1. TAX-EXEMPT BONDS: WHAT YOU NEED TO KNOW Leading Age Annual Meeting and Expo Wednesday, November 4, 2015

2. Overview What are we discussing today?  Role of Borrower’s Counsel and others in a tax-exempt bond transaction  Post issuance compliance ● Federal tax law requirements ● Disclosure responsibilities under the federal securities laws  Responsibilities are those of the Issuer, Obligated Persons and certain individuals Why are we doing this?  Track bond proceeds and use of funds  Avoid inaccurate disclosure (misstatements or omissions)  Best practices – training is key component Why do I care?  You have some responsibility, direct or indirect, for the preparation, review, or approval of tax compliance and disclosure

3. Role of Borrower’s Counsel Representing a Client in a Tax Exempt Borrowing Transaction Background

4. Role of Borrower’s Counsel Negotiation of terms of the transaction ● “Legal” terms ● “Business” terms ● Other issues

5. Role of Borrower’s Counsel Documentation Review and Preparation  Who prepares what?  Who reviews what?

6. Role of Borrower’s Counsel Due Diligence  What is it?  Areas ● Exempt status ● Security ● Representation/warranty/client disclosure ● Other areas

7. Role of Borrower’s Counsel Marshalling of other counsel in multi- facility/multi-state transactions

8. Role of Borrower’s Counsel Approvals (including governing body approvals)

9. Role of Borrower’s Counsel Opinion(s)

10. Role of Borrower’s Counsel Closing Post-Closing

11. Federal Tax Compliance Use of Bond Proceeds Use of Bond Financed Facilities Arbitrage – Investment Yield Restrictions and Rebate Requirements Remedial Actions

12. Tax Compliance – Use of Bond Financed Facilities Limitations on “private use”  Generally, no more than 10% of proceeds of a governmental issue  No more than 5% for private activity bonds and qualified 501(c)(3) bonds Examples  Leases to certain persons  Sale of bond-financed assets  Management contracts and other contracts

13. Tax Compliance – Investment Yield Restrictions and Rebate Requirements Investment Yield Restrictions v. Rebate Requirements  Two ways the IRS tries to stop “arbitrage”  Applicability and interpretation of rules can be complex  These issues will become more important as investment yields rise

14. Post Issuance Tax Complaince Policies Post-issuance federal tax requirements generally fall into two categories: (1) qualified use of proceeds and financed property; and (2) arbitrage yield restriction and rebate Qualified use requirements require monitoring of the various direct and indirect uses of bond-financed property over the life of the bonds and calculations of the percentage of nonqualified uses Arbitrage requirements also require monitoring over the life of the bonds to determine whether both the yield on investments acquired with bond proceeds are properly restricted and whether the issuer must pay a yield reduction payment and/or rebate payment

15. Post Issuance Tax Complaince Policies IRS has said that issuers (conduit borrowers) should adopt written procedures, applicable to all bond issues, which go beyond reliance on tax certificates included in bond documents provided at closing. Sole reliance on the closing bond documents may result in procedures insufficiently detailed or not incorporated into an issuer’s operations The goal of establishing and following written procedures is to identify and resolve noncompliance, on a timely basis, to preserve the preferential status of tax-advantaged bonds Form 8038—check the box?

16. Post Issuance Tax Complaince Policies Written procedures should contain certain key characteristics, including making provision for:  Due diligence review at regular intervals;  Identifying the official or employee responsible for review;  Training of the responsible official/employee;  Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds);  Procedures reasonably expected to timely identify noncompliance; and  Procedures ensuring that the issuer will take steps to timely correct noncompliance

17. Tax Compliance – Remedial Actions Issuer may take remedial actions discussed in Treasury Regulations to cure deliberate action  Redemption/defeasance  Alternative use of disposition of proceeds Voluntary Closing Agreement Program Continuing Education

18. Municipal Securities Not generally regulated directly by SEC Offered to investors by means of an official statement or other offering document Official statement generally includes at least 3 key topics:  Description of bonds and source of repayment  Description of key factors influencing source of repayment  Audited financial statements of the entity providing the source of repayment

19. Legal Framework for Municipal Securities Disclosure Disclosure Obligations Generally  Anti-Fraud Provisions  SEC Rule 15c2-12 Potential Impacts of Failure to Comply  Issuer/Obligated Person  Officials Reliance on Experts

20. Disclosure Obligations Generally Primary – when bonds first sold  Preliminary and Final Official Statements Secondary – during the life of the bonds  Rule 15c2-12 Continuing Disclosure  Voluntary filings  “Reasonably expected to reach investors”  Certifications relied upon by bond counsel for tax exemption analysis

