Post-Issuance Compliance

1. Post-Issuance Compliance Staying Out of Trouble After the Bonds are Issued Southern Association of College and UniversityBusiness Officers (SACUBO) June 1, 2015 Mary Nash Rusher Hunton & Williams LLP

2. Scope of This Presentation Post-Issuance Compliance – Two Primary Areas of Focus: I. Federal Tax Law Topics II. Securities Law Topics

3. I. FEDERAL TAX LAW TOPICS The Importance of Monitoring the Use of Bond Proceeds and the Facilities Financed Thereby • Beginning in 2007, IRS began to focus on compliance with rules relating to use of proceeds and use of bond financed facilities after the bonds were issued • “Post-issuance tax compliance begins with the debt issuance process itself and provides for a continuing focus on investments of bond proceeds and use of bond-financed property. It will require identifying existing policies, the responsible people, the applicable procedures, and the affected population.” Advisory Committee on Tax-Exempt and Governmental Entities June 13, 2007

4. The Office of Tax Exempt Bonds • Originally contained in Exempt Organizations • Became distinct office in 1990 • Today has staff of approximately 100 • www.IRS.gov/ top bar-upper right hand corner: “Tax-Exempt Bond Community”

5. What is the IRS Looking For? • Failure to comply with rebate requirements • Improper expenditure of bond proceeds • Improper use of bond financed property • Failure to comply with specific tax rules relating to issue type (e.g. solid waste disposal bonds, 501(c)(3) rules, etc.)

6. Compliance Contacts with Issuers • Compliance Check Questionnaires • A compliance check is not an examination • No penalty for failing to respond; however refusal to participate will likely lead to an examination • Focused Compliance questionnaire process in 2007-2009 for governmental (Form 14002) and tax exempt bonds (Form 13907) • Focused Correspondence • “We have been provided with certain information” • “We have learned the following; please voluntarily explain” • Full Exams • Random exams selected on Form 8038-G, Form 8038-CP, Form 8038 data • Program exams selected on type of bond purpose (qualified 501(c)(3) bonds, qualified school construction bonds) • Targeted exams for potential abuse • Examination and audit mean the same thing

7. TEB VCAP • Tax Exempt Bonds Voluntary Closing Agreement Program • Section 7121 of the Code • Notice 2008-31 and IRM 7.2.3 • Must identify a violation • Anonymous requests • Identified violations for which voluntary closing agreements may be obtained: For example- • Too much private use • Exceeding capital expenditure limitations • Failure to timely reinvest proceeds in 0% SLGs

8. TEB VCAP • Voluntary closing agreement typically pre-empts later examination • Updated administrative procedures for VCAP IRM 7.2.3 released August 5, 2011 • Reduced settlement amount if written post-issuance compliance procedures are in place

9. Create Written Policies & Procedures — Why? • IRS wants governmental entities to create written procedures to manage tax compliance • Currently not a federal tax law requirement, but ignore at one’s peril • Organizations with procedures are viewed as more likely to comply • 2011 Final Report on Tax Exempt Bond Questionnaire Project indicated that while 95% of 501(c)(3) organizations reported a post issuance procedures or guidelines, only 16% actually had a specific written procedure; “adoption and consistent utilization of formal procedures and practices generally improves the likelihood of post issuance compliance.”

10. IRS clearly wants written procedures • Line 43 of revised Form 8038 and Lines 43, 44 of revised Form 8038-G ask if issuer has established written procedures: 1) “to ensure that all nonqualified bonds of an issue are remediated” 2) “to monitor the requirements of Section 148”

11. Key Boxes on Form 8038 • Adopting a Policy allows you to check Lines 43 and 44

12. Seven Elements of AnEffective Post-Issuance TaxCompliance Program

13. Elements of a Post-IssuanceTax Compliance Program • Written policies & procedures • Team assigned to manage compliance process • Record retention • Arbitrage rebate & yield restriction compliance • Private business use compliance • Staff training and education • Periodic review of process

