Voluntary Compliance with the IRS and SEC for Washington School Debt Annual Conference

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Damian Casey
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1 Voluntary Compliance with the IRS and SEC for Washington School Debt

2 Speakers Arbitrage Compliance Specialists, Inc. Robert Goubert, Vice President (800) ext Mr. Goubert has over 13 years of bond compliance experience with regard to Washington School Districts. Stephen H. Broden, Vice President (800) ext Mr. Broden has over 6 years of bond compliance experience with Washington School Districts.

3 Learning Objectives IRS Compliance Rules Review SEC Compliance Rules Review Pre/Post Issuance Procedures Review Quick Test

IRS Compliance Rules Review IRS Publication 5091 Key Points: Use of Proceeds Compliance - Private Business Use Arbitrage and Yield Restriction Record Retention Voluntary Closing Agreement

4 IRS Compliance Rules Review IRS Publication 5091 Key Points: Use of Proceeds Compliance - Private Business Use Arbitrage and Yield Restriction Record Retention Voluntary Closing Agreement Program (TEB VCAP) Importance of Compliance Due Diligence - Identifying, Preventing and Correcting Violations) Written Procedures Please refer to the available handout for additional details.

5 Key Questions: 1) Is the facility used in a manner that will benefit a for-profit entity or individual (private business use test)? 2) Is the facility owned or leased to a for-profit entity or individual (private security or payment tests)? 3) Are proceeds used to make or finance loans (private financing test)?

6 IRS Compliance Rules Review Summary of Private Business Use Triggers Sale of facilities Leases Management Contracts Tests Private Business Use (General Test) Private Security Or Payment Test Private Loan Financing Test Remedial Actions Redeem Non-Qualified Debt (within 90 days) Alternative Use of Disposition Proceeds Alternative Use of Facility

7 IRS Compliance Rules Review Arbitrage Rebate Rules Established: Arbitrage rebate rules are established for all tax-exempt debt as part of the Tax Reform Act of Established to discourage Issuers from creating arbitrage bonds which can result from the following: Issuing too much debt; or Issuing debt before a legitimate need; or Allowing debt to stay outstanding longer then necessary. Established a long list of rules for Issuers to follow for the life of the debt Established exemptions for issues of a certain size and for certain funds

8 IRS Compliance Rules Review Summary of Arbitrage Rebate Exemptions Bond Type Governmental 501(c)(3) Fund Type Project Cost of Issuance Escrow Refunding Debt Service Bond Level Exemption(s) Available Small Issuer Exemption Small Issuer Exemption / No Exemption (Based on the ability to tax) Fund Level Exemption(s) Available 6-Month, 18-Month, 24-Month 6-Month, 18-Month 6-Month Interest earnings or 1/12 test

9 IRS Compliance Rules Review Yield Restriction Rules Established: Yield restriction rules are established as part of the Tax Reform Act of Established to discourage Issuers from investing either purpose or nonpurpose investments in a manner that would create an arbitrage bond. Established rules for Issuers to follow that generally complement those created for arbitrage rebate. Established exemptions based on temporary periods, materially higher yields and creation of a minor portion.

10 IRS Compliance Rules Review Summary for Yield Restriction Funds Trigger Yield Restriction Rate Project 3/5 Years Bond Yield +.125% Cost of Issuance 3 Years Bond Yield +.125% Current refunding is defined as a refund that takes place within 90 days 90 Days Bond Yield +.001% Advanced refunding is defined as a refunding that takes place after 90 days 0/30 Days Bond Yield +.001% Debt Service 13 Months Bond Yield +.001%

11 IRS Filing Period: Every 5 years; and Maturity date of the issue. For both Arbitrage Rebate and Yield Reduction Payments. Example: IRS Compliance Rules Review Payments (Tax-Advantaged Debt) Bond Delivery Date - 3/1/14 Bond Final Date - 3/1/34 Reporting and Payments are required as of 3/1/19, 3/1/24, 3/1/29 and 3/1/34.

12 IRS Compliance Rules Review IRS Record Retention IRS Section 6001 provides record retention requirements for federal tax purposes. It is important that sufficient records are retained to demonstrate compliance for debt issues so they maintain their applicable tax-advantaged status. Retention period is the life of the bond plus three (3) years. Extended for refunding circumstances as the new retention period for refunded debt is the life of the refunding bond plus three (3) years.

13 IRS Compliance Rules Review Voluntary Closing Agreement Program (TEB VCAP) Key Points: The closing agreements may be used to permanently and conclusively resolve violations based upon the facts & circumstances of each case. The closing agreement committee ensures the fairness and consistency of proposals. The appeals process is available to issuers under examination when an agreement cannot be reached at the exam level.

SEC Compliance Rules Review SEC Rule 15c2-12: Continuing Disclosure Key Points: Required Elements - Financial data and audited financial reports. Event notices to be filed for 14 listed events.

14 SEC Compliance Rules Review SEC Rule 15c2-12: Continuing Disclosure Key Points: Required Elements - Financial data and audited financial reports. Event notices to be filed for 14 listed events. 10 business day submittal period. Some Common Exemptions - Small issues (<$1,000,000). Sophisticated investors (No less than $1,000,000 to no more than 35 sophisticated investors). Please refer to the available handout for additional details.

15 Pre/Post-Issuance Procedures Review Entities need to work with internal and external parties to ensure that applicable compliance measures are taken within the entity. Key Questions/Ideas - 1) Do the Procedures need to be submitted to a governing board for approval? 2) Should the governing board receive only a Procedure Statement which elects the Compliance Officer, in lieu of submittal of the Procedures? 3) Who do we contact for guidance?

16 Quick Test 1. Name a common trigger for private business use in Washington School Districts? A. 2. What benefits would a Washington School District receive from entering into VCAP? A. 3. What are the required elements for continuing disclosure? A. Bonus Question(s). What question(s) do you have regarding compliance for Washington School Districts?

17 This presentation provides brief and general information. Bond compliance rules are complex and detailed, so it is important to review the specific guidance provided by the requirements of the Internal Revenue Code, Treasury Regulations and Securities and Exchange Commission. Arbitrage Compliance Specialists, Inc. Robert Goubert, Vice President (800) ext Stephen H. Broden, Vice President (800) ext. 7530

for Tax-Advantaged Debt STEPHEN H. BRODEN, VICE PRESIDENT ARBITRAGE COMPLIANCE SPECIALISTS, INC.

for Tax-Advantaged Debt STEPHEN H. BRODEN, VICE PRESIDENT ARBITRAGE COMPLIANCE SPECIALISTS, INC. Post-Issuance Compliance for Tax-Advantaged Debt PRESENTED BY STEPHEN H. BRODEN, VICE PRESIDENT ARBITRAGE COMPLIANCE SPECIALISTS, INC. PRESENTATION OUTLINE First Topic IRS Publication 5091, IRS & SEC Enforcement