21. Rule 15c2-12 Rule applies to broker-dealers acting as underwriters, and not to the Issuer/Obligated Person directly Issuer/Obligated Person has entered into, and will be entering into, Continuing Disclosure Agreements, to allow broker-dealers to meet Rule 15c2-12 Underwriter must reasonably determine that the Issuer/Obligated Person will provide, for the life of the bonds, “annual financial information”, other operating data, and notices of specified events respecting the bonds Concern – if Issuer/Obligated Person were not to comply, underwriter may not be able to reach “reasonable determination” for future bond offerings

22. Anti-Fraud Provisions – 10b-5 Section 10b-5 of the Securities Exchange Act and Rule 10b-5 thereunder:  Material misstatement or omission of material fact ● What you say must be materially true and accurate, and It must not leave anything material out  Materiality – the alleged misstatement or omission must be material ● To be material, under all the circumstances, it would have assumed actual significance in the deliberations of the reasonable investor ● “20/20” hindsight

23. Potential Impacts of Failure to Comply Generally – violations of Federal securities laws do not require that the issuer defaults or that ratings be downgraded Issuer/Obligated Person and officials are subject to:  SEC, Department of Justice and other investigations  Civil or criminal penalties  Injunctions or cease and desist orders  Judgments in civil lawsuits by private plaintiffs Issuers/Obligated Persons are additionally subject to:  SEC sanctions  Ratings downgrade or withdrawal  Loss or market access or payment of market penalties  Political turmoil Officials are additionally subject to:  Prohibition from future involvement in public securities offerings  Dismissal from employment  Damage to reputation and political harm

24. Reliance on Experts Municipal issuers/Obligated Persons can rely on experts in preparing their disclosure, but the reliance must be reasonable For reliance to be reasonable,  Selection must be through a process that takes into account experience and expertise, and not just fees  Experts must be used only in their field of expertise  Experts must be given access to all information they need to prepare their materials  Issuer/Obligated Person must not know of facts that are inconsistent with, or raise questions about, the actions or advice of the expert The Issuer/Obligated Person and its officials remain primarily liability for the content of the disclosure and have an affirmative obligation to know the contents of the disclosure, including the financial statements

25. SEC increased activity State of Illinois – cease and desist order involving pension disclosure City of Harrisburg, Pennsylvania – public statements made outside of the formal disclosure process City of South Miami, Florida – allegations of fraud relating to eligibility of bonds for tax-exemption West Clark Community Schools, Indiana – failure to disclose non-compliance with continuing disclosure obligations City of Miami, Florida and its budget director for alleged misrepresentations relating to nature of internal fund transfers that were fraudulent Largest hospital in Miami-Dade County, Florida alleging negligent failure to disclose the extent of its deteriorating financial condition; recognizing its poor financial position, no financial penalties were imposed The Greater Wenatchee Regional Events Center Public Facilities District, Washington, and a senior staff member alleging disclosure failures relating to review of financial projections – the District agreed to develop written disclosure policies and to pay a $20,000 fine – the first financial penalty assessed by the SEC against a municipal issuer in an order

26. SEC Actions – expanded enforcement tools Municipal Continuing Disclosure Cooperation Initiative (“MCDC”) – offered issuers and underwriters the opportunity to “self-report” what the SEC viewed as certain violations of the Federal antifraud laws – SEC puts the municipal market on notice that its intent is to change disclosure practices City of Harvey, Illinois – SEC proactively and successfully petitions a court to halt an offering State of Kansas – SEC enters an order against an issuer for pension disclosure City of Allen Park, Michigan and 2 of its officials – SEC enters an order for false and misleading statements about the scope and viability of the movie studio project as well as the City’s overall financial condition and its ability to service the bond debt – the first order in which the SEC pursued not just the issuer but its officials, resulting in a fine for the individuals Procedural Matters – throughout these actions, SEC, in addition to the content of the substantive disclosure, has put emphasis on whether the issuer has a set of formal disclosure practices and procedures which it follows and whether those involved in disclosure activities have been properly trained

27. SEC Actions--MCDC Since September 2015, the SEC has announced two tranches of enforcement actions under its MCDC Initiative, targeting 58 municipal bond underwriting firms for alleged due diligence failures in connection with municipal bond offerings. The SEC provided an identical federal securities law analysis in each of its 58 MCDC actions against underwriting firms. Rule 15c2-12(f)(3) imposes a requirement on underwriters “that a final official statement set forth any instances in the previous five years in which an issuer of municipal securities, or obligated person, failed to comply in all material respects with any previous continuing disclosure undertakings.” According to the SEC, the underwriters participated in municipal bond offerings in which statements or omissions regarding an issuer’s or obligated person’s compliance with its prior continuing disclosure undertakings were materially false or misleading, and failed to discover such material misrepresentations and omissions through adequate due diligence.

