
 Financial interests
 Appendices
 Economic, Financial &
Demographic on Issuer
 Audited Financials
 Form of Bond Counsel
Opinion
 Summary of Legals
 Credit Enhancement
GOVERNMENT FINANCE OFFICERS ASSOCIATION
SEC Rule 15c2-12
 Effective January 1, 1996
 Designed to prevent fraudulent, deceptive, or manipulative
acts or practices
 Requires municipal debt issuers to file updated financial
information and operating data annually with EMMA
(Electronic Municipal Market Access System) by a specified
date and file material event notices.
 Requires underwriters to reasonably determine that the issuer
has complied with the rule prior to offering for sale the related
securities
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Requirements

The issuer must enter into a written agreement for the benefit of the
bond holders to do the following:
 Provide through a filing to the Electronic Municipal Market Access
(EMMA) and to the appropriate State Information Depository (SID),
if any, annual financial information or operating data presented in
the Official Statement
 Submit audited financial statements to the EMMA system and
respective SID when available, if not provided as part of the annual
financial information listed above
 Submit a notification to the EMMA system and respective SID of
any material event occurrence in a timely manner
 Submit a notification to the EMMA system and respective SID of
failure to comply in a timely manner
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Material Events

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Material events related to bonds issued after 12/1/10, but
submit the material event to the EMMA system within 10
business days of the event occurring.
Some events need to be disclosed regardless if they are
‘material’ or not:
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Principal and interest payment delinquencies
Unscheduled draws on debt service reserves reflecting
financial difficulties
Unscheduled draws on credit enhancement reflecting
financial difficulties
Substitution of credit or liquidity providers, or their failure
to perform
Adverse tax opinions
Defeasances
Rating Changes
GOVERNMENT FINANCE OFFICERS ASSOCIATION
New Material Events

Updated in May, 2010: New Material Events
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IRS proposed or final determinations of taxability
Tender officers
Bankruptcy, insolvency, receivership, or similar event of the
obligated person
Consummation of a merger, consideration, or acquisition, or
certain asset ales, involving the obligated person, or entry into or
termination of a definitive agreement to the foregoing (if material)
Appointment of a successor or additional trustee or the change of
name of a trustee (if material)
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Notice of Failure to Comply
 If the issuer fails to meet its annual filing requirements, the
issuer must:
 Submit a notice of failure to comply with EMMA and the
appropriate SID
 Complete and submit all past due filings prior to issuing
debt
 Create procedures to ensure the failure to file will not
reoccur
 Disclose its failure to comply in every Official Statement
for 5 years
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Risks of Non-Compliance

If the issuer fails to meet its annual filing requirements, the ease of
selling its securities diminishes
 The underwriter is prohibited from bidding on or offering for sale
the primary offering
 Rating agencies could assign a lower rating if the failed filings
were deemed to be caused by poor management
 The investors may not show interest in securities where the
required disclosure filings are not available
 In the event of a default, the investor could argue the required
disclosure filings were not available for due diligence review
 Higher borrowing costs
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Debt Issue Exemptions

Exemptions from annual filings and material event notices
 Debt issues with a total par amount of $1,000,000 or less
 Debt issues authorized in denominations of $100,000 if,
• Sold to no more than 35 persons who are believed to
capable of evaluating risk and who are purchasing the
securities for one account
• Have a maturity of 9 months or less, or
• May be tendered to the issuer at par value or above every
9 months until maturity

