it wasn’t our - iowa league of cities · 2012-10-12 · it wasn’t our fault but we have to live...
TRANSCRIPT
It Wasn’t Our
Fault But we have to live
with the
consequences
Elisabeth Grob
Iowa League of Cities 2012 Annual Conference & Exhibit
Handouts and presentations are available online at www.iowaleague.org
Dodd-Frank The Dodd-Frank Wall Street Reform and Consumer
Protection Act signed into law July 21, 2010.
Most comprehensive financial regulatory reforms taken since Great Depression
Much left to regulators
243 Rulemakings; 67 studies
Created within the SEC an Office of Municipal Securities Administers rules related to muni b/d, MA, muni
securities investors, MUNI ISSUERS, coordinate with MSRB
Dodd-Frank Municipal Provisions “Investor Protection and Improvements to the
Regulation of Securities”
Municipal Securities Rulemaking Board
Greatly expanded
Assist SEC and FINRA in examinations and enforcement actions related to MSRB rules (keep $$)
Establish information systems and impose fees
Regulate advice provided to or on behalf of municipal entities
Dodd-Frank Municipal Provisions Requires Registration and Oversight of “municipal advisor”
A person (who is not a municipal entity or an employee of a municipal entity) that: Provides advice to or on behalf of a municipal entity with respect to
municipal financial products or the issuance of municipal securities; or
Undertakes a solicitation of a municipal entity.
MA has fiduciary duty to always act in municipal entity’s best interest. MA may not engage in any act, practice or course of business, which
is not consistent with fiduciary duty/MSRB Rules.
No fraudulent, deceptive, manipulative act/practice in providing advice to issuer
Dodd-Frank Municipal Provisions “Municipal Entity” any state, political subdivision of a
state or a municipal corporate instrumentality of a state, including agencies, instrumentalities, or plans or programs or pools of assets sponsored or established by a municipal entity, or any other issuer of municipal securities
“Municipal Financial Product” municipal derivatives, guaranteed investment contracts and investment advice
Dodd-Frank Municipal Provisions Municipal Advisor does NOT include:
Municipal entity being advised or its employees
Registered investment advisors
Registered Commodity advisors
Attorneys offering legal advisor or services of a traditional legal nature (advice provided to clients regarding structure, timing, terms and other similar matters concerning municipal financial products or issuance of municipal securities if provided within a lawyer-client relationship specifically related to such products)
Engineers ACCOUNTANTS ARE NOT EXCLUDED!!!
Dodd-Frank Municipal Provisions Underwriters are not municipal advisors
Rule G17 effective August 2, 2012; “robust disclosure” regarding role, compensation and actual/potential conflict of interest
Provide at time UW engaged in sufficient time before the execution of the contract to allow officials to evaluate recommendation – WRITTEN ACKNOWLEDGEMENT
“Arm’s Length” nature of relationship disclosed at earliest states (Rule G23)
Dodd Frank Municipal Provisions G17 cont’d
All representations made by UW to issuers whether written or oral be truthful and accurate and may not misrepresent or omit material facts.
Complex vs. routine disclosures differ Routine: disclose material aspects Based on UW’s “reasonable
belief” that issuer lacks knowledge or experience with structures and linked to whether UW has recommended structure.
In writing, sufficiently in advance to evaluate, in manner designed to make clear the subject of disclosure and implications to issuer.
Dodd Frank Municipal Provisions G17 cont’d
Implied representation that price paid by UW is fair and reasonable, taking into acct all relevant factors.
Lavish gifts and entertainment – rating agency trips
Conflicts of interest – 3d party payments Proposed Rule G37 – Dealers must disclose contributions to
bond ballot campaigns, issuer officials and payments to political parties of states and political subdivisions
“Collecting additional disclosure information would assist the MSRB in our ongoing study of the perceived correlation between giving bond ballot campaign support and getting underwriting business. ” Lynette Kelly, August 15, 2012 MSRB Press Release
Dodd Frank Municipal Provisions Required Municipal Securities Market Study, Value of
Enhanced Disclosure and Repeal of Tower Amendment?
Tower Amendment prohibits SEC and MSRB from requiring issuers to file documents with them before offering muni securities and bars MSRB from requiring issuer filings.
165 page report issued July 31, 2012
Dodd Frank Municipal Provisions DOES NOT RECOMMEND WHOLESALE REPEAL OF
TOWER AMENDMENT
Recommends 15 major legislative and regulatory changes to “improve disclosure and price transparency for investors.”
