POST-ISSUANCE COMPLIANCE TRAINING: TAX RULES AND EMMA. WPTA Annual Conference, April 13, 2017

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1 POST-ISSUANCE COMPLIANCE TRAINING: TAX RULES AND EMMA WPTA Annual Conference, April 13, 2017

2 Tax Sarah Kuipers, Foster Pepper

3 Tax Discussion Topics Purpose of post-issuance compliance policies Form of post-issuance compliance policies Review of private use rules New management contract safe harbors Identifying private use issues Review of arbitrage rebate rules New issue price regulations Identifying arbitrage rebate issues 3

4 Purpose of Post-Issuance Compliance Policies Revised Form 8038-G Line 43: Written procedures relating to remedial action Line 44: Written procedures relating to compliance with arbitrage rules Responsibility for tax law compliance also falls on conduit borrower in conduit bond issues 4

5 Purpose of Post-Issuance Compliance Policies (cont d) Provide continuity of attention Allow the policies and procedures to survive employee turnover during the life of the bonds Prevent or avoid violations Educate users of bond-financed property Promote early discovery of violations Regular review of federal tax law compliance Coordinate review with required EMMA filing deadlines for practical purposes 5

6 Purpose of Post-Issuance Compliance Policies (cont d) Ability to exercise remedial action because of a change in use of bond financed property Any permitted redemption or defeasance of non-qualified bonds must occur within 90 days Waiver of 50% penalty on late arbitrage payment Requires finding of no willful neglect, which may be shown by following established compliance policies and procedures 6

7 Purpose of Post-Issuance Compliance Policies (cont d) Potential benefit under IRS Voluntary Closing Agreement Program (VCAP) Information that an issuer must submit includes: An affirmative or negative statement as to whether it has adopted comprehensive written compliance procedures Detailed description of the portion of such comprehensive procedures which relate to the violation 7

8 Form of Post-Issuance Compliance Policies No required format May be part of general debt management policies or in the form of separate procedures May be adopted formally in writing by governing board or developed independently by management 8

9 Review of Private Use Rules No more than 10% of the proceeds of the bonds, measured on an annual basis and averaged over the life of the bonds No more than 5% of bond proceeds if the use is unrelated to the governmental purpose of the bonds More private business use may be allowed if no payments are made with respect to the use or if only de minimis payments are made (10% private payment test) Cap of $15,000,000 for all private business use of proceeds of a single issue 9

10 Review of Private Use Rules (cont d) For buildings, private business use generally is measured by percentage of space used in private business use averaged over life of bonds May allocate equity to portions of building used in private business use Management contracts that are not qualified can result in private business use of the entire building 10

11 New Management Contract Safe Harbors New management contract safe harbors in Revenue Procedure (modifying and superseding the previously issued Revenue Procedure ) apply to any management contract entered into on or after January 17, 2017 Issuers may choose to apply new safe harbors to management contracts entered into before January 17, 2017 Issuers may apply old safe harbors to management contracts entered into before August 18, 2017 New safe harbors more flexible and less formulaic, but may require more substantive review of the contract terms 11

12 New Management Contract Safe Harbors (cont d) Key changes: Service provider cannot bear any net losses from the operation of the property (in addition to not sharing in net profits) Only limitation on term of contract is that it is not longer than the lesser of 30 years or 80% of the economic life of the managed property Requirement that issuer must control managed property includes control over rates charged for the use of the managed property Note that Revenue Procedure approves of the following as reasonable compensation (consistent with past guidance): compensation based solely on a capitation fee, periodic fixed fee, or per-unit fee; incentive compensation based on the service provider s performance in meeting one or more standards that measure quality of services, performance, or productivity; or a combination of the above. 12

13 New Management Contract Safe Harbors(cont d) New management contract safe harbor requirements: Reasonable compensation to service provider not based on a share of net profits from the managed property (same as prior rules) The service provider does not bear any net losses from the operation of the managed property The term of the contract, including legally enforceable renewal options, is not longer than the lesser of 30 years or 80% of the economic life of the managed property The issuer/borrower exercises a significant degree of control over the use of, and bears the risk of loss with respect to, to the managed property The service provider does not receive the benefit of any tax attributes of the managed property (depreciation, tax credits, etc.) The service provider does not have any role or relationship with the issuer/borrower that substantially limits the issuer/borrower s ability to exercise its rights under the contract 13

14 Identifying Private Use Issues Examples of arrangements that can result in private use include: Private ownership Nonqualified management and service contracts Leases, including cell tower leases Naming rights Preferential rates for certain customers Use by federal government and nonprofits on preferential basis Certain take and take or pay contracts for output facilities Keep records of any contracts providing special legal entitlements to use property 14

15 Identifying Private Use Issues (cont d) Examples of arrangements that are not private use include: General public use Use by a natural person not engaged in a trade or business Use by another state or local governmental entity Use according to a uniformly applied rate schedule Qualified management and service contracts Certain short-term uses Incidental use, such as advertising displays and vending machines 15

16 Identifying Private Use Issues (cont d) Educate users of property Includes persons with authority to propose: Any lease of the property Operation or the property under a management or service contract Any sale or other disposition of all or any part of the property Involve legal counsel when new use arrangements proposed Was this property financed with tax-exempt bonds? 16