Exemptions from annual filings but not material event notices
 Debt issues with a maturity 18 months or less
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Requirements on Underwriters
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Prior to bidding on or offering for sale municipal securities the
underwriter must review the preliminary official statement (“POS”)
and reasonably determine that issuer has complied with the rule
The underwriter must send a POS no later than 1 business day after
the request of a potential customer, if available
The underwriter must receive the final official statement 7 business
days after the purchase agreement and in sufficient time and
quantity to accompany any confirmation that requests payment from
any customer
Issuers may now submit POS documents to EMMA.
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Tax Compliance
 Pre-Issuance
 Closing Documents
 Post-Issuance Compliance
GOVERNMENT FINANCE OFFICERS ASSOCIATION
New Money Bonds
 What you can finance with Tax-Exempt Bonds
 What you can’t finance with Tax-Exempt Bonds
 Reimbursement
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Official Intent
• Functional Description of Property or Account
• Maximum Principal Amount of Debt
• Must actually reasonably expect to reimburse
Timing
• No later than 18 months after the later of date of expenditure or placed in
service date of property (but not more than 3 years after date original
expenditure is paid)
Nature of Expenditure
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Refunding Bonds
 Tax-Exemption of Refunding Bonds depends on prior bonds
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Bond Counsel will trace back to original project
Useful life considerations
 Current Refunding
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Less than 90 days
 Advance Refunding
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Greater than 90 days
Limitation on number of Advance Refundings
Yield Restriction
 Arbitrage Considerations
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Yield Restriction
Final Arbitrage Calculation required on Refunded Bonds
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Tax Documents at Closing
 Tax and Non-Arbitrage Certificate
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Conduit Issue: separate certificates for Issuer and Borrower
Contains reasonable expectations at time of closing
 Form 8038-G
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Must be filed by 15th day of second month after close of calendar quarter bonds
are issued
New boxes for written procedures
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Post-Issuance Compliance
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Record Retention
Arbitrage and Yield Restriction
Expenditure of Proceeds
Private Use
Remedies
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Post-Issuance Compliance
 Benefits of Written Procedures
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Check the box on 8038-G
More lenient penalties for noncompliance
Audit compliance will be easier
Training new staff will be easier in the event of turnover
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Record Retention
 General Rule: Life of the Bonds plus 3 years
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If refunded, then extends to life of Refunding Bonds plus 3 years
Note: this is different than State of Florida record retention guidelines
 What do you keep?
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Basic records relating to the bond transaction
Documents evidencing the expenditure of bond proceeds
Documents evidencing the use of bond-financed property by public and private
sources
Documents evidencing all sources of payment and security of the bonds
Documents pertaining to the investment of bond proceeds
 How do you keep it?
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IRS Electronic storage guidelines
GOVERNMENT FINANCE OFFICERS ASSOCIATION
What is Arbitrage?
 Arbitrage is the ability to earn profit by capitalizing in differences
between investments or markets.
 In the case of public finance, Arbitrage refers to ability to profit from
investment of tax-exempt bond proceeds in taxable securities.
 The ability to earn arbitrage depends on the relationship between
taxable and tax-exempt rates and the shape of the yield curve.
 Positive arbitrage represents earnings above the arbitrage yield.
Negative arbitrage represents earnings below the arbitrage yield
(i.e., “losses”).
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Arbitrage Rebate Compliance
Activities
 Internal monitoring of rebate compliance
 Recommend annual calculations during construction period
 Set aside annual rebate liability in Rebate Fund
 Get it out of the Construction Fund
 Paying rebate is not bad, just need to monitor and pay as
required
 Pay attention to requirements in Tax/Arbitrage Certificate
GOVERNMENT FINANCE OFFICERS ASSOCIATION
How Do We Measure Arbitrage?
 Bond Yield vs. Investment Yield
 Bond Yield:
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Fixed Rate vs. Variable Rate
Qualified Guarantee Fees
Qualified Hedge
 Investment Yield
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Yield on Proceeds
 Proceeds
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Original/Sale Proceeds (including investment earnings)
Transferred Proceeds
Replacement Proceeds
GOVERNMENT FINANCE OFFICERS ASSOCIATION
When is Rebate Calculated?
 Required:
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Every 5 years, and on Final Maturity
Refunding Triggers New Final Maturity
8038-T: Only file if rebate is owed
 Recommended:
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Annually during construction period
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Exceptions to Rebate
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Six Month Spending Exception
18-Month Spending Exception
24-Month Spending Exception
Small Issuer Exception
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Yield Restriction
 Separate from Arbitrage Rebate
 Temporary Periods
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Expenditure of Proceeds
 Reasonable Expectations vs. Actual Facts
 Best Practice: open communication with those responsible for
spending the money
 Reallocation of Bond Proceeds
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Use / Payment Tests
 Private Business Use Test:
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No more than 10% of the proceeds of the Bonds can be used for Private Business
Use
 Private Payment Test:

No more than 10% of the payment of principal or interest on the Bonds is made
or secured by payments for Private Business Use
 BOTH tests must be “met” in order to have Private Activity Bonds
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Business Use
 Private Business Use Test:
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No more than 10% of the proceeds of the Bonds can be used for Private Business
Use
Generally easier to measure than Private Payment Test
 Measurement
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Square footage
Number of parking spaces in a garage
Time
 Exceptions:
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Incidental Use
Short-Term use
General Public Use
Qualified Management Agreements (Rev. Proc. 97-13)
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Loan Financing Test
 No more than the lesser of $5 million or 5% of the proceeds of the
issue may be used directly or indirectly to finance loans to one or
more governmental persons
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Remedial Actions
 Redemption of Nonqualified Bonds
 Alternative Use of Disposition Proceeds
 Alternative Use of Facility
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Other Matters
 VCAP – Voluntary Compliance Agreement Program
 Audit
GOVERNMENT FINANCE OFFICERS ASSOCIATION
Questions?
Misty Taylor
Bryant Miller Olive
255 South Orange Avenue, Ste. 1350
Orlando, FL 32801
(407) 426-7001
[email protected]
Will Milford
Bryant Miller Olive
111 Riverside Ave., Ste. 200
Jacksonville, FL 32202
(904) 384-1264
[email protected]
GOVERNMENT FINANCE OFFICERS ASSOCIATION