Post Issuance Complinance - Office of the Controller

Post-Issuance Compliance
Staying Out of Trouble After the Bonds are Issued
Southern Association of College and University
Business Officers (SACUBO)
June 1, 2015
Mary Nash Rusher
Hunton & Williams LLP
Scope of This Presentation
Post-Issuance Compliance – Two Primary
Areas of Focus:
Federal Tax Law Topics
Securities Law Topics
The Importance of Monitoring the Use of Bond
Proceeds and the Facilities Financed Thereby
Beginning in 2007, IRS began to focus on compliance with rules relating
to use of proceeds and use of bond financed facilities after the bonds
were issued
“Post-issuance tax compliance begins with the debt issuance process
itself and provides for a continuing focus on investments of bond
proceeds and use of bond-financed property. It will require identifying
existing policies, the responsible people, the applicable procedures, and
the affected population.”
Advisory Committee on Tax-Exempt and Governmental Entities
June 13, 2007
The Office of Tax Exempt Bonds
Originally contained in Exempt
Became distinct office in 1990
Today has staff of approximately 100 top bar-upper right hand
corner: “Tax-Exempt Bond Community”
What is the IRS Looking For?
Failure to comply with rebate requirements
Improper expenditure of bond proceeds
Improper use of bond financed property
Failure to comply with specific tax rules relating
to issue type (e.g. solid waste disposal bonds,
501(c)(3) rules, etc.)
Compliance Contacts with Issuers
Compliance Check Questionnaires
― A compliance check is not an examination
― No penalty for failing to respond; however refusal to participate will likely lead
to an examination
― Focused Compliance questionnaire process in 2007-2009 for governmental
(Form 14002) and tax exempt bonds (Form 13907)
Focused Correspondence
― “We have been provided with certain information”
― “We have learned the following; please voluntarily explain”
Full Exams
― Random exams selected on Form 8038-G, Form 8038-CP, Form 8038 data
― Program exams selected on type of bond purpose (qualified 501(c)(3) bonds,
qualified school construction bonds)
― Targeted exams for potential abuse
― Examination and audit mean the same thing
• Tax Exempt Bonds Voluntary Closing Agreement
― Section 7121 of the Code
― Notice 2008-31 and IRM 7.2.3
• Must identify a violation
• Anonymous requests
• Identified violations for which voluntary closing agreements may be
For example-
― Too much private use
― Exceeding capital expenditure limitations
― Failure to timely reinvest proceeds in 0% SLGs
Voluntary closing agreement typically pre-empts later
Updated administrative procedures for VCAP IRM 7.2.3
released August 5, 2011
― Reduced settlement amount if written post-issuance compliance
procedures are in place
Create Written Policies & Procedures — Why?
• IRS wants governmental entities to create written
procedures to manage tax compliance
Currently not a federal tax law requirement, but ignore at one’s
Organizations with procedures are viewed as more likely to
2011 Final Report on Tax Exempt Bond Questionnaire Project
indicated that while 95% of 501(c)(3) organizations reported a
post issuance procedures or guidelines, only 16% actually had a
specific written procedure; “adoption and consistent utilization of
formal procedures and practices generally improves the
likelihood of post issuance compliance.”
IRS clearly wants written procedures
• Line 43 of revised Form 8038 and Lines 43, 44
of revised Form 8038-G ask if issuer has
established written procedures:
1) “to ensure that all nonqualified bonds of an
issue are remediated”
2) “to monitor the requirements of Section 148”
Key Boxes on Form 8038
• Adopting a Policy allows you to check Lines 43 and 44
Seven Elements of An
Effective Post-Issuance Tax
Compliance Program
Elements of a Post-Issuance
Tax Compliance Program
Written policies & procedures
Team assigned to manage compliance process
Record retention
Arbitrage rebate & yield restriction compliance
Private business use compliance
Staff training and education
Periodic review of process
Create Written Policies & Procedures — How?
