Presentation to: Association of Independent Schools in New England April 30, 2014

1. Presentation to: Association of Independent Schools in New England April 30, 2014 Tax-Exempt Financing: Conflicts of Interest, Ethics, and Good Governance

2. ETHICS: The rules of conduct recognized in respect to a particular class of human actions or particular group a system of moral principals

3. Ethics Applied The School’s Governing Principals of a Financing Transaction Governing Principals of a Financing Transaction Post Issuance Compliance Debt Policy Derivatives Policy Conflict of Interest Policy Conflicts of Interestof transaction participants

4. Principals of A Financing Transaction:Industry Wide Lawsuits: What’s Going On? The municipal market has been headlined by several prominent defaults over the past several years. ???? ???? ????

5. When Things Go Wrong: Who’s at Fault? Bond Counsel Tax-Exempt Opinion Independent FA Recommends Transaction Underwriter Executes Transaction Borrower’s Counsel Borrower’s Opinion Jefferson County, AL Underwriter’s Counsel 10b-5 Opinion Trustee Represents Bondholders Rating Agency Determines Credit Rating

7. New SEC Regulations (732 Pages)

8. New SEC Rules: Highlighting Conflicts of Interest • Do any professionals on a tax-exempt financing have a conflict of interest? • Some conflicts of interest are “resolvable” through additional disclosure – others are “unresolvable”.

9. The Role of Counsel Borrower’s Counsel has a fiduciary relationship and no conflict of interest with the borrower. Therefore, they can give unbiased legal advice, but are not qualified or licensed to provide tax-exempt financing advice. Bond Counsel gives the tax opinion for a tax-exempt bond financing and thus represents the rights of bondholders and the issuing authority. While it does not have a conflict of interest, it does not represent the rights of the borrower. Borrower’s Counsel Borrower’s Opinion Bond Counsel Tax-Exempt Opinion

10. Bank Direct Purchase: The Role of a Bank No Advisory of Fiduciary Responsibility. In connection with all aspects of the Transactions (including in connection with any amendment, waiver or other modification hereof or of any other Bond Document), the Borrower acknowledges and agrees that: (a) (i) the arranging, structuring and other services regarding this Agreement provided by the Bank and any Bank Affiliate are arm’s length commercial transactions between the Borrower and its Affiliates on the one hand, and the Bank and any Bank Affiliates on the other hand, (ii) the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (iii) the Borrower is capable of evaluating, and understands and accepts, the terms, risks, and conditions of the Transactions; (b) (i) the Bank and each Bank Affiliate is and has been acting solely as a principal and has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Borrower, or any other Person and (ii) neither the Bank nor any Affiliate has any obligation to the Borrower with respect to the Transactions, except those obligations expressly set forth herein or expressed or implied under applicable law; and (c) the Bank and each Bank Affiliate may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower, and neither the Bank nor any Bank Affiliate has any obligations to disclose any of such interests to the Borrower. To the fullest extent permitted by applicable laws, the Borrower hereby waives and releases any claims that it may have against the Bank and each Bank Affiliate with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any Transaction. Borrower Bank (Bond Purchaser) arm’s length commercial transactions will not be acting as an advisor, agent or fiduciary for the Borrower May be engaged in a broad range of transactions that involve interests that differ from those of the Borrower

11. Direct Purchase: Non-Broker Dealer Financial Advisor Independent (Unregulated) Financial Advisors historically have not been subject to Federal regulations – by FINRA, MSRB, or the SEC. Are not broker dealers – hence do not have the internal resources to obtain public market data, interest rate swap intelligence, or remarketing desks for variable rate bonds. Independent (non broker dealer) financial advisors need to form non-disclosed alliances with broker dealers to obtain this information for their clients Independent Financial Advisor Borrower Bank (Bond Purchaser) have not been subject to Federal regulations – by FINRA, MSRB, or the SEC. need to form undisclosed alliances with broker dealers to obtain investor/market based information for their clients

