Presentation Title AGLF Lawyers Panel Juliet H. Huang Presenters - - PowerPoint PPT Presentation

Presentation Title

Presenters

AGLF Lawyers Panel

Juliet H. Huang Partner Chapman and Cutler LLP Anne L. Barragar Partner Davis Wright Tremaine Maryann Santos Internal Counsel and Business Operations Manager Capital One Public Funding, LLC

Topics for Discussion

• Buena Vista, Virginia (or Putting Up City Hall to Finance a Golf Course)

§ Annual Appropriation Leases for New Mexico Schools § Michigan ESPC Law § Perfecting Vehicle Liens in Various States § Indemnity by Lenders § Appropriation Mechanics § Proposed Changes to MSRB Rule G-34 for CUSIPs and SEC 15c2-12 Amendment § XaaS (anything as a service)

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City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

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City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

• Buena Vista, Virginia is nestled in the Shenandoah

Valley at the foothills of the Blue Ridge Mountains

• Population around 6,650
• In 2004, the 18-hole Vista Links Golf Course was
• pened in an attempt to ignite the City’s economy
• City believed the Golf Course would anchor and attract

economic development

• Feasibility study projected the Golf Course would pay

for itself

• Expectations were that the 70 acres surrounding the

Golf Course would be developed with a hotel, homes, small businesses and restaurants

• City took out a loan to construct the Golf Course, then

refinanced it in 2005 with Lease Revenue Bonds

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City of Buena Vista, Virginia (“City”) holds fee simple title to City Hall and Police Department Public Recreational Facilities Authority of the City of Buena Vista (“Authority”) holds legal title to Municipal Golf Course Lease Agreement: City leases Municipal Golf Course from Authority. The rental

• bligation is secured by Golf Course

Revenues and the Deeds of Trust, and additionally payable from subject to annual appropriation. Essentiality Certificate: City declares the refinancing and leasing of the Municipal Golf Course to be essential to the government functions of the City. Trustee for Bondholders Trust Agreement: The Authority issues $9,205,000 of Lease Revenues Bonds (Golf Course Project), Series 2005A, which are insured by ACA. ACA Financial Guaranty Corporation: insures the Bonds; subrogated to rights of bondholders; third-party beneficiary under Lease Agreement, Deeds of Trust and Trust Agreement. Authority Deed of Trust: Fee simple grant

• f the Vista Links Golf

Course (“Municipal Golf Course”) for benefit of Trustee, securing obligations under the Lease Agreement

Transaction ¡Diagram: ¡City ¡of ¡Buena ¡Vista, ¡Virginia ¡ Municipal ¡Golf ¡Course ¡and ¡Lease ¡Revenue ¡Bond ¡Issue

City Deed of Trust: Fee simple grant of the City Hall and Police Department for benefit of Trustee, securing

• bligations under

the Lease Agreement

City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

§ Soon after Golf Course was completed, the Great Recession hit § Development surrounding Golf Course never materialized § Except for one profitable year, Golf Course lost hundreds of thousands of dollars annually § City had to pay lease payments from its own strained coffers ($665,462 annually) § City’s 2016 CAFR indicates Golf Course has required general fund subsidies totaling $5.6 million since operating § In 2010 City failed to pay $423,000 § Debt service reserve fund paid bondholders for 1 year § City tried to put Golf Course up for sale, cut staff from seven to two and reduced fertilization and watering

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ Faced with a decision to either fund essential services (education, public safety, the library and social services) or the Golf Course, in 2010 the City Council decided not to appropriate funds to pay lease payments § Moody’s downgraded City to Ba1 from A1, then withdrew its rating § Actions impacted the City’s ability to finance needed infrastructure – the Virginia Resources Authority denied the City’s request for a loan for its water treatment facility § VRA encouraged City to return to table with bond insurer and work on improving its borrowing profile § Davenport & Co. was informally engaged and likely advised City to workout adjustment with bond insurer rather than nonappropriate

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ City asked ACA to forbear from exercising rights and remedies under the Lease Documents and Deeds of Trust § ACA agreed to Forbearance Agreement on July 1, 2011 allowing City to pay 50% of its debt service for five years through January 1, 2016, with the deferred amount to be paid over five years after the Bonds’ original maturity § Under Forbearance Agreement, City and Authority expressly ratified and reaffirmed the validity of the Lease Documents and Deeds of Trust § City sold Wastewater Revenue Bonds in the public market two weeks after the Forbearance Agreement was signed § City made the adjusted lease payments for next 3 and half years

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ Then, in January 2015, the City nonappropriated on lease payments and has not made any lease payments since then § City’s perspective: “The amount of payments required over next 27 years are insurmountable.” § Financial burden has forced City to push aside other projects. § ”Almost no infrastructure has been improved, the roads have not been improved, the water and sewer pipes have not been improved, the schools need help, the buildings in the schools need to be repaired.” § The City has raised taxes. But citizens want City’s focus to be on essential improvement projects, not a golf course.

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ Interestingly, ACA’s contends that City operations have improved since 2005 and since the Forbearance Agreement was signed in 2011 § In fact, City’s 2015 Annual Report stated: “The City’s economic condition is stabilizing and the long-term economic prospects appear quite positive. The City anticipates significant growth in capital expenditures that will fuel local

• expenditures. As a result, a substantial increase in the City’s tax

base and corresponding local revenues should be attained benefiting its citizens and the surrounding geographic area.”

• “However, for political or other reasons – perhaps recognizing in

retrospect that the entire Project was a bad idea – the City now refuses to make the appropriations and payments that it originally agreed to make” ~ from ACA complaint

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Buena Vista, Virginia: Essentiality Certificate Or Putting Lipstick on a Pig

§ Of course, when the Bonds were issued, the City signed an

Essentiality Certificate, declaring the golf course to be “essential to the governmental functions of the City”: “The Bond proceeds will be used for the purpose of performing

• ne or more governmental or proprietary functions of the City

consistent with the permissible scope of the City’s authority…the City has an immediate need for the benefits to be realized by the City as a result of the financing/refinancing of the Project, and the City anticipates that the leasing of the Project pursuant to the Lease Agreement will remain essential throughout the term of the

• Bonds. The City has determined that the Project is essential

to the welfare of the City’s citizens and the economic development of the City.”

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

“This issue has hindered the City of Buena Vista’s progress for the past decade, and today the City is announcing decisive action to secure our future.” ~ Statement of Buena Vista City Council after voting to stop making payments on Golf Course in December 2014

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

“The prior City Council acted more responsibly. Once the [2011] City Council heard the reactions of various advisors and state officials they understood that their actions would affect the City’s future access to financing, so they came to ACA and asked for leeway while the City figured out a long-term solution for the golf course…We worked in good faith with the City several years ago to accommodate the City’s needs, and the City was making progress in following the terms of that deal until this abrupt policy change...Now, part way through this forbearance period and even though funds for the required payments were included in the budget the City approved earlier this year, they’ve simply thrown up their hands and have refused to pay the reduced debt schedule that was agreed to by the City.” ~ Statement by head

• f remediation at ACA Financial Guaranty Corporation

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ Bond Insurer filed lawsuit in June 2016 in state court asking judge to uphold validity of Lease Documents and Deeds of Trust § City asserts that the Resolution authorizing financing documents that pledged public property of the City was ultra vires (beyond City’s authority) due to procedural defects because only four of the City’s seven Council members voted on the Resolution and Virginia’s constitution requires all seven Council members to be present to vote on a deal that involved selling the City’s interest in “public places.” This would make Lease Documents and Deeds of Trust void ab initio (invalid from the outset). § Recall, under Forbearance Agreement, City and Authority expressly ratified and reaffirmed the validity of the Lease Documents and Deeds of Trust § Bond Insurer and Trustee had received validity and enforceability opinions from law firm of LeClairRyan as well as from City Attorney and Authority Counsel

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ City asserts that a pledge, such as a deed of trust, is subject to the requirements of Article VII, Section 9 of the Constitution of Virginia and Va. Code § 15.2-1800 § VA Const. Art. 7, § 9 provides: “ No rights of a city or town in and to its waterfront, wharf property, public landings, wharves, docks, streets, avenues, parks, bridges, or other public places, or its gas, water, or electric works shall be sold except by an ordinance or resolution passed by a recorded affirmative vote of three-fourths of all members elected to the governing body.

• Va. Code § 15.2-1800 provides that (subject to VA Const. Art. 7, § 9) a city

can mortgage or pledge at public or private sale its real property, but this cannot deprive the resident judge or judges of the right to control the use of the courthouse.

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City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

§ Under the Deeds of Trust, Bond Insurer has right to foreclose on Golf Course, City Hall and Police Department and appoint a receiver § Collateral (high $2 million) is worth one third of the debt ($9 million); Golf Course was valued at $950,000 in 2010 § City Hall (small two-story building constructed in 1960s) and Police Department § Bond Insurer withdrew the state suit and filed suit in federal court requesting appointment of a receiver for City Hall, the Police Department and the Golf Course to protect ACA’s ownership stake in collateral and prevent waste of the collateral § First floor of City hall houses Courthouse § Va. Code § 15.2-1800 gives control of courthouses to judges

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City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

§ Bond Insurer is seeking an order to compel the City to move its courthouse § But Virginia statute gives control of courthouses to judges, not City Council § Nevertheless, the Essentiality Certificate provided: “The City has pledged its interest in the City Hall Facilities component of the mixed used facility in accordance with the City Deed of Trust and acknowledges that the judicial system which serves the City has the right to continue its operations in the City Hall building following an event of default in the satisfaction of the debt service obligations under the Bonds until such time as a suitable replacement location is secured for the Courthouse Facilities. The City has agreed to locate such a replacement location for the Courthouse Facilities upon the occurrence of an event of default on its obligation

• n the Bonds in order for the Trustee to obtain full rights to foreclose

upon the entire City Hall building, and not just the City Hall Facilities component of the mixed use facility”.

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Buena Vista, Virginia:

ACA Financial Guaranty Corporation v. City of Buena Vista

§ Essentiality Certificate also provided: “The City acknowledges that its

• fficials can be required to vacate the City Hall Facilities following the
• ccurrence of an event of default with respect to the Bonds and that the

City may be required to vacate the property where its Police Department is located under such circumstance as well. To the extent the City relocates its governmental administrative activities to another location, it has agreed to provide a deed of trust on such property to secure the performance of its

• bligations under the Lease Agreement as well. The City has agreed that

it will not contest or judicially challenge any action undertaken by the Trustee to exercise its remedies under the Deed of Trust with respect to the City Hall Facilities or the Police Department following the

• ccurrence of an event of default as to its obligations under the Lease

Agreement.”

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City of Buena Vista, Virginia: (or Putting Up City Hall to Finance a Golf Course)

§ Currently parties are wrapping up the discovery phase § Trial is scheduled for this month in US District Court in Lynchburg, VA § Bond Insurer acknowledges foreclosure is a last resort § Depending on case outcome, see if Bond Insurer files suit against bond counsel, LeClairRyan § Public Policy Issues with Foreclosure of Essential Assets § Actual Essential Use of Project is Essential

Annual Appropriation Leases for New Mexico Schools:

Montano v. Gabaldon, 108 N.M. 94, 95 (1989)

§ The Board of County Commissioners sought to finance the construction of a new jail on county owned land. The proposition to raise money via debt financing was twice put to voters in a referendum and voted down both times. The Board then entered into a lease purchase agreement with a private contractor, wherein the contractor would take title to the land and build the jail, then lease the jail back to the county. Each twice-yearly payment would be split into a portion for principal and for interest. The agreement provided no legal duty for the county to continue paying the lease from year to year, but if the county made full lease payments over the 20-year term of the lease it would take title to the whole property. If it ended the lease, title to the property (including the land) would vest in the contractor. § The agreement was challenged on the grounds that it constituted debt, and thus entering the agreement violated Article IX, Section 10

• f the New Mexico Constitution which requires a majority vote of electors of the county to incur debt. The lower court determined that

the lease purchase agreement was not debt and granted summary judgment to the county. § On appeal, the New Mexico Supreme Court reversed. The Court cited authority stating that a borrowing is deemed to take place in violation of Article IX, Section 10 of the constitution when a county obtains an equitable interest in property which is subject to forfeiture if future periodic payments are not made. Regardless of whether an obligation is legal, or simply equitable or moral (or contingent), any duty “to make payments out of general revenues in future fiscal years, without voter approval, violates the…Constitution.” § In summarizing its holding, the Court said that the agreement was basically just a disguised installment-purchase agreement because the county obtains ownership simply by making the required payments. The option price was only a nominal or nonexistent sum, and thus the lease should be treated as a sale, as opposed to a true lease purchase agreement where the option price is usually the fair market value.

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Annual Appropriation Leases for New Mexico Schools:

New Mexico Constitution Article 9, Section 11

§ The constitutional provision bars any school district from borrowing money except to fund the building of, or modifications to, school buildings, or to improve school grounds. Any debt entered into for these acceptable purposes must first be authorized by a majority vote in favor by qualified electors of the school district, which is anyone owning taxable real estate within the school district. No school district may be indebted, in total, in an amount exceeding six percent of the assessed valuation of taxable property within the district, determined by the preceding general assessment. § A school district may also create debt via a lease-purchase agreement to acquire educational technology without submitting to a vote of electors. But this debt is still taken into account when determining the six percent debt limit. § However, a lease-purchase agreement entered into by a school district or charter school, if for the purpose of leasing real estate with an option to purchase for a price that is discounted by lease payments already paid, is not debt if the contract meets two requirements: 1. There is no legal obligation on the part of the district or charter school to continue the lease from year to year or to purchase. 2. The agreement provides for the termination of the lease if sufficient money is not available to meet current payments.

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Annual Appropriation Leases for New Mexico Schools:

Highlights of New Mexico Public School Lease Purchase Act

§ The purpose of this Act is to effectuate the part of Article 9, Section 11 of the New Mexico Constitution that was approved by voters in 2006. That section allowed school districts or charter schools to enter lease purchase agreements without the arrangement being debt (so long as the two above requirements are met). § Under the Act a governing body (either a school board or the governing structure of a charter school) must forward a copy of a proposed lease purchase agreement to the New Mexico Department of Education (the “department”) for approval, which must be received to enter into the agreement. The Act then specifies the terms that may and must be included in a lease purchase arrangement. Such agreements may have: § Annual or more frequent payments § Prepayment at option of governing body § A final payment date not exceeding thirty years after date of execution § The option to be acquired at a public or negotiated sale § The ability of the owner of the building to sell certificates of participation or other interests in the payments made under the agreement, and the proceeds of such sale may be used to acquire the building or real estate

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Annual Appropriation Leases for New Mexico Schools:

Highlights of New Mexico Public School Lease Purchase Act (continued)

§ Such agreements must: § Specify the principal and interest component of each payment (but net effective interest rate may not exceed the maximum permitted by the Public Securities Act). § Provide that if the governing body makes any capital improvements, there shall be no change in lease payments or final payment without a written amendment approved by the department. § Provide that if the governing body uses its own or state funds, above those required for lease payments, to make improvements to the real estate, then the cost of those improvements will constitute a lien on the real estate in favor of the governing body. If the arrangement is ever terminated prior to final payment or transfer of title, at the option of the governing body, then the governing body may either foreclose on the real estate or receive as a payment from the lessor the current fair market value of the property that is in excess of the outstanding principal due. § Provide for no legal obligation on the part of the governing body to continue lease payments from year to year or purchase the property. § Be terminated if insufficient money is available to make payments. § With the approval of the lessor (not to be unreasonably withheld), the agreement is assignable, without cost to the governing body and with all rights and benefits transferred to the assignee. Such assignments may only be made to another governing body or the state (or

• ne of its instrumentalities, institutions, or other political subdivision).

§ Provide that amendments to the agreement, except those that would improve the property without additional financial obligations to the governing body, must be approved by the department.

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Annual Appropriation Leases for New Mexico Schools:

Highlights of New Mexico Public School Lease Purchase Act (continued)

§ Other provisions provide for the methods (pursuant to the Open Meetings Act) that the governing body must use to authorize a lease purchase agreement. A charter school may obtain property tax funds to pay its lease payments if the local school board of the district in which the charter school is located adopts a resolution to be presented to voters, and the resolution passes. A governing body may apply any legally available funds to lease payments. § Any property tax imposed to make lease payments must still be approved by a majority of qualified electors in the school district. § A governing body may also enter into lease purchase agreements for the purpose of refunding or refinancing outstanding lease purchase agreements. Moreover, purchasing certificates of participation in lease purchase agreements constitute legal investments for public officers and fiduciaries, and the income earned from such interests is exempt from state taxation.

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Michigan ESPC Law

§ Updated Michigan legislation allows villages/cities to enter into lease-purchase agreements (“LPAs”) to finance energy conservation measures. (MLCS 78.24b and 117.5f):

• 1. The governing/legislative body of a village/city may acquire or finance an “energy conservation improvement” by installment contract, which

specifically includes an LPA. (Section 2).

• 2. An LPA is not subject to the revised Municipal Finance Act and is not a municipal security or a debt for purposes of the Municipal Finance Act.

(Section 2)

• 3. Before entering into an LPA and 60 days before completion of the improvements a village/city must report the following to the Michigan Public

Service Commission: a) A description of the energy conservation improvement and the name of each facility to which an improvement is made. b) The actual energy consumption during the 12-month period before commencement of the improvement. c) Project costs and expenditures, including the total of all lease payments over the duration of the LPA. d) Estimated annual energy savings, including projected savings over the duration of the installment contract.

• 4. An LPA is defined in section (5) and some of the highlights are as follows:

a) Payments may be made under an LPA from any legally available funds or from a combination of energy or operational savings, capital contributions, future replacement costs avoided, or billable revenue enhancements that result from energy conservation improvements, provided that the legislative body has determined that those funds are sufficient to cover, in aggregate over the full term of the contractual agreement, the cost of the energy conservation improvements. b) Payments under a lease-purchase agreement shall be a current operating expense subject to annual appropriations of funds by the governing/legislative body. c) Lease-purchase agreements shall obligate the legislative body only for those sums payable during the fiscal year of contract execution or any renewal. d) During the term of the lease-purchase agreement, the governing/legislative body shall be the vested owner of the energy conservation improvements and may grant a security interest in the energy conservation improvements to the provider of the lease-purchase.

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Perfecting Vehicle Liens in Various States

§ To have a valid security interest in any property, a security interest must “attach” to that property (UCC 9-203(a)). Such interest attaches when the security interest becomes enforceable against the debtor, which occurs when: § value has been given, § the debtor has rights in the collateral, and §

• ne of four conditions is met (relevant here are the first two, a security

agreement has been authenticated by the debtor or the secured party has possession of the collateral) (UCC 9-203(b)). § Once these three conditions are met, the security interest is enforceable against the debtor. § However, it will not be enforceable against other creditors or other perfected security interests until the security interest is perfected, which establishes the priority of rights of secured parties in the same collateral. Generally, to perfect a security interest you have to file a financing statement with the Secretary of

• State. However, under UCC 9-303, goods covered by a certificate of title are

perfected in the manner provided by state law, in the state that issued such certificate of title. According to the Uniform Law Commission, every state has such a Certificate of Title law that governs such perfection.

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Perfecting Vehicle Liens in Various States:

State Specific Requirements for Perfection

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California: A security interest in a vehicle will only be effective if the secured party has deposited, either physically or by electronic transmission, a properly endorsed certificate of ownership of the vehicle showing the secured party as the legal owner of the vehicle with the Department of Motor Vehicles at its office in Sacramento. (Vehicle Code § 6300). This applies to vehicles that are already registered. For unregistered vehicles, the secured party would submit an application in the usual manner for an original registration, together with an application for registration of the secured party as the legal owner. So long as such certificate is properly endorsed showing the secured party as legal owner, the security interest is perfected at the moment such certificate is deposited with the Department. (Vehicle Code § 6301). Florida: No office of the Department of Highway Safety and Motor Vehicles shall be a recording

• ffice for liens, except for liens that will be noted on a certificate of title when it is first issued by the Department. In
• rder to perfect a security interest, the secured party must complete a sworn notice of

such lien and file such notice with the Department. Such notice must include: (i) the date of the lien granted in a security agreement, (ii) the name and address of the registered owner, (iii) a description of the vehicle showing make, type, and vehicle identification number, and (iv) the name and address of the lien holder. The secured party must then note the lien on the certificate of title. (Florida Statutes § 319.27) New York: New York has adopted the Uniform Vehicle Certificate of Title Act. To perfect a lien, the existing certificate of title, if any, must be delivered to the office or branch office of the Commissioner (in the Department of Motor Vehicles) along with an application for a new certificate of title containing the name and address of the secured party. The secured party must also pay the required fee. The Commissioner will then issue the new certificate and keep a record of the lien. (Vehicle and Traffic Law § 2118).

Perfecting Vehicle Liens in Various States:

State Specific Requirements for Perfection (continued)

North Carolina: Secured parties must file an application with the Division of Motor Vehicles to have the lien noted on the certificate of title. The application must be signed by the debtor, contain the date of application of each security interest, and the name and address of the secured party. If the vehicle is not registered with the state, then the application for notation of a security interest shall be the application for the certificate of title as generally required of vehicle owners. If the vehicle is registered, then the secured party must fill out the form for notation of a security interest available on the Division of Motor Vehicles website. If an existing certificate of title is in the possession of a prior secured party, the application for notation must also include the name and address

• f such prior secured party. The secured party may also sign in lieu of the debtor if the application includes

documentary evidence of the applicant’s security interest signed by the debtor and an affidavit stating the reason the debtor did not sign the application. (N.C.G.S.A. § 20-58).

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Ohio: The secured party must present evidence of a security interest to a clerk of a court of common pleas, together with the certificate of title if a physical certificate exists, along with a fee. Unless the secured party requests that the clerk not issue a physical certificate, the clerk will issue a new original certificate of title from the automated title processing records that indicates the security interest and the date of such interest. However, the secured party may also submit evidence of a security interest electronically via a written confirmation, and the clerk shall enter the security interest in the automated title processing system. (R.C. § 4505.13).

In each of these five states, there is an exception for vehicles held as inventory, which generally just requires possession

• f the Certificate of

Title to perfect a lien.

Indemnity by Lenders

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Appropriation Mechanics

§ “Non-Appropriation Event” means, with respect to a Lease, the failure of Lessee’s governing

body to appropriate funds to pay Rent Payments under such Lease following the Original Term or then current Renewal Term sufficient for the continued performance of such Lease by Lessee. § Lessee affirms that sufficient funds are legally available to pay all Rent Payments when due during the current fiscal year, and Lessee reasonably believes that an amount sufficient to make all Rent Payments during the entire Scheduled Term can be obtained from legally available funds

• f Lessee.

§ Lessee further intends to do all things lawfully within its power to obtain and maintain funds sufficient and available to discharge its obligation to make Rental Payments due hereunder. Lessee shall take all actions necessary to include such Rental Payments in each proposed budget or appropriation request and shall submit the same in accordance with applicable provisions of law. Notwithstanding the foregoing, the decision whether or not to budget and appropriate funds or to extend the Lease Term for any Renewal Term is within the sole discretion

• f the governing body of Lessee, and the failure to appropriate is not an “Event of Default”.

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Proposed Changes to MSRB Rule G-34 for CUSIPS

• History of CUSIP
• Improving efficiency and clearance activities.
• Provide dealers with reliance on CUSIPs in receiving and safeguarding securities.
• Now the MSRB believes CUSIPs will increase transparency in the market.
• MSRB Rule G-34
• MSRB Position is that the proposed changes to the rule is a clarification to the current

rule.

• Industry Practice
• Existing rule language applies only when a dealer acquires (takes up) a new issue of

municipal securities.

• When a placement agent merely acts as a go-between the issuer and financing entity

and never acquires the “municipal security” the existing rule by it terms does not apply.

• The Industry reaction to the draft rule: The proposed definition of underwriter would have

the effect for the first time requiring placement agents to: (i) obtain CUSIPS for direct placements and (ii) apply to DTC to make such securities DTC eligible.

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Proposed Changes to MSRB Rule G-34 for CUSIPS

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• This raises many issues and concerns for the participants in the direct placement market:
• Is the instrument DTC eligible when it includes typical bank transfer restrictions to affiliates, banks,

insurance companies and other financial institutions?

• Is it appropriate for a Placement agent to apply to DTC when they never touch the instrument?
• Will this force Banks to work directly with municipal issuer rather than placement agents that require

CUSIPS?

• CUSIPS are problematic for Banks because CUSIPs are indicative of a plan of distribution.
• MSRB questions whether a carve out to a single purchaser would be beneficial?
• Comment letters mostly agree that such a carve would be beneficial to a single bank, bank affiliate,

bank subsidiary or consortium of banks thereof.

• This exception eliminates the need for a placement agent to determine for G-34 purposes whether

the transaction involves a security for security law purposes.

• Carve-out may come with transfer restrictions.
• MSRB is concerned that subsequent distribution may change the nature of the municipal instrument.

Proposed Amendments to SEC’s Rule 15c2-12

32

• On March 1, 2017, the Securities and Exchange Commission (“SEC”) issued a release (the

“Release”) seeking comments on proposed amendments (the “Proposed Amendments”) to Rule 15c2-12 (the “Rule”) under the Securities Exchange Act of 1934, as amended.

• The proposal seeks to amend the list of reportable events for which an issuer must provide

notice to the Municipal Securities Rulemaking Board (the “MSRB”).

• Under the Proposed Amendments, disclosure would be required for the following additional

events: 1) incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and 2) default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.

Proposed Amendments to SEC’s Rule 15c2-12

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• The Proposed Amendments have implications for issuers and underwriters of

publicly-offered municipal securities as well as financial institutions that enter into direct purchases, private placements, bank loans, municipal leases and other types

• f financial obligations with issuers of publicly-offered municipal securities.
• When entering into a financial obligation, the issuer and the other party (e.g. a

lender, lessor, swap provider, vendor, counterparty or other financial institution) will need to consider whether the material terms of the financial obligation are summarized or whether full copies of the documents are posted to EMMA, and if so what sensitive or proprietary terms should be redacted, and, if the terms are summarized, who will incur the costs to ensure the summaries are accurate and

• complete. Lenders may want to consider covenants that giving them the right to

review and redact such sensitive or proprietary terms (perhaps in accordance with G-34 redactions).

Proposed Amendments to SEC’s Rule 15c2-12

34

• In addition, the application of the Proposed Amendments to the concepts of

defaults, modification of terms and similar events reflecting financial difficulties could present a challenge when analyzing whether such an event presents financial difficulties requiring disclosure.

• Modifications and waivers of terms of a financial obligation provided by lenders to

issuers (including forbearance) raise particular concerns and questions. For example, if an issuer is unable to meet a particular financial covenant and the lender agrees to waive the covenant, the issuer will need to make a determination as to whether this type of waiver should be disclosed.

• Under these circumstances or similar situations, a lender may want to consider the

implications letting the market know that it has granted such waiver or accommodation if the issuer is required or advised to disclose the full details of the waiver or accommodation.

XaaS (Anything as a Service)

§ XaaS refers to the concept of “Anything as a Service,” whereby a third party provides a service that a person or entity would normally acquire through the direct purchase of a good or with an in-house process. For example, rather than an individual purchasing a car, they may instead purchase a subscription for the use of a car only when needed. In the municipal context, XaaS could entail purchasing a service that the municipal entity may normally have provided with its own staff. § The concepts and legal issues inherent in XaaS may already have corollaries in: 1. Solar PPA structures 2. Public Private Partnership arrangements

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