George B. Wolfe
Nelson Mullins, Columbia
Published in Nelson Mullins newsletter on June 24, 2010
On June 23, the South Carolina Economic Development Competitiveness Act of 2010 (H. 4478, R. 351) (the “Act”) became law. To view the Act, please click here. The Act contains a number of useful changes to existing law that will support economic development in South Carolina. Among the areas in which the Act makes the most significant changes are the following:
Endowed chairs program—allows certain large private sector investments to serve as basis for endowed chairs if certified by Secretary of Commerce.
State Ports Tax Credit—provides for credit against employee withholding taxes.
Stimulus Act Bonds—provides a process for the reallocation of South Carolina bond capacity under the 2009 federal Stimulus Act in order to maximize the use of that capacity.
Fee-in-lieu of taxes—extends benefit period by 10 years and allows modification of method for valuing real property.
Special Source Revenue Credit/Bond—allows expenditures on machinery and equipment to serve as basis for credit/bond.
Investment Tax Credit—extends credit to entire state.
Jobs Tax Credit—removes special exceptions for the categorization of counties so that counties will be categorized based solely on objective economic criteria.
A summary of the changes made by the Act is provided below.
FEE-IN-LIEU OF TAXES (FILOT) (Sections 2-6 and 8-12 of the Act)
There are three separate FILOT statutes that provide mostly comparable benefits—the “Big Fee” Statute (which requires a $45 million minimum investment, transfer of project title to a county and a bond issuance), the “Small Fee” Statute (which requires a $2.5 million minimum investment and transfer of project title to a county) and the “Simple Fee” Statute (which requires a $2.5 million minimum investment). The Act amends all three of these statutes, as described below.
Minimum Multi-Company Investment. The Act reduces the multi-company FILOT minimum total investment under the Small Fee and Simple Fee Statutes from $10 million to $5 million for manufacturing, research and development, corporate office, and distribution facilities. This makes it easier for companies coming together to invest in a single project to avoid the otherwise applicable $2.5 million minimum investment by each company.
Term. The Act increases by 10 years—from 20 years to 30 years—the term of theFILOT “benefit period” for “regular” fees.The Act also increases by 10 years—from 30 to 40 years—the term of theFILOT benefit period for “enhanced fees,” at least under the Big Fee andSmall Fee Statutes.Parties can amend existing FILOT agreements to provide for this 10-year increase.When taken together with the 10-year extension available under present law,the Act provides for a possible total benefit period of up to 40 years (forregular fees) and 50 years (for enhanced fees).
Real Property Valuation. Present law requires the value of real property to be set at its original income tax cost basis for the duration of the FILOT agreement. The Act allows a county and a company to agree to value real property subject to a fee at its fair market value as determined by periodic reappraisal, just as if such property were subject to regular property taxes. Parties can amend existing FILOT agreements to provide for this change, which may be helpful to projects with buildings that have declined or will decline in value.
Property Placed in Service Prior to FILOT Agreement. The Act provides that property placed in service pursuant to an inducement agreement or inducement resolution prior to execution of the FILOT agreement is eligible for a FILOT agreement even if such property has been subject to property taxes before the execution of the FILOT agreement. This is a technical change from present law that removes a trap for the unwary.
Nuclear Facilities. The Act lengthens certain FILOT time periods in recognition of the fact that nuclear facilities take longer to permit and construct than other projects. For qualifying nuclear projects involving an investment of at least $1 billion, the Act provides (i) up to 15 years after an inducement resolution or inducement agreement before a fee agreement must be entered into, and (ii) a 10-year investment period.
SPECIAL SOURCE REVENUE CREDIT/BOND (Section 7 of the Act)
Present law authorizes counties to provide a Special Source Revenue Credit (SSRC) or Special Source Revenue Bond (SSRB) to the extent that the property owner incurs expenditures for infrastructure or improved or unimproved real estate used for manufacturing or commercial purposes.
The Act adds machinery and equipment as qualifying expenditures for SSRC/SSRB purposes. However, the Act also provides that if a company removes machinery and equipment that serves as the basis for an SSRC or SSRB before the end of the FILOT agreement, the company must pay the otherwise applicable FILOT payment on such property for the two years following its removal.
