DISCLAIMER: This session should supplement other CGFOA sessions Other recommended topics to consider include:

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2 DISCLAIMER: This session should supplement other CGFOA sessions Other recommended topics to consider include: Debt Issuance Arbitrage Records Retention 2

3 WHAT WE WILL BE TALKING ABOUT: Overview of the Issuance Process Perspective: Issuer Perspective: Regulatory, Enforcement, and Advisor Perspective: Underwriter, Rating Agency, and the Public Resources 3

4 OVERVIEW: THE ISSUANCE PROCESS MSRB - Municipal Securities Rulemaking Board EMMA Electronic Municipal Market Access 4

5 CONTINUING DISCLOSURE DEFINED: Disclosure of material information relating to municipal securities provided to the marketplace by the issuer of the securities or any other entity obligated with respect to the securities after the initial issuance of municipal securities. Such disclosures include, but are not limited to, annual financial information, certain operating information and notices about specified events affecting the issuer, the obligor, the municipal securities or the project financed. 5

6 ISSUER PERSPECTIVE : POLICY AND PROCEDURES Policy vs. Procedure Policy guiding principle used to set a direction; drives procedures Procedures detailed steps required to perform an activity 6

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8 ISSUER PERSPECTIVE : POLICY What are we talking about? Monitoring Financial information Who s involved? Initial Ongoing Arbitrage Records retention 8

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10 ISSUER PERSPECTIVE : PROCEDURES WHAT ARE WE TALKING ABOUT? Monitoring CAFR & Other financial information Who s involved? Initial Ongoing Arbitrage Records retention Internal controls 10

11 ISSUER PERSPECTIVE : OTHER BEST PRACTICES Full audit of debt documents Adopt policies Implement procedures Internal audit reviews Incorporate responsibilities into job description Provide trainings to those responsible Communicate with Bond Counsel/Financial Advisor/Underwriter/Rating Agency 11

12 ISSUER PERSPECTIVE : CONTINUING DISCLOSURE Documents: Preliminary and final official statements Annual audited financials Other annual financial information Material events 12

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14 ISSUER PERSPECTIVE : CONTINUING DISCLOSURE 14

15 ISSUER PERSPECTIVE : CONTINUING DISCLOSURE 15

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23 REGULATION, ENFORCEMENT, ADVISOR PERSPECTIVE 23

24 OVERVIEW OF POST ISSUANCE COMPLIANCE IRS SEC FUNDED PROJECT FOLLOW THE MONEY INVESTING CONTINUING DISCLOSURE Purpose (Bricks and Mortar) Bonds Arbitrage Rebate 15c2-12 Undertakings/Emma Use of Property Debt Payment Qualified Investment Annual Financial Information Funds/Accounts Change in Use Disposition Records/Invoices/ Statements Yield Restriction Operating Data Material Event Notices Remediation & VCAP EMMA 24

25 TWO BASIC AREAS OF FEDERAL SECURITIES LAW IMPACT DISCLOSURE BY GOVERNMENTAL ENTITIES Continuing disclosure obligations (Rule 15c2-12) Antifraud provisions (Section 17a of the 1933 Act and Rule 10b-5 of the 1934 Act) 25

26 THE TOWER AMENDMENT In 1975, the Securities Exchange Act of 1934 was amended by Senator John Tower through the addition of Section 15B(d) of the Act which provides, in part, as follows: The MSRB is not authorized under this title to require any issuer of municipal securities, directly or indirectly, to furnish to the MSRB or to a purchaser or a prospective purchaser of such securities any application, report, document, or information with respect to such issuer; provided, however, that the MSRB may require municipal securities brokers and municipal securities dealers to furnish to the MSRB, reports, documents, and information with respect to the issuer thereof which is generally available from a source other than such issuer. 26

27 THE MUNICIPAL SECURITIES REGULATORY FRAMEWORK Indirect regulation through SEC Rule 15c2-12, imposing requirements on the underwriter of municipal securities 1975 mandatory registration of brokers /dealers; MSRB created 1989 underwriters required to obtain and review deemed final official statement before offering or purchasing municipal securities 1994 continuing disclosure agreements with issuer and obligated persons required 2008 EMMA established (and beginning July 1, 2009 becomes the sole NRMSIR - nationally recognized municipal securities information repository) 2010 amendments to continuing disclosure requirements including establishing a 10 business day timeliness standard for reporting and deleting the general materiality condition for certain material event reporting 27

28 ISSUER UNDERTAKING RESULTING FROM 15c2-12 Obligation documented in Continuing Disclosure Agreements Filings to be made with EMMA Annual financial information (financial information or operating data, provided at least annually, of the type included in the final official statement) Notices of material events 28

29 SEC RULE 10b-5 It is unlawful for any person, directly or indirectly, in connection with an offering of securities to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 29

30 MUNICIPALITIES CONTINUING DISCLOSURE COOPERATION INITIATIVE - SEC MCDC Standardized Settlement Terms For eligible issuers, the settlement to be recommended by the SEC Division of Enforcement will require that the issuer undertakes to establish appropriate policies and procedures and training regarding continuing disclosure obligations within 180 days of the institution of the proceedings. 30

