Implementing New CDC Governance Rules Broadmoor Hall C 10:45 am 11:45 am

Transcription

1 Implementing New CDC Governance Rules Broadmoor Hall C 10:45 am 11:45 am

2 Office of Capital Access Final Rule 504 Loan Program Corporate Governance Rules Office of Financial Assistance Office of Financial Program Operations Office of Credit Risk Management Colorado Springs, Colorado 04/30/14 05/03/14

3 OCA Final Rule Final Rule Published 3/21/2014 Revises and Finalizes the Proposed Rule of 2/25/2013 Improves access to 504 loan program Enhances job creation through expanded eligibility Increases the number of potential participants Strengthens CDC operations and management 3

4 OCA Final Rule Corporate Governance Regulations are Effective April 21, 2015: CDC may need/wish to amend its the By- Laws/Policies SBA will develop a recommended sequencing schedule to assist CDCs in review of any new By- Laws content Distributed widely through SBA District Offices and NADCO 4

5 CDC Governance Rules Policy Revisions

6 CDC Corporate Governance - Policy CDC Corporate Governance Updates include: Elimination of Mandatory Membership Increased CDC Board size/composition Board Requirements (Boards and Committees) For Profit CDC compliance Community Advantage participation allowed (by request) Prohibition of CDC affiliation with other CDCs Contracting Issues Expansion of Board Oversight Expenditure Review and Approval Reporting Requirements 6

7 Elimination of Mandatory Membership Membership Requirement is Deleted No longer a Mandatory Membership Requirement CDCs may have a Membership Some CDCs may need Membership to comply with other programs in which they participate 7

8 Increased CDC Board Size (a) Board Size CDC must have at least 9 Voting Directors Fewer may be approved by D/FA for good cause In Isolated Geographic Areas In rural areas with limited pool of eligible persons SBA Recommends no more than 25 Board Members 8

9 CDC Board Composition (a) & (b) CDC s Board Composition No longer limited to financial, business, government, and community groups ( the four food groups ) Must have Directors with expertise in: Internal controls Financial risk management Commercial lending Legal issues relating to commercial lending, and Corporate governance Must have at least one (1) voting director representing the economic, community or workforce development field Must have at least two (2) voting directors that represent commercial lending 9

10 CDC Board Composition (cont.) (a) Retirees represented in Board composition Directors may be currently employed or retired If retired, may represent expertise in the field from which they retired Former job title and specific experience are important in determining the board composition requirement of a retiree 10

11 CDC Board Requirement Revisions (c) Board Meetings, Quorums & Attendance A Quorum must be present to transact business at any board meeting Quorum > 50% of voting Board Members Meeting may be any format permitted by State law e.g., Teleconference, , Fax, Web Conference, and Video Conference Board is responsible for the actions of the CDC and any Committees CDC Manager is still the only CDC staff who can be a Voting Director 11

12 CDC Board Requirement Revisions (c)(5) Restricting Service on Other Boards No Board Member may serve on another CDC s Board No more than one Director may be jointly employed by, or serve on the Board of, another same single entity, including the entity s affiliates, unless: The entity is a Civic, Charitable, or Comparable Organization; and The entity is not involved in Financial Services; and The entity is not involved in Economic Development More to come 12

13 CDC Board Requirement Revisions (d)(4)(i) Executive Committees CDC may establish an Executive Committee if Authorized in the By-Laws Executive Committee must: Meet Organization and Representation Requirements Have at least 5 Voting Members present to conduct business Written protocol should exist for membership, committee actions and official minutes. 13

14 Loan Committees (d)(4)(ii) Loan Committees CDC may establish a loan committee Be chosen by the Board or Shareholders Consist of individuals who live/work in the Area of Operations of the 504 project Have a Quorum of at least five (5) Members Have at least two (2) members with commercial lending experience Multi-state CDCs must have a loan committee in each state Written protocol should exist for membership, committee actions and official minutes. 14