14. Create Written Policies & Procedures — How? • Start by documenting current unwritten procedures • Use bond documents and Governmental Bond Compliance Check form as guides • Bond documents: Non-Arbitrage Certificate, Arbitrage Rebate Compliance Instructions, Trust Indenture requirements, etc. • Gov’t Compliance Check Questionnaire – Form 14002 (can be found at https://www.irs.gov/pub/irs-tege/f14002.pdf) • Review with bond counsel and financial advisor • Bond Counsel will often draft a compliance policy as part of a bond issue

15. Create Written Policies & Procedures — How? • Other Resources: • NABL/GFOA Post-Issuance Compliance Checklist (www.gfoa.org/downloads/PostIssuanceCompliance.pdf) • Advising Committee on Tax-Exempt and Government Entities (ACT) Paper – “After the Bonds Are Issued, Then What?” (www.irs.gov/pub/irs-tege/bonds_act_0607.pdf)

16. Team Assigned to Manage Compliance Process • Assign individual(s) or offices responsible for compliance management • Depends on size of issuer • Types of bond deals • Team effort • Project/Facilities Coordinator • Finance Department • Address succession issues

17. Record Retention • IRS Guidance – IRC Section 6001 – general rule for proper retention of records for federal tax purposes • Basic records (e.g. transcript) • Documentation on expenditures of bond proceeds • Documentation on use of bond-financed property (public vs. private use, management contracts, research agreements) • Documentation on all sources of payment or security for the bonds • Documentation on investment of bond proceeds • IRS Tax-Exempt Bond FAQs regarding Record Retention Requirements (www.irs.gov/taxexemptbond)

18. Record Retention Sample Records to Retain: • Board minutes, resolutions • Feasibility studies, appraisals • Bond transcripts • Newspaper ads, miscellaneous correspondence • Investment records – bank statements, investment transaction information (e.g., trade confirms), etc. • Expenditure histories – invoices, check images, documents showing and supporting disbursements • IRS Filings – 8038-T (and related checks), 8038-CP • Records related to acquisition of investment agreements and interest rate swaps • Payments for a letter of credit or standby bond purchase agreement • Arbitrage rebate and yield restriction compliance reports • Memos to file regarding bad use and other tax questions

19. Staff Training and Education • Educate staff about applicable rules, written procedures • Internal communication between departments • Procedures to train new staff • Continuing education — Evolving regulatory landscape

20. Periodic Review of Process • Don’t let a good plan go to waste • Should periodically (at least annually) review, ask questions and monitor compliance • Use an annual checklist; be sure to complete it and keep it, along with backup documentation (i.e. emails re: no private use, copies of qualified management contracts, etc.)

21. Arbitrage Rebate & Yield Restriction Compliance • Code Section 148 – Arbitrage and Yield • Expenditure of bond proceeds • Temporary periods • Rebate – Spend-down exceptions, “Small Issuer” Exemption • Yield Calculation – bond, investments • Yield reduction payments • Rebate Consultant

22. Private Business Use Compliance • Tax law limits private use of tax-exempt financed facilities to 10% (or 5% for unrelated or disproportionate use) • Average use measured over the life of the financed facility • Maintain records of business activities • Rental of financed facilities for non- governmental/non 501(c)(3) functions • Legal counsel review of all management & service agreements, leases, sub-leases, naming rights contracts, etc. • Coordinate use of tax-exempt bond financed facilities with administrative team to ensure compliance • “Deliberate Actions” — “Remedial Actions”

23. Private Business Use (cont.) Examples of Deliberate Actions – Change in Use: • Sale of facilities – change in ownership • Lease of Facilities • Output Contracts • Non-qualifying management contracts (Rev. Proc. 97-13 – Safe harbors) • Non-qualifying research contract (Rev. Proc. 97-14 – Safe harbors) • “Special legal entitlements” • arrangements that convey special rights over bond-financed facilities (e.g., priority rights to the use or capacity of a facility)

24. Remedial Actions • Redemption or defeasance of nonqualified bonds within 90 days of deliberate action; defeasance escrow cannot be used if the period between the issue date and the first call date is more than 10.5 years. • Alternative use of disposition proceeds within 2 years of the date of the deliberate action • Alternative use of bond-financed property    • http://www.irs.gov/Tax-Exempt-Bonds/TEB-Self-Correction-Some-Basic-Concepts

25. II. SECURITIES LAW POST ISSUANCE COMPLIANCE The Importance of Having Good Disclosure Practices Rule 15c2-12 Effect on future issuances

26. Background — Primary Market Disclosure • The Official Statement • Purpose • Helps to sell bonds • Protections to issuers and underwriter under federal securities laws • Role of professionals • Credit ratings • Credit enhancements • Financial information • Private Placements • Conduit Financings (NC Capital Facilities Finance Agency, SC Educational Facilities Authority, VA College Building Authority etc.)

27. Background — Rule 15c2-12 SEC Rule 15c2-12 • Amendments made in 1994 – Sea-change to muni disclosure • Underwriters may not purchase bonds unless issuer has contractually promised to provide specific continuing disclosure for the lifetime of the bonds • Ongoing financial information • Filing material events • Timing for making filings • “Annual Financial Information” – GFOA recommends no later than 6 months following end of FY; NC typically 7 months • “Event Notices” • Bonds Issued < 12/2011 – notify of “material” events in a timely manner • Bonds Issued > 12/2011 – notify within 10 business days after the occurrence of the listed event

28. Continuing Disclosure Requirements • SEC Rule 15c2-12 – Continuing Disclosure • Purpose: Increases Information Available after Municipal Securities are Initially Marketed • Requires “binding commitment” • Requires Limited Information at Limited Times • Creates Need for Ongoing Procedures and Monitoring – Compliance Officer • Requirement applies to underwriters; must have “reasonable expectation” that issuer will comply based on past history of compliance

29. Continuing Disclosure Requirements (cont.) • Continuing Disclosure Agreement (“CDA”) • Written Agreement for Benefit of Bondholders • Make Clear What Information is Subject to Continuing Disclosure • Provide Annual Financial Information and Operating Data • Timeframe set out in CDA • Mirror the Financial Information and Operating Data Contained in Final Official Statement • Issuers May Not Reduce Continuing Disclosure Undertaking By Reducing Initial Disclosure in Official Statement

30. Continuing Disclosure – Events to Monitor • Principal and interest payment delinquencies • Non-payment related defaults, if material • 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, IRS notices or material events affecting the tax status Modifications to rights of security holders, if material • Bond calls, if material and tender offers • Defeasances • Release, substitution, sale of property securing repayment of securities, if material • Rating changes • Bankruptcy, insolvency, receivership or similar event of the obligated • Merger, consolidation, or acquisition of the obligated person, if material • Appointment of a successor or additional trustee, or the change of name of a trustee, if material

31. Elements of an EffectivePost-Issuance Disclosure Program

32. Continuing Disclosure Agreement The Continuing Disclosure Agreement (“CDA”) • Developing the CDA • Understanding the requirements set within document for ongoing disclosure filings • “Annual Financial Information” filed by a certain date • “Event” notice filings within 10 business days • Notice of failure to provide required disclosures • Who makes filing? – Issuer or “Material Obligated Person” (Conduit issuer contexts) • Dissemination Agent? • Required to file at Electronic Municipal Market Access (“EMMA”)

33. Continuing Disclosure — Policy and Procedures • Event Notices • Develop notice in consultation with counsel • Make the filing with EMMA • Annual Financial Information • Must cover information required by CDA • Submission of CAFR/audited financials may be appropriate (monitor changes over time in CAFR/ tables) • Submit to EMMA in PDF-readable format • Voluntary Disclosure • Posting Information on web site • Using EMMA • GFOA Best Practices - Making Voluntary Disclosure of Interim Financial Information; How Practical? • Ensures “level playing field” • Use of disclaimers with unaudited financial and budget info

34. Continuing Disclosure —Policy and Procedures (Cont’d) • Identify person with overall responsibility for overseeing continuing disclosure policy and procedures • May hire a dissemination agent • Develop a disclosure management policy • Adopt a thorough disclosure policy • Outline the disclosure practices of your entity • Adhere to the practices • Avoid material omissions • Monitor telephone inquiries

35. Ongoing Disclosure Procedures • Obligated entities should develop continuing disclosure procedures that: • identify the information that is obligated to be submitted in an annual filing; • disclose the dates on which filings are to be made; • list the material events as stated by the SEC and your CDA; and • identify the person who is designated to be responsible for making the filings.