“Principles-based legislative changes” – not “granular, prescriptive”
Provide SEC with authority to establish disclosure requirements, principles, timeframes and frequency – enforcement tools
Appropriate Disclosure policies and procedures for issuers
SEC establish form and content of FS used in offerings and establish standards and designate GAAP as standard setter.
Dodd Frank Municipal Provisions
Safe Harbors to provide more frequent and timely disclosure
Permit IRS to disclose return info to SEC
Enforce Continuing Disclosure Agreements
Regulatory initiatives
Annual “muni-conference”
Interpretive Release
Rule 15c2-12 Amendment if legislation not passed
SEC continue to work with MSRB (primary medium for regulation of municipal industry)
Dodd Frank Municipal Provisions Market Initiatives
Develop “best practice” guidelines
Disclosure policies/procedures; interim financial information; timeliness of disclosure
“Perceived lack of price transparency”
IRS Initiative Post-Issuance Compliance The on-going nature of post-issuance compliance
requirements applicable to tax-advantaged bonds requires issuers to actively monitor compliance throughout the entire period their bonds remain outstanding. This due diligence will significantly improve the issuer’s ability to identify noncompliance and prevent violations from occurring, or timely correct identified violations (when prevention is not possible), to ensure the continued tax-advantaged status of the bonds.
8/4/12 TEB Post-Issuance Compliance: Some Basic Concepts
IRS Initiative Post-Issuance Compliance Why Care about PIC?
IRS wants to ensure the federal subsidy provided by the interest exclusion on bonds properly applied
Defending TE status of bonds in audit process is costly and time-consuming
Reputation in credit markets and beyond
Financial settlement to protect bondholders
IRS Initiative Post-Issuance Compliance Audits of TEB rare prior to 1992; focus on perceived
problems on date of issue of bonds (arbitrage-driven structures, purchase of investments with bond proceeds – yield-burning)
1998 TE-GE created (Tax-Exempt and Government Entities Divisions) within IRS
Over 40 Revenue Agents devoted to auditing TEB. At any time throughout year, about 400 issues being audited.
In 2007, TE-GE collected $45M in settlements
IRS Initiative Post-Issuance Compliance Issuers must comply with federal tax rules for life of
original bonds and any refunding bonds.
Easy for errors to occur/issuers to lack records and detailed info in audit challenging TE status of bonds.
2007 501(c)(3) PIC Questionnaire; New ANNUAL Schedule K required to Form 990
2011 Governmental Bonds Compliance Questionnaire
2012 IRS Work plan specifically included “small issuers”
2012 QSCB Compliance Questionnaire
IRS Initiative Post-Issuance Compliance 4 Categories of Questions
Current Debt Management Policies and Procedures
Volume Cap Policies and Procedures
Current Procedures Related to Issue Price Determination
Current Record Retention Procedures
Post-Issuance Compliance Procedures
IRS Initiative Post-Issuance Compliance Compliance Checks – Review conducted by the IRS to
determine the following: Whether Issuer is adhering to recordkeeping and information
reporting requirements; and
Whether Issuer’s activities are consistent with their stated “tax-exempt” purpose. Ask if you have questions about filing obligations or requirement
forms and understand them; questions regarding activities
MAY LEAD TO AN EXAMINATION
“The officer or director may refuse to participate in a compliance check without penalty. However, [IRS has] the option of opening a formal examination, whether or not the organization agrees to participate in the compliance check.”
IRS Initiative Post-Issuance Compliance 2 categories:
Arbitrage/Rebate File 8038G TIMELY
Monitor bond yield vs. investment of bond proceeds
Perform Rebate Calculations
Monitor timely spend down of bond proceeds
Private Use: 90% of bond issue must be used for govt’l purposes Lease of facility by for-profit org
Parking facility operated by for-profit org
Management contracts with outside entities
Naming Rights
IRS Initiative Post-Issuance Compliance
ID at time bonds issued:
Quantify the expected private use
Allocate to 10% allowed
Contribute other revenue
After Bonds are issued
Review use and 3d party agreements ANNUALLY
Calculate private use per bond issue
Allowed b/c within 10% (for entire period bonds outstanding)
Reallocate bond proceeds if allowed
Change use, modify k terms, avoid future private use
VCAP
It’s a brave, new world…. Issuing tax-exempt debt has become extremely complex, will become more complex. Ask questions and consult professionals. Don’t stick transcript on the shelf and think once the bonds are issued the city’s responsibilities are covered.
Questions