15 For-Profit CDC Compliance Applicability to Existing For-Profit CDCs Any Program Requirement that applies to Non-Profit CDCs also apply to For-Profit CDCs 15

16 Community Advantage Participation CDC Affiliation CDC may request approval as a Community Advantage participant By application Community Advantage Program Guide update available soon 16

17 Clarifications on CDC Affiliation CDC Affiliation CDC must be independent and not affiliated with any Persons Person means any individual, corporation, partnership, association, unit of government, or legal entity, however organized. CDC may be affiliated with an entity who is: Involved in Economic Development as its primary function In the same Area of Operations as the CDC A non-profit entity or a State or Local Government or Political Subdivision (e.g. Council of Government) EXCEPT for 7(a) lenders or another CDC 17

18 Clarifications on CDC Affiliation (cont.) A CDC may remain affiliated with a for-profit entity if: The affiliate is not a 7(a) Lender The affiliation existed prior to publication of the Final Rule The entity s function is Economic Development in the CDC s Area of Operations Prior written approval required from Director/OFA A CDC is prohibited from being affiliated with another CDC, or directly or indirectly investing in or financing another CDC. 18

19 CDC Contracting With Another CDC(s) Issues of concern for contracting include, but are not limited to: CDC as a shell of its contracting entity Expansion by Contract CDC providing Management and Marketing services for another CDC Several CDCs contracting with the same entity in a dependency mode Executive Director of a CDC providing services to another CDC when already serving as the full time manager of a CDC 19

20 CDC Governance Rules Oversight Revisions

21 CDC Corporate Governance - Oversight Expansion of Board Oversight Clarify Insurance Requirements and Implementations Strengthen and Document Internal Controls Revised By-laws Requirements (By-laws/Policy Matrix) Revised Reporting Requirements CDC Annual Reports Economic development investments, Executive compensation, and Job Creation/Retention Documentation New Reports and Compliance Reporting 21

22 Expansion of Board Oversight (d) Board Oversight and Roles The responsibilities of the Board include, but are not limited to the following: Approving the Mission and Policies for the CDC Hiring, firing, supervising & evaluating the CDC Manager Setting salary for CDC Manager and reviewing all other salaries Establishing Committees (including protocol, membership, and minutes) 22

23 Board Oversight of Loan Committee (d)(14) Loan Committee and Loan Policy Updated Bylaws must include any Delegations of Authority to Loan and Executive Committees CDC s Approval Authority Delegation (Prior to Application to SBA): <$1 Million: The Loan Committee approves >$1 Million to $2,000,000: Approved by Loan Committee and ratified by the Board > $2 Million: Approved by Board or Executive Committee Phase-In Plan 23

24 Revised CDC Insurance Requirements ALL CDCs must maintain: Directors and Officers Liability Insurance, and Errors and Omissions (E&O) Insurance In amounts established by SBA By CDC portfolio size and other factors SBA will establish Insurance Scale for CDCs SBA will coordinate with CDCs SBA will research best practices Addresses higher risks associated with the statutory increases in the 504 loan amounts 24

25 Enhanced Internal Controls (d) Board Oversight and Roles Oversight Board must engage in oversight regarding: Ensuring expenses are reasonable & customary Directly hiring an Independent Auditor Monitoring the CDC s portfolio performance Reviewing a semi-annual performance report Ensuring establishment and maintenance of adequate reserves 25

26 Enhanced Internal Controls (d) Board Oversight and Roles The responsibilities of the Board include (cont.): Establishing/revising By-Laws of the CDC Protocols, membership, and minutes Retaining accountability for all actions of CDC Maintaining updated By-Laws Updating Loan Policies and Procedures Maintaining satisfactory written Internal Control Policies Certifying Board Compliance annually 26

27 Annual Reports Composition Audited or Reviewed Financial Statements Required for the CDC and any affiliates or subsidiaries Audited Financial Statements must include: Audited Balance Sheet Audited Statement of Income and Expenses Audited Statement of Source and Application of Funds Footnotes as necessary to understand the financials Auditor s letter to management on internal control weaknesses; and Auditor s Report 27