• Start by documenting current unwritten procedures
• Use bond documents and Governmental Bond
Compliance Check form as guides
Bond documents: Non-Arbitrage Certificate, Arbitrage Rebate
Compliance Instructions, Trust Indenture requirements, etc.
Gov’t Compliance Check Questionnaire – Form 14002 (can be
found at
• Review with bond counsel and financial advisor
• Bond Counsel will often draft a compliance policy as part
of a bond issue
Create Written Policies & Procedures — How?
• Other Resources:
NABL/GFOA Post-Issuance Compliance Checklist
Advising Committee on Tax-Exempt and Government Entities
(ACT) Paper – “After the Bonds Are Issued, Then What?”
Team Assigned to Manage
Compliance Process
• Assign individual(s) or offices responsible for
compliance management
– Depends on size of issuer
– Types of bond deals
• Team effort
– Project/Facilities Coordinator
– Finance Department
• Address succession issues
Record Retention
• IRS Guidance – IRC Section 6001 – general rule for proper retention
of records for federal tax purposes
– Basic records (e.g. transcript)
– Documentation on expenditures of bond proceeds
– Documentation on use of bond-financed property (public vs.
private use, management contracts, research agreements)
– Documentation on all sources of payment or security for the
– Documentation on investment of bond proceeds
– IRS Tax-Exempt Bond FAQs regarding Record Retention
Requirements (
Record Retention
Sample Records to Retain:
• Board minutes, resolutions
• Feasibility studies, appraisals
• Bond transcripts
• Newspaper ads, miscellaneous correspondence
• Investment records – bank statements, investment transaction information
(e.g., trade confirms), etc.
• Expenditure histories – invoices, check images, documents showing and
supporting disbursements
• IRS Filings – 8038-T (and related checks), 8038-CP
• Records related to acquisition of investment agreements and interest rate
• Payments for a letter of credit or standby bond purchase agreement
• Arbitrage rebate and yield restriction compliance reports
• Memos to file regarding bad use and other tax questions
Staff Training and Education
• Educate staff about applicable rules, written
• Internal communication between departments
• Procedures to train new staff
• Continuing education — Evolving regulatory
Periodic Review of Process
• Don’t let a good plan go to waste
• Should periodically (at least annually) review,
ask questions and monitor compliance
• Use an annual checklist; be sure to complete it
and keep it, along with backup documentation
(i.e. emails re: no private use, copies of qualified
management contracts, etc.)
Arbitrage Rebate &
Yield Restriction Compliance
• Code Section 148 – Arbitrage and Yield
– Expenditure of bond proceeds
– Temporary periods
– Rebate – Spend-down exceptions, “Small
Issuer” Exemption
– Yield Calculation – bond, investments
– Yield reduction payments
• Rebate Consultant
Private Business Use Compliance
• Tax law limits private use of tax-exempt financed facilities to
10% (or 5% for unrelated or disproportionate use)
– Average use measured over the life of the financed facility
• Maintain records of business activities
– Rental of financed facilities for non- governmental/non
501(c)(3) functions
• Legal counsel review of all management & service
agreements, leases, sub-leases, naming rights contracts, etc.
• Coordinate use of tax-exempt bond financed facilities with
administrative team to ensure compliance
• “Deliberate Actions” — “Remedial Actions”
Private Business Use (cont.)
Examples of Deliberate Actions – Change in Use:
1) Sale of facilities – change in ownership
2) Lease of Facilities
3) Output Contracts
4) Non-qualifying management contracts (Rev. Proc. 97-13 –
Safe harbors)
5) Non-qualifying research contract (Rev. Proc. 97-14 – Safe
6) “Special legal entitlements”
• arrangements that convey special rights over bondfinanced facilities (e.g., priority rights to the use or
capacity of a facility)
Remedial Actions
• Redemption or defeasance of nonqualified bonds within
90 days of deliberate action; defeasance escrow cannot
be used if the period between the issue date and the first
call date is more than 10.5 years.