31 NEW DEVELOPMENTS IN TAX POST-ISSUANCE COMPLIANCE Two new boxes on IRS Form 8038-G! 1. Do you have post-issuance compliance policies? 2. Do you have remedial action procedures? 31

32 TYPICAL IRS AUDIT QUESTION The one question we typically see on IRS audits these days is the following compliance check: Are there written procedures, other than bond documents provided at closing, which contain key characteristics to ensure that violations are timely identified and corrected so that the Bonds remain in compliance with federal tax requirements from the time they are issued until they are no longer outstanding? 32

33 IRS ON POLICIES AND PROCEDURES The IRS website states Generally, an issuer that has established and followed comprehensive written procedures to promote post-issuance compliance is less likely, than an issuer that does not have such procedures, to violate the federal tax requirements related to its bonds. 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. 33

34 PRIMARY POST-ISSUANCE TAX CONSIDERATIONS 1. Monitor use of bond-financed property 2. Spend bond proceeds quickly Tax Post- Issuance Compliance 3. Comply with yield restriction and arbitrage rebate rules 4. Keep adequate records concerning use of bond proceeds 34

35 UNDERWRITER, RATING AGENCY, AND PUBLIC PERSPECTIVE 35

36 HISTORICAL PROGRESSION Town Hall Meetings Annual Disclosure Full, Immediate Transparency Follows general progression of availability of information Supported by increased professionalization of government Matches corporate debt practices Corresponds to increased variety of holders and trading activity Increased pressure resulting from heightened sense of risk Driven by the SEC s focus on retail investors 36

37 HEIGHTENED SENSE OF RISK Time Period First Time Municipal Defaults # of First-time Municipal Defaults Total Par Amount ($ Billion) (January October) (January October)

38 A WORD ON MCDC INITIATIVE MCDC Initiative, while not directly addressing investor losses, demonstrated existing weaknesses in disclosure practices Most common failures: Unreliable, duplicative and changing reporting systems Management and staff turnover Reporting requirements that exceeded CAFR Information Changes outside of the direct control of issuers Lack of direct communication and reporting requirements to issuers Lack of immediate, timely direction from regulators 38

39 CREDIT AND MARKET IMPLICATIONS Regulatory consequences remain to be played out Little immediately observable market or pricing reaction MCDC initiative caught a wide array of issuers in its net Little distinction among size or sophistication of issuers Not directly linked with risk or rating levels Going forward, investors may become more impatient with repeat offenders Distinction may exist at the margins for issuances cleared by internal credit review for purchase. Heightened distinction in periods of high volume or rising rates. Investors remain focused on risk seeking to understand and price it within a contextual framework. Heightened sense of wariness perhaps paranoia on What have I missed? 39

40 RATING AGENCY FOCUS Lingering sense that somehow the recession was a surprise Defaulted poster children resulted from long-simmering, but subterranean risks Concern over what is not reported or disclosed All cases of default involve some level of management failure 40

41 DIRECT LOAN PRACTICES AND REPORTING S&P estimates that between February 2011 and February 2014, direct loans accounted for as much as 20% of municipal issuances Moody s review of 2013 CAFRS revealed approximately 100 direct loan placements, many of which had not been reported at the time of execution While these debt issuances lack legal reporting requirements, both S&P and Moody s believe that they may impact risks associated with debt to which they have assigned a rating Concern that market has become less transparent 41

42 RATING AGENCY FOCUS Direct loan placements: Both S&P and Moody s are demanding full and timely disclosure of direct loan placements even in advance of execution. S&P s USPF_Review@standardandpoors.com Heightened concern over risks not legally required to be disclosed Corresponds with heightened focus on management and expertise Rejection of CAFRs and EMMA filings as constituting full disclosure Lack of certainty in standing behind public ratings 42

43 KEY CONCERNS WITH DIRECT LOAN PRACTICES AND REPORTING Key credit concerns include: Increased debt burdens that remain unreported Risks associated with variable rate structures Acceleration provisions that effectively place direct lenders ahead of bondholders in the event of losses Cross-default provisions that may trigger defaults across securities Segregated payment streams or lock box structures that impact pledged flow-offunds for existing bondholders Most favored nation clauses that impact subsequent debt Default provisions including rating triggers, liquidity levels, coverage or reporting requirements or material adverse change Cure periods that assume immediate market access 43

44 BEST PRACTICES While many debt policies require disclosure requirements as mandated by Rule 15c2-12, most lack specific measures for implementation Best practices in ongoing debt disclosure call for: Inclusion of disclosure policies in formally adopted debt policy Practices that support viewing risks from the perspective of the bondholder, ensuring compliance with existing covenants Designate specific staff position responsible for ensuring continuing disclosure practices Identify review practices by governing body Specify regular review period Move from a mindset of formalizing debt practices to formalizing review and reporting practices Challenges remain amidst possible Catch-22 situations in exposure to regulatory, legal and enforcement action 44

45 QUESTIONS?

46 RESOURCES: Please see handout for more info Policy and Procedures: GFOA, National Association of Bond Lawyers Continuing Disclosure: MSRB-EMMA Enforcement: IRS, SEC 46