Post-Issuance Compliance Staying Out of Trouble After the Bonds are Issued Southern Association of College and University Business Officers (SACUBO) June 1, 2015Mary Nash Rusher Hunton & Williams LLP

2 Post-Issuance Compliance – Two Primary Areas of Focus: I.Federal Tax Law Topics II.Securities Law Topics Scope of This Presentation

3 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 I.FEDERAL TAX LAW TOPICS

4 The Office of Tax Exempt Bonds Originally contained in Exempt Organizations Became distinct office in 1990 Today has staff of approximately 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.) 5

6 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 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

7 TEB VCAP Tax Exempt Bonds Voluntary Closing Agreement Program ― Section 7121 of the Code ― Notice and IRM Must identify a violation Anonymous requests Identified violations for which voluntary closing agreements may be obtained: For example- ― Too much private use ― Exceeding capital expenditure limitations ― Failure to timely reinvest proceeds in 0% SLGs

8 TEB VCAP Voluntary closing agreement typically pre-empts later examination Updated administrative procedures for VCAP IRM released August 5, 2011 ― Reduced settlement amount if written post-issuance compliance procedures are in place

9 IRS wants governmental entities to create written procedures to manage tax compliance –Currently not a federal tax law requirement, but ignore at one’s peril –Organizations with procedures are viewed as more likely to comply –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.” Create Written Policies & Procedures — Why?

10 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” IRS clearly wants written procedures

11 Adopting a Policy allows you to check Lines 43 and 44 Key Boxes on Form 8038

Seven Elements of An Effective Post-Issuance Tax Compliance Program 12

13 1.Written policies & procedures 2.Team assigned to manage compliance process 3.Record retention 4.Arbitrage rebate & yield restriction compliance 5.Private business use compliance 6.Staff training and education 7.Periodic review of process Elements of a Post-Issuance Tax Compliance Program

14 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 (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?

15 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?” ( Create Written Policies & Procedures — How?

16 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 Team Assigned to Manage Compliance Process

17 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 bonds –Documentation on investment of bond proceeds –IRS Tax-Exempt Bond FAQs regarding Record Retention Requirements ( Record Retention

18 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 swaps 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 Record Retention

19 Educate staff about applicable rules, written procedures Internal communication between departments Procedures to train new staff Continuing education — Evolving regulatory landscape Staff Training and Education

20 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. s re: no private use, copies of qualified management contracts, etc.) Periodic Review of Process

21 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 Arbitrage Rebate & Yield Restriction Compliance

22 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 Compliance

23 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 – Safe harbors) 5)Non-qualifying research contract (Rev. Proc – Safe harbors) 6)“Special legal entitlements” arrangements that convey special rights over bond- financed 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 Correction-Some-Basic-Concepts 24

25 The Importance of Having Good Disclosure Practices Rule 15c2-12 Effect on future issuances II.SECURITIES LAW POST ISSUANCE COMPLIANCE

26 The Official Statement –Purpose Helps to sell bonds Protections to issuers and underwriter under federal securities laws –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 — Primary Market Disclosure

27 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 Background — Rule 15c2-12

28 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

29 Continuing Disclosure Requirements (cont.) Continuing Disclosure Agreement (“CDA”) –Written Agreement for Benefit of Bondholders Make Clear What Information is Subject to Continuing Disclosure –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 Defeasances 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 30

Elements of an Effective Post-Issuance Disclosure Program 31

32 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 Agreement

33 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

34 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 Continuing Disclosure — Policy and Procedures (Cont’d)

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. 35

36 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

37 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 Voluntary Disclosure — Policy and Procedures (Cont’d)

38 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

39 Considerations for Disclosing on a Web Site: Segregate information intended solely for investors from other information and clearly identify information as intended for investors 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 Web Site Disclosure — Policy and Procedures (Cont’d)

Disclosure of Bank Loans MSRB Notice 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 proceeds; –Amount of additional debt and its impact on the debt position; Source of repayment; –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; 40

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. 41

42 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

43 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) Educational Resources (Cont’d)

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 checklist Actually comply with the policy and complete the checklist! 44 Conclusion

45 For more information, contact: Mary Nash Rusher Hunton & Williams LLP 421 Fayetteville Street, Suite 1400 Raleigh, NC (919) Questions?