• Alternative use of disposition proceeds within 2 years of
the date of the deliberate action
• Alternative use of bond-financed property
The Importance of Having
Good Disclosure Practices
Rule 15c2-12
Effect on future issuances
Background — Primary Market Disclosure
• The Official Statement
– Purpose
• Helps to sell bonds
• Protections to issuers and underwriter under federal securities
– Role of professionals
– Credit ratings
– Credit enhancements
– Financial information
• Private Placements
• Conduit Financings (NC Capital Facilities Finance Agency, SC
Educational Facilities Authority, VA College Building Authority etc.)
Background — Rule 15c2-12
SEC Rule 15c2-12
– Amendments made in 1994 – Sea-change to muni disclosure
– Underwriters may not purchase bonds unless issuer has
contractually promised to provide specific continuing disclosure
for the lifetime of the bonds
• Ongoing financial information
• Filing material events
Timing for making filings
• “Annual Financial Information” – GFOA recommends no later than 6
months following end of FY; NC typically 7 months
• “Event Notices”
– Bonds Issued < 12/2011 – notify of “material” events in a timely manner
– Bonds Issued > 12/2011 – notify within 10 business days after the
occurrence of the listed event
Continuing Disclosure Requirements
– SEC Rule 15c2-12 – Continuing Disclosure
• Purpose: Increases Information Available after
Municipal Securities are Initially Marketed
• Requires “binding commitment”
• Requires Limited Information at Limited Times
• Creates Need for Ongoing Procedures and
Monitoring – Compliance Officer
• Requirement applies to underwriters; must
have “reasonable expectation” that issuer will
comply based on past history of compliance
Continuing Disclosure Requirements (cont.)
• Continuing Disclosure Agreement (“CDA”)
– Written Agreement for Benefit of Bondholders
• Make Clear What Information is Subject to Continuing
– Provide Annual Financial Information and Operating Data
• Timeframe set out in CDA
• Mirror the Financial Information and Operating Data
Contained in Final Official Statement
• Issuers May Not Reduce Continuing Disclosure Undertaking
By Reducing Initial Disclosure in Official Statement
Continuing Disclosure – Events to Monitor
Principal and interest payment delinquencies
Non-payment related defaults, if material
Unscheduled draws on debt service reserves reflecting financial difficulties
Unscheduled draws on credit enhancements reflecting financial difficulties
Substitution of credit or liquidity providers or their failure to perform
Adverse tax opinions, IRS notices or material events affecting the tax status
Modifications to rights of security holders, if material
Bond calls, if material and tender offers
Release, substitution, sale of property securing repayment of securities, if material
Rating changes
Bankruptcy, insolvency, receivership or similar event of the obligated
Merger, consolidation, or acquisition of the obligated person, if material
Appointment of a successor or additional trustee, or the change of name of a trustee,
if material
Elements of an Effective
Post-Issuance Disclosure Program
Continuing Disclosure Agreement
The Continuing Disclosure Agreement (“CDA”)
• Developing the CDA
• Understanding the requirements set within document for ongoing
disclosure filings
– “Annual Financial Information” filed by a certain date
– “Event” notice filings within 10 business days
– Notice of failure to provide required disclosures
– Who makes filing? – Issuer or “Material Obligated Person”
(Conduit issuer contexts)
– Dissemination Agent?
– Required to file at Electronic Municipal Market Access (“EMMA”)
Continuing Disclosure — Policy and Procedures
Event Notices
– Develop notice in consultation with counsel
– Make the filing with EMMA
Annual Financial Information
– Must cover information required by CDA
– Submission of CAFR/audited financials may be appropriate (monitor
changes over time in CAFR/ tables)
– Submit to EMMA in PDF-readable format
Voluntary Disclosure
– Posting Information on web site
– Using EMMA
– GFOA Best Practices - Making Voluntary Disclosure of Interim Financial
Information; How Practical?