MANUFACTURER’S WAREHOUSE PROPERTY TAX (Section 13 of the Act)
The Act provides a six percent assessment ratio for real property owned by or leased to a manufacturer and used primarily, rather than exclusively as under present law, for warehousing and wholesale distribution. Such warehouse or wholesale distribution real property must not be physically attached to a manufacturing plant unless the warehousing and wholesale distribution area is separated from the manufacturing plant by a permanent wall.
RURAL INFRASTRUCTURE FUND (Section 14 of the Act)
The Act adds the following to the list of eligible expenditures for which the Coordinating Council may provide financial assistance to local governments for infrastructure and other economic development activities in the less prosperous areas of the state:
SOUTH CAROLINA VOLUME CAP ALLOCATION ACT (Section 15 of the Act)
The Act creates the “South Carolina Volume Cap Allocation Act,” which provides a process, through the State Budget and Control Board, for the reallocation of county and large municipality volume caps for bonds to be issued under the American Recovery and Reinvestment Act of 2009.
Among the bonds impacted are recovery zone facility bonds, recovery zone economic development bonds and qualified energy conservation bonds. The objective is to maximize the issuance of such bonds for projects within South Carolina before the authorization to issue them terminates at the end of 2010 (unless extended by Congress).
JOBS TAX CREDITS (JTC) (Section 16 of the Act)
The Act’s changes to the JTC statute include the following:
Adds “agribusiness operations” to the list of facilities qualifying for JTCs.
Reduces the county tiers from five to four, and identifies those tiers by number from IV to I—rather than words; determines tiers based solely upon the original criteria of unemployment rate and per capita income; and removes all special exceptions (the removal of special exceptions automatically removes one of the existing five tiers).
Provides for the following amounts of credit for each county tier:
Tier IV -- $8,000
Tier III – $4,250
Tier II – $2,750
Tier I -- $1,500
By way of comparison, the following are the county tiers/credit amounts under present law (before the Act):
Distressed -- $8,000
Least Developed -- $4,500 (this is the tier that is removed by the Act)
Under Developed -- $3,500
Moderately Developed -- $2,500
Developed -- $1,500
STATE PORTS TAX CREDIT (Section 17 of the Act)
Present law provides for a credit in an amount determined by the Coordinating Council against state income taxes for a company that uses port facilities in this state and which increases its port cargo at such facilities by at least five percent in a single year over its base year port cargo volume. There is a total annual cap of $8 million on the credit. The changes made by the Act include the following:
Up to $4 million out of the $8 million annual cap may be provided as a credit against employee withholding taxes.
Up to $1 million of the $8 million annual cap may be provided to a new warehouse or distribution facility committing to a minimum $40 million investment and the creation of 100 jobs, without regard to the base year cargo provisions.
The Coordinating Council continues to be authorized to determine the amount of the credit, as under present law.
UTILITY TAX CREDIT (Section 18 of the Act)
The Act adds to the list of qualifying projects eligible for this credit incubator buildings whose ownership is retained by a county, political subdivision or agency of the State.
JOB DEVELOPMENT CREDITS (JDC) (Section 19 of the Act)
The Act’s changes to the JDC statute include the following:
The Act conforms the county tier structure for JDC purposes to the above-described Jobs Tax Credit changes:
Tier IV – 100% JDC
Tier III – 85% JDC
Tier II – 70% JDC
Tier I – 55% JDC
The Act adds the following expenditures as “qualifying expenditures” for JDC purposes: operating leases with terms of at least five years; and employee relocation expenses, but only where such employees are being paid at least two times the lower of the state or county per capita income.
INVESTMENT TAX CREDIT (Sections 20-21 of the Act)
The original investment tax credit statute, passed in 1995, was intended to help offset the impacts of the job losses at Charleston Naval Base and Savannah River. That statute provided a credit against income tax with respect to qualifying manufacturing property where such property is first used in a qualifying area, which included 27 of the state’s 46 counties. The credit equaled one to five percent of the cost of such property, depending upon the depreciable life of the property in question.
The Act expands the qualifying area to all 46 counties, so that the credit now applies throughout the state. To minimize the fiscal impact of this geographic expansion, the Act also cuts the amount of the credit in half, so that the credit now ranges from 0.5% to 2.5%.
BIODIESEL RESEARCH AND DEVELOPMENT TAX CREDIT (Section 22 of the Act)
The Act amends the state income tax credit for qualified research and development expenditures to include expenditures relating to waste grease-derived biodiesel.
RENEWABLE ENERGY FACILITY CREDIT (Section 23 of the Act)
The Act provides an income tax credit equal to 10 percent of the cost of a company’s qualifying investments in plant and equipment for renewable energy operations. To qualify a company must do each of the following:
Manufacture renewable energy systems and components in South Carolina for solar, wind, geothermal or other renewable energy uses;
Invest at least $500 million in a new renewable energy facility in South Carolina; and
Create at least 1.5 jobs for every $500,000 of capital investment and pay 125 percent of state average annual median wage for such jobs.
The credit is for a five-year period from 2010 through 2015. A taxpayer’s total credit under this section cannot exceed $500,000 annually, or $5 million total.
RENEWABLE ENERGY MANUFACTURING ACT (Sections 24-28 of the Act)
The Act amends the “South Carolina Life Sciences Act” to make it the “South Carolina Life Sciences Act and Renewable Energy Manufacturing Act.” As part of this amendment, the Act does the following:
“Renewable energy manufacturing facility” is defined as a business which manufactures (i) qualifying machinery and equipment for use by solar and wind turbine energy producers or (ii) qualifying batteries for certain alternative energy motor vehicles.
The South Carolina Energy Office is authorized to determine whether a facility qualifies as a renewable energy manufacturing facility.
Qualifying renewable energy manufacturing facilities involving investments of $100 million and 200 new jobs with an annual average cash compensation of at least 150 percent of the lower of state or county per capita income are entitled to the following benefits:
–The manufacturing machinery and equipment used at such a facility is entitled for property tax purposes to a 20 percent annual depreciation rate rather than the 11 percent rate that would otherwise apply to such machinery and equipment.
–Any taxpayer establishing such a facility may enter into an income apportionment contract with SCDOR, with a term not to exceed 15 years.
–The Coordinating Council may allow up to 95 percent of Job Development Credits to be provided with respect to the employees of such facility, even if such Job Development Credits would otherwise be subject to a lower limit (55, 70 or 85 percent) based on the tier for the county in which the jobs are located.
SET-ASIDE FUNDS (Section 29 of the Act)
The Act adds the following to the list of eligible expenditures for which the Coordinating Council may make grants from the Council’s “set-aside” fund to which $18 million is annually appropriated:
ENDOWED CHAIRS (Section 30-31 of the Act)
The Act provides that 25 percent of the appropriations for Endowed Chairs shall be awarded by the Endowed Chairs review board pursuant to recommendations by the Secretary of Commerce.
The Secretary of Commerce may request that the review board award an endowment of up to $2 million for each “significant capital investment” committed by a “qualified project or industry.” Upon a decision by the review board to make an allocation for such endowment, the qualified project or industry sector will have 36 months from the date of allocation to make such investment. Once the significant capital investment has been made, the Secretary of Commerce shall certify to the review board and the review board shall make awards for one or more endowed professors who will directly support the industry in which the significant capital investment is made.
“Qualified projects or industries” are those that make a significant capital investment in South Carolina after January 1, 2010, in certain specified activities or in other activities as determined by the Secretary of Commerce.
“Significant capital investment” means a private investment of at least $100 million in a single project or at least $500 million in an industry sector.
Importantly, the otherwise applicable requirement for non-state matching funds does not apply to Endowed Chairs funded pursuant to this process.
This provision will allow a portion of the Endowed Chairs funds to more closely track the direction of the South Carolina economy as evidenced by significant private investments. This provision also adds an incentive that the state can use in recruiting significant investments in economic sectors that the state wants to promote.
WORKFORCE AGENCY MEMBERSHIP ON COORDINATING COUNCIL (Section 32 of the Act)
The Act replaces the chairman of the South Carolina Employment Security Commission with the Executive Director of the newly created Department of Employment and Workforce as a member of the South Carolina Coordinating Council for Economic Development.
FINANCING WATERWAY IMPROVEMENTS (Section 33 of the Act)
The Act authorizes the creation of municipal improvement districts to widen and dredge the waterways of the State by issuing bonds payable from assessments in that district. In certain instances, such bonds may be secured in whole or in part by the full faith, credit and taxing power of the municipality.
EXTENSION OF REDEVELOPMENT AUTHORITY FUNDING (Section 34 of the Act)
The Act extends for two years (from 2015 to 2017) the redevelopment fees that may