28. Lessons to be Learned Extraordinary for the level of activity (13 orders or other actions, including two states and several cities) Extraordinary for scope (pension disclosure in Illinois and Kansas; continuing disclosure compliance and MCDC initiative; targeted accounting fraud in Miami; targeted misstatements or omissions relating to projections, use of bond proceeds and general financial condition) Employed new and expanded tools (MCDC Initiative; halted an offering by the City of Harvey; fined individuals in the City of Allen Park for the first time) SEC continues to emphasize adoption of disclosure policies and procedures and training of personnel involved in the disclosure process

29. Lessons to be Learned When issuers provide information that is reasonably expected to reach the market, they need to realize that investors who are trading bonds purchased years ago have as much need and use of that disclosure as investors buying in a primary offering Must be as careful with secondary market disclosure as with primary disclosure The secondary market disclosure, including continuing disclosure filings, need to be timely made

30. Lessons to be Learned SEC took 2013 and 2014 as an opportunity to bring several classic fraud cases The following actions all stand for this point: Harrisburg – city did not tell investors that the city’s obligations under a guarantee would render the city’s general fund insolvent Allen Park, Michigan – city misstated the scope and viability of a movie studio project Harvey – city misstated the diversion of bonds proceeds These are not cases of miscommunications– these are cases where the SEC found that the issuers and individuals knowingly did not tell investors the whole story

31. Questions?

32. Presenters George T. Magnatta, Esq. T: (215) 972-7126 | gmagnatta@saul.comgmagnatta@saul.com George Magnatta is chair of the firm's Public Finance Practice. His practice focuses on serving as bond counsel, underwriter's counsel, borrower's counsel, and tax counsel for states, cities, economic development authorities, housing authorities, and non-profit entities in the implementation and financing of major capital initiatives that benefit public, private, and non- profit entities. He is also an experienced practitioner in the tax aspects of public finance, with a thorough understanding of the complex Internal Revenue Code requirements in this area. George also represents issuers of bonds whose bond transactions are being audited by the Internal Revenue Service. Prior to joining Saul Ewing, George served as Assistant Branch Chief of the Office of Chief Counsel, Legislation and Regulations Division of the Internal Revenue Service in Washington, D.C. George is a frequent panelist at meetings of the National Association of Bond Lawyers. George has extensive experience with structuring tax-exempt financings for states, cities, industrial development authorities, housing authorities, colleges, universities, and real estate developers.

33. Presenters Glenn D. Fox, Esquire T: (215) 972-1084 | gfox@saul.comgfox@saul.com Glenn is a business attorney and Certified Public Accountant who has more than 30 years of experience representing numerous business and nonprofit organizations, including senior living, long term care and other health care providers, in corporate, transactional, tax and financial matters. Until recently, Glenn was a shareholder and the senior member of a suburban Philadelphia corporate and estate law firm where he counseled clients on mergers, acquisitions, restructurings, affiliations, financings and related matters. Previously, he served as chair of the corporate and municipal bond groups at a national firm based in Philadelphia. Experience Acted as counsel to the affiliator (acquirer) in connection with the affiliation of two nonprofit senior living organizations with a third nonprofit senior living organization Completed the restructure of an operating nonprofit system by creating a parent and management, service and development supporting organizations

34. Presenters Joshua S. Pasker, Esq. T: (215) 972-7783 | jpasker@saul.comjpasker@saul.com Josh Pasker concentrates his practice in finance matters of states, municipalities, and their authorities. Josh serves as bond counsel, underwriter's counsel and borrower's counsel for a variety of public finance transactions including: Josh also counsels issuers and borrowers on securities laws, tax laws and post issuance compliance procedures relating to tax-exempt bonds. Josh has experience in representing parties before the IRS in connection with tax-exempt bond audits. Additionally, Josh represents financial institutions in the implementation of derivative transactions. Airport Revenue Bonds General Obligation Bonds Higher Education Bonds Multifamily Housing Bonds Student Loan Bonds Transportation Bonds Wastewater Revenue Bonds 501(c)(3) Bonds