– Ensures “level playing field”
– Use of disclaimers with unaudited financial and budget info
Continuing Disclosure —
Policy and Procedures (Cont’d)
• Identify person with overall responsibility for overseeing
continuing disclosure policy and procedures
• May hire a dissemination agent
• Develop a disclosure management policy
– Adopt a thorough disclosure policy
– Outline the disclosure practices of your entity
– Adhere to the practices
– Avoid material omissions
– Monitor telephone inquiries
Ongoing Disclosure Procedures
• Obligated entities should develop continuing disclosure
procedures that:
– identify the information that is obligated to be
submitted in an annual filing;
– disclose the dates on which filings are to be made;
– list the material events as stated by the SEC and your
CDA; and
– identify the person who is designated to be
responsible for making the filings.
Voluntary Disclosure — Policy and Procedures
• Voluntary Disclosures
After consulting with legal counsel:
• A governmental entity or obligated person may wish to provide
other financial information to investors that goes beyond what
is specified in the CDA
• Examples of additional information that could be disclosed:
– Annual budgets, financial plans, revenue forecasts
– Investment information, monthly financial reports
Voluntary Disclosure —
Policy and Procedures (Cont’d)
• Voluntary Disclosures
– If an entity chooses to post unaudited interim financial
information as part of its voluntary disclosures:
• It must be clearly described as such on the document
• A government entity may wish to include additional disclaimer
language regarding unaudited information
– Entity should design a system of internal controls to
ensure the accuracy, completeness, consistency, and
freshness of information posted
Web Site Disclosure — Policy and Procedures
• When using a web site to disseminate
information electronically:
– Keep it simple
– Ensure proper security of web site
– Use proper disclaimers about the information
being presented
• Unaudited information
• Stale information
Web Site Disclosure —
Policy and Procedures (Cont’d)
Considerations for Disclosing on a Web Site:
• Segregate information intended solely for investors from other
information and clearly identify information as intended for
• Institute a formal process for reviewing and approving any
information posted on the web site to ensure accuracy,
consistency, and completeness of the information
• Be familiar with the SEC’s Interpretive Release on “Use of
Electronic Media”
• See
Disclosure of Bank Loans
MSRB Notice 2015-03 encourages issuers to voluntarily post information
about bank loans to EMMA
Can either file a redacted copy of the loan document or a summary, to
include the following:
– Details of the purpose of the additional debt obligation and use of
– Amount of additional debt and its impact on the debt position; Source of
– Payment dates, interest rate, if fixed, or method of computation, if
variable, maturity and amortization of bank loan;
– Covenants and other ancillary business provisions;
– Terms of the additional debt including liquidity requirements and
optional, mandatory, and extraordinary prepayment terms, if any;
Bank Loans (continued)
• Summary of Loan Documents (continued)
Evidence of compliance with additional debt test, if applicable
Events of default and remedies;
Acceleration events such as a ratings downgrade;
Disclosure of “most-favored nation” or similar clause;
Ratings, if assigned;
Governing law;
Tax status of interest;
Financial reporting requirements.
Educational Resources
Resources Available at MSRB / EMMA (
• Videos:
Six Things to Know When Issuing Bonds
EMMA Continuing Disclosure Overview
• Fact Sheets:
General – EMMA
Six Things to Know When Issuing Bonds
Submitting Continuing Disclosure to EMMA
Six Ways to Use EMMA
Signing Up for EMMA System Alerts
MSRB Fact Sheet
Educational Resources (Cont’d)
• GFOA Best Practices Related to Disclosure and
Investor Relations:
– Understanding Your Continuing Disclosure
Responsibilities (2010)
– Using a Web Site for Disclosure (2002 and 2010)
– Web Site Presentation of Official Financial
Documents (2009)
– Maintaining an Investor Relations Program (1996,
2003 and 2010)
• Adopt a Post Issuance Compliance Policy that includes
both tax and securities law compliance
• Designate one or more responsible persons/offices
• Use an annual compliance checklist to ensure
compliance with the policy
• Consider adding loan/MTI covenant compliance to the
• Actually comply with the policy and complete the
For more information, contact:
Mary Nash Rusher
Hunton & Williams LLP
421 Fayetteville Street, Suite 1400
Raleigh, NC 27109
(919) 899-3066