17 Review of Arbitrage Rebate Rules Arbitrage and Rebate rules apply to: Earnings on investments of bond proceeds prior to being spent Earnings on investments of certain revenues set aside to pay bonds Rebate excess of amount earned over what would have been earned if invested at bond yield Rebate amounts not likely earned on investments of bond proceeds since 2008, but future investment rates could be higher e.g., on reserve fund investments held during the life of the bonds 17

18 Review of Arbitrage Rebate Rules (cont d) Timing for Rebate Computation - at least every five years from issue date May calculate earlier upon final expenditure of all bond proceeds Upon final maturity or early redemption of all bonds Form 8038-T and payment due within 60 days after the computation date Yield reduction or rebate is only necessary if you cannot show that interest earned was below the bond s arbitrage yield 18

19 New Issue Price Regulations Affect the determination of issue price of bonds, which is used to determine bond yield for arbitrage purposes General rule for bonds issued for money is the same Treas. Reg (f)(2)(i) provides that the issue price of bonds issued for money generally is the first price at which a substantial amount (10%) of the bonds is sold to the public If a bond is issued for money in a private placement to a single buyer that is not an underwriter or a related party to an underwriter, the issue price of the bond is the price paid by that buyer Issue price is not reduced by any issuance costs 19

20 New Issue Price Regulations (cont d) Reasonable Expectations/Hold-the Offering Price Rule: may treat initial offering price to public as issue price if: lead or sole underwriter provides a certification, together with supporting documentation, that underwriter(s) offered bonds to the public at a specified initial offering price on or before the sale date; and underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price higher than the initial offering price during the period from sale date to the earlier of (1) the close of the fifth (5th) business day after the sale date, or (2) the date on which underwriters have sold at least 10% of the bonds of that maturity at a price no higher than the initial offering price of that maturity 20

21 New Issue Price Regulations (cont d) Competitive Sale Rule: issuer may treat reasonably expected initial offering price to the public as of the sale date as the issue price if issuer obtains a certification from the winning bidder regarding the reasonably expected initial offering price to the public upon which the price in the winning bid is based competitive sale must meet these requirements: issuer disseminates notice of sale to potential underwriters in a manner reasonably designed to reach potential underwriters; all bidders have an equal opportunity to bid; issuer receives bids from at least three underwriters of municipal bonds who have established reputations for underwriting new issuances; and issuer awards sale to the bidder who offers highest price or lowest interest cost 21

22 New Issue Price Regulations (cont d) Forthcoming guidance from NABL and SIFMA regarding how to modify form documents (including BPA, notice of sale, certifications) to comply with the various rules Effective date: bonds sold to public on or after June 7,

23 Identifying Arbitrage Rebate Issues Maintain records for life of the bonds (including refunding bonds) plus three years Records to be maintained include Bond transcript Purchases and sales of investments made with bond proceeds and receipt of earnings on those investments Records showing how bond proceeds were spent: purchase contracts, construction contracts, invoices and records of allocations Records showing how bond-financed property used 23

24 EMMA Stacie Amasaki, Foster Pepper

25 Securities Law Discussion Topics Disclosure policies Rule 15c2-12 EMMA review 25

26 Disclosure Policies Policies designed to reduce chance of failing to comply with requirements and establish a defense of reasonable care Policy can avoid silo effect where facts known by one department are not known by finance department Internal working group review and diligence Subject matter review Senior official review Outside consultants SEC has indicated if it investigates an issuer it will look more favorably if the issuer has a disclosure policy 26

27 Disclosure Policies (cont d) National Association of Bond Lawyers has provided guidance on policies Policies should be tailored to the size, complexity and other features of particular issuers Policies should cover 1. Types of disclosures covered 2. Process involved in disclosure and documenting compliance 3. Adequate supervision and disbursement of responsibilities 4. Training Tailor the policy to your situation and adopt something you expect to be able to comply with 27

28 Rule 15c2-12 Applies to public offerings >$1 million Does not apply to private bank loans Prior to purchase, underwriter must obtain and review official statement Underwriter must obtain undertaking to provide disclosure Annual disclosure of financial information and operating data Timely disclosure of listed events Official statement must disclose past noncompliance with prior undertakings 28

29 Listed Events Principal and interest payment delinquencies Non-payment related defaults 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 or events affecting the tax status of the security Modifications to the rights of holders of the security Bond calls (other than scheduled mandatory redemptions of Term Bonds) and tender offers Defeasances Release, substitution or sale of property security repayment of the security Rating changes Bankruptcy, insolvency, receivership or similar event of the issuer Merger, consolidation or acquisition involving the issuer or sale of all/substantially all of the assets of the issuer Appointment of a successor or additional trustee 29

30 Proposed Amendments to Listed Events On March 1, 2017, SEC issued proposed amendments to Rule 15c2-12 Amendments would add to the list of events requiring an issuer or obligated person to file on EMMA: Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties. SEC is currently taking comments on proposed amendments 30

31 EMMA Review emma.msrb.org Things to have handy when preparing to file on EMMA MSRB/EMMA User ID and password 6-digit base CUSIP number(s) Document(s) and information to be filed (in word searchable.pdf) 31

32 Walk-Through of an EMMA Filing 32

33 Where Your Filings Go 33

34 MSRB/EMMA Resources MSRB website Disclosing Information to Investors Periodic webinars Tutorials Fact sheets How-to.pdfs Bond counsel Financial advisors 34

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