SLGS FORUM 2013 August 8, 2013 Louisville, KY David Cholst Chapman and Cutler LLP and Andy Mathes Farr, Miller & Washington, LLC

Investing Bond Proceeds  Arbitrage  Federal Guarantee  Prudence  Yield 1

Prudent Choices  Treasuries (incl SLGS)  Agencies  Insured Deposits  Collateralized Debt  Pooled Arrangements  Mutual Funds  Highly Rated Debt (GICS) 2

Guidelines  State Law  Indenture Requirements  Insurer Requirements  Investment Policies  Tax Restrictions 3

Arbitrage Rules  Rebate  Yield Restriction 4

Exceptions to Yield Restriction  Temporary Periods  Reasonably Required Reserve or Replacement Fund  Bona Fide Debt Service Funds 5

Exceptions to Rebate  Spending Exceptions  Small Issuer Exceptions 6

Basic Arbitrage Requirement  Fair Market Value Requirement 7

SLGS – Always O.K. SLGS deemed purchased for fair market value 8

Type Traded on Established Securities Market –T + 1Trading for Treasuries –T + 3Trading for Muni's  Over $100,000,000 Maturities 9

Bidding  3 Bids Required  Fair Process Required  Bid Rigging once rampant 10

Federal Guarantee  No more than 5% of the proceeds can be: –Invested in Insured Deposits –Used to make federally guaranteed loans 11

Exceptions:  Temporary Period  Bfdsf  Advance Refunding Escrow  4 R Fund 12

FDIC Insurance  Not Optional  $250,000 Per Insured Per Bank 13

Prudent Strategy (may violate tax law)  Purchase many CDs  Each from a different bank  Each with a par amount below $250,000 14

Collateral  Treasuries – O.K.  Federal Home Loan Bank ? 15

What Is A Loan? 16

IRS Actions on Federal Guarantee  We don’t really know  Anecdotes 17

IRS Correspondence Exam  Included Question: –If you know of a problem tell us! 18

Issuer Told IRS 149(b) Violated  IRS issued no change letter 19

Different Issuer Submitted VCAP  No response yet –[UPDATE POSSIBLE]  No other known IRS review 20

If Insured Deposits Are To Be Avoided  What to use? –Treasuries –SLGS –Agencies –Be careful with Commercial Paper 21

Demand Deposit SLGS Time Deposit SLGS  Safe  Liquid  Rate is low but reasonable  Easy 22

SLGS May Be Used  Escrows (for T.E. Bonds)  Project Funds  Reserves  Debt Service Funds  Commingled Funds 23

SLGS May Not Be Used  Window closed  Taxable bond proceeds (unless refunds T.E. Bonds)  Amounts unrelated to Bonds (unless commingled) 24

Alternatives If SLGS Unavailable  Open Market Treasuries –With bidding –Without bidding  Riskier Investments  FDIC Insured Deposits (if allowed) 25

How long does the SLGS program remain suspended, on average? 3 Weeks?2 Months?5 Months?

The Good, The Bad and The Ugly What are the available options when the net yield of Treasuries will be negative (net of expenses)? Cash Buy them anyway Money Markets

Questions 28

This document has been prepared by Chapman and Cutler LLP attorneys and others for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Accordingly, readers should consult with, and seek the advice of, their own counsel with respect to any individual situation that involves the material contained in this document, the application of such material to their specific circumstances, or any questions relating to their own affairs that may be raised by such material. © 2013 Chapman and Cutler LLP 29