12. Direct Purchase: Broker-Dealer Financial Advisor Broker-Dealers, acting in the capacity of financial advisor, are regulated by FINRA, MSRB, and the SEC. By accepting a fiduciary role, the Broker-Dealer Financial Advisor has a duty of fair dealing, duty of loyalty, and a duty of care. Broker-Dealer Financial Advisor Borrower Bank (Bond Purchaser) are regulated by FINRA, MSRB, and the SEC. duty of fair dealing, duty of loyalty, and a duty of care

13. Two Types of FAs: One Regulated, One Not

14. Comparing Financial Advisors Bond Purchasers Broker Dealer Financial Advisor Bond Purchasers Bond Purchasers Borrower Independent Financial Advisor Bank (Bond Purchaser)

15. What Does the SEC Have to Say? New SEC rules and regulations have been established to clarify the giving of “advice” and to highlight “unresolvable” conflicts of interest. These new rules, known as the Municipal Advisory Rules, amend the regulatory framework imposed on broker dealers (SEC Act of 1934). • New rules promulgated and effective January 10, 2014 • New rules suspended as of 1:30 pm ET on January 10, 2014 • New rules expected to be reinstated on July 1, 2014 • effective January 10, 2014 • suspended as of 1:30 pm ET on January 10, 2014 • reinstated on July 1, 2014 effective January 10, 2014 suspended as of 1:30 pm ET on January 10, 2014 reinstated on July 1, 2014

16. The New Regulation is a Monumental Task 22,000 Unregulated Financial Advisors 20 Broker-Dealers (85% Market Share)

17. What Does This Mean for Your School? • It is important to understand the role each professional plays in your financing transaction. Are they are a fiduciary? Do they have a conflict of interest with the School’s interests? • Trust, in any tax-exempt bond transaction, should be your primary concern. If you don’t trust your transaction professionals, don’t use them. • If you find them working in their own interest at the detriment of your School, then you shouldn’t use them. • The new Municipal Advisory rules require historically unregulated non-broker dealer financial advisors to adhere to the same regulatory guidelines as broker dealers. • Ultimately the School wants its advisor to put the School’s interests above its own. • The fiduciary relationship assumes: • Duty of Fair Dealing 2. Duty of Loyalty 3. Duty of Care

18. What do the New Rules Say? • If you give advice to a municipal tax-exempt bond/loan issuer, then you are a Municipal Advisor. • As a Municipal Advisor, you must put the interests of the borrower above your own. • The approximately 22,000 independent (non-broker dealer) financial advisors will now become subject to the same regulation as broker dealers. • Each transaction participant must disclose any inherent conflicts of interest

19. Why is All of This Important? The bank direct purchase: lowest interest rate lots of covenants and imbedded risk

20. Understanding the Differences in Financing Options….Is Complex

21. Good Governance and a Tax-Exempt Financing • Hiring a financial advisor to assist your school, (1) in developing the appropriate policies for undertaking a financing and (2) in building a financial model. A financial model allows your school to: • Analyze and understand debt capacity • Develop prudent risk guidelines • Understand the long-term impact of debt on the school’s finances • Stress-test downside scenarios • Evaluate different project and campaign sizes and timing

22. Finance Committee: How do you Resolve the Issue? • Add cartoon with two guys shouting No Debt! Debt!

23. Sample Financial Planning Model

24. How Does A Financial Model Aid in the Financing Process? • How did the financial modeling process influence the School’s Finance Committee? • Is “not borrowing” really the conservative strategy? • Can the School afford debt? • What financial parameters did the School use to test affordability? • Liquidity to Debt • Cash Flow – Debt Service Coverage

25. Stress Testing the Financial Model

26. Best Practices in Independent School Governance • Post Issuance Compliance Policy • Debt and Derivatives Policy • Conflict of Interest Policy