28 Economic Development Investments (d)(10) Board Oversight and Roles Oversight Board must ensure CDC invests in Local Economic Development: In Each State in its Area of Operations Board must approve each investment If Investment is in the CDC s Annual Budget: Board s Budget Approval is deemed Approval Interim changes must be reported in Quarterly Meetings If investment is not in the CDC s Annual Budget: Board must separately approve the investment 28

29 Executive Compensation Report on Compensation - Details on Total Compensation Salary, Bonuses and Expenses Paid within the CDC s most recent tax year For Current and Former Officers and Directors For Current and Former Employees For Independent Contractors earning >$100k Consistent with IRS Form 990, 1065 or 1120, as applicable 29

30 New CDC Reports Annual Reports: Written Certification of Board of Directors Each individual certifies they have read and understand Requirements of the Board Written Report on economic development investments For all investments in economic development activities For each State CDC has an outstanding 504 loan 30

31 New Emphasis on Contract Reporting (e) Professional Management and Staff: Board must explain why it is in the best interest of CDC to contract for the professional services CDC Board must demonstrate to SBA that compensation is only from CDC and is reasonable and customary Full term of contract is reasonable Contract does not evidence any actual or apparent conflict of interest or self dealing 31 Confidential

32 Jobs Created/Retained Documentation The GAO report also recommends SBA should review CDC job creation and retention follow-up documentation after the 2 year reporting period. This documentation requirement should be discussed with the small business borrower at the closing. Instructions on reporting formats and timeframes should be provided to the small business so the CDC can obtain documentation when it is needed CDC currently provides estimates of job creation and retention in the 504 loan application and report actual small business job creation and retention in CDC annual reports 32

33 SMART Regulations SMART Component "S" "M" "A" "R" "T" Regulatory Citation Existing SBA Regulation Description of Regulation Regulatory Citation New SMART Regulation Description of Regulation Financial Ability to Operate (d)(9) Board ensures CDC maintains adequate reserves PCLP Reserve & Multi-State Accounting Requirement (b) Board-approved internal control policy Non-profit Status & Good Standing - independent loan review Eliminate Membership -loan classification system (a) Emphasize Board Accountability Non-profit status & good standing (c) Oversight Responsibilities Full time staff person to manage CDC (d)(3) Board sets salaries (b) SBA must pre-approve Professional Service Contracts (d)(6) Independent Loan Reviews (d)(12) & (d)(13) Board Accountability and Internal Controls (a)(2) Executive Compensation/IRS In cases of fraud, negligence or misrepresentation (d)(7)&(8) Board Monitors Portfolio/Semi-annual status reports (b) CDC responsible for receipt & review (d)(14) Approvals of Loans over $2,000, Annual Report with Audited Financials (over $20MM) CDC non-profit status and good standing Requirement that CDCs are in full compliance for ALP (d) Board oversees compliance with SBA requirements and bylaws (a) Minimum level of activity (e) D & O/E&O Insurance - amount based on sliding scale (b) Diversified by Business Sector (a)(3) Economic development activity/reinvestment Job Opportunity Average (d)4 Documentation of any SBA required insurance (ALP) 33

34 Program Contacts For questions on the OCA Final Rule send an to: Linda Rusche, Director, OFA Linda Reilly, Chief, 504 Loan Program John Miller, Director, OFPO Richard Taylor, Director, SLPC Brent Ciurlino, Director, OCRM Paul Kirwin, 504 Team Leader

35 What s Up Next Awards Luncheon and Panel Discussion Broadmoor Halls AB 12:00 pm 1:30 pm Hall of Fame Award Economic Development Grants Luncheon Panel: CDC & 504 Success in a Competitive Market Breakout Session II Broadmoor Halls C, D, E & F 1:45 pm 2:45 pm