36. Voluntary Disclosure — Policy and Procedures • Voluntary Disclosures • After consulting with legal counsel: • A governmental entity or obligated person may wish to provide other financial information to investors that goes beyond what is specified in the CDA • Examples of additional information that could be disclosed: • Annual budgets, financial plans, revenue forecasts • Investment information, monthly financial reports

37. Voluntary Disclosure —Policy and Procedures (Cont’d) • Voluntary Disclosures • If an entity chooses to post unaudited interim financial information as part of its voluntary disclosures: • It must be clearly described as such on the document • A government entity may wish to include additional disclaimer language regarding unaudited information • Entity should design a system of internal controls to ensure the accuracy, completeness, consistency, and freshness of information posted

38. Web Site Disclosure — Policy and Procedures • When using a web site to disseminate information electronically: • Keep it simple • Ensure proper security of web site • Use proper disclaimers about the information being presented • Unaudited information • Stale information

39. Web Site Disclosure —Policy and Procedures (Cont’d) Considerations for Disclosing on a Web Site: • Segregate information intended solely for investors from other information and clearly identify information as intended for investors • Institute a formal process for reviewing and approving any information posted on the web site to ensure accuracy, consistency, and completeness of the information • Be familiar with the SEC’s Interpretive Release on “Use of Electronic Media” • See www.sec.gov/rules/interp/34-42728.htm

40. Disclosure of Bank Loans • MSRB Notice 2015-03 encourages issuers to voluntarily post information about bank loans to EMMA • Can either file a redacted copy of the loan document or a summary, to include the following: • Details of the purpose of the additional debt obligation and use of proceeds; • Amount of additional debt and its impact on the debt position; Source of repayment; • Payment dates, interest rate, if fixed, or method of computation, if variable, maturity and amortization of bank loan; • Covenants and other ancillary business provisions; • Terms of the additional debt including liquidity requirements and optional, mandatory, and extraordinary prepayment terms, if any;

41. Bank Loans (continued) • Summary of Loan Documents (continued) • Evidence of compliance with additional debt test, if applicable • Events of default and remedies; • Acceleration events such as a ratings downgrade; • Disclosure of “most-favored nation” or similar clause; • Ratings, if assigned; • Governing law; • Tax status of interest; • Financial reporting requirements.

42. Educational Resources Resources Available at MSRB / EMMA (www.msrb.org): • Videos: • Six Things to Know When Issuing Bonds • EMMA Continuing Disclosure Overview • Fact Sheets: • General – EMMA • Six Things to Know When Issuing Bonds • Submitting Continuing Disclosure to EMMA • Six Ways to Use EMMA • Signing Up for EMMA System Alerts • MSRB Fact Sheet

43. Educational Resources (Cont’d) • GFOA Best Practices Related to Disclosure and Investor Relations: • Understanding Your Continuing Disclosure Responsibilities (2010) • Using a Web Site for Disclosure (2002 and 2010) • Web Site Presentation of Official Financial Documents (2009) • Maintaining an Investor Relations Program (1996, 2003 and 2010)

44. Conclusion • Adopt a Post Issuance Compliance Policy that includes both tax and securities law compliance • Designate one or more responsible persons/offices • Use an annual compliance checklist to ensure compliance with the policy • Consider adding loan/MTI covenant compliance to the checklist • Actually comply with the policy and complete the checklist!

45. Questions? For more information, contact: Mary Nash Rusher Hunton & Williams LLP 421 Fayetteville Street, Suite 1400 Raleigh, NC 27109 (919) 899-3066 mnrusher@hunton.com