27. Why is a Post Issuance Compliance Policy Important? IRS/Tax exempt bond compliance requirements fall into several different categories. Many Schools are having problems with Use – triggering the dreaded IRS VCAP Direct Placement & Public Issue Public Issue USE OF FUNDS FOLLOW THE MONEY INVESTING CONTINUING DISCLOSURE Purpose(Bricks and Mortar) Bonds ArbitrageRebate 15c2-12 Undertakings/Emma Debt Payment QualifiedInvestment Annual Financial Information Use of Property Hedges Change in Use YieldRestriction Operating Data Funds/Accounts Disposition Material Event Notices GICs Remediation & VCAP EMMA Records/Invoices/Statements

28. Brookwood School – Navigating the Tax Law Restrictions Use of the School’s Turf Field • Only 5% of the tax-exempt issue can be used for non-qualified use – should you use bond proceeds for this? Dining Hall Contract • Tax law restricts profit sharing contracts with food vendor services

29. VCAP! • Voluntary Closing Agreement Program • Zero tolerance • No sense of humor – or “materiality” context Tax-Exempt issue could be deemed taxable Five months to a year to resolve Legal fees Fines for lost interest to the IRS

30. Do We Need a Debt Policy? • Courted by several banks – “We are anxious to do business with your School!” • Incumbent bank - ? • Inside the RFP Process – 26 options, 7 banks • How do we decide? What were our goals? • The role of an outside financial advisor

31. The Purpose of a Debt and Derivative Policy

32. Key Components of a Debt & Derivatives Policy • Internal process required before undertaking a borrowing • Fixed vs. variable rate debt • Reasons for use of derivative instruments (swaps, caps, etc.) and permitted instruments • Internal process required before derivative executed • Maximum life of financing relative to life of assets • Minimum benchmark savings requirements for any refinancing

33. What Not to Include in a Debt & Derivatives Policy • Borrower may only borrow utilizing certain type of debt • Borrower must maintain a minimum credit rating in order to borrow • Requiring a certain person to sign off on a debt/derivative transaction • Requirement for specific financing covenants • Allowable security provisions (i.e. tuition revenue pledge, first deed of trust, etc.) The School’s Financial Advisor will help the School determine the full range of options available in the market and the risk vs. cost tradeoffs

34. The Purpose of a Conflicts of Interest Policy

35. What is a Conflicts of Interest Policy? • A CIP is aimed at avoiding any actual or potential conflicts between the interests of the School and any personal interest a Trustee or Officer may have • Generally, conflicts arise when: • a Trustee or Officer has an existing or potential financial or other interest which impairs, or might appear to impair, his or her independence or objectivity in serving the School; or • the Trustee or Officer might derive, or appear to derive, a financial or other material benefit from confidential information learned in the course of his or her employment or Board service.

36. When Should a School Utilize a CIP? Disclosure should be required, and abstention or recusal may be necessary, whenever a Trustee or Officer or a related party (spouse, children, etc.) engages in the following activity: • has a material interest in any transaction or any proposed transaction to which the School was or is to be a party, or serves as a director, officer, trustee, partner, employer, or employee of any person or entity having a material interest in an actual or proposed transaction with the School, or • serves as a director, officer, trustee, partner, employer, or employee of any person or entity that competes directly with the School, holds more than 5% of the stock or equity of any such organization, or has received substantial compensation, gifts, or services from any such organization or person.

37. Bottom Line: Conflicts of Interest • Ultimately, a School’s Conflict of Interest Policy relies on each Trustee’s and Officer’s sound judgment as it is difficult to anticipate all potential conflicts in advance • Potential conflicts of interest should be discussed with the Chair of the Board and Head of School as soon as knowledge of a potential conflict arises and a decision should be made by the Board prior to any discussion/decisions to avoid any conflicts of interest • All Trustees and Officers should annually disclose actual and potential conflicts of interest by completing a Confidential Conflict of Interest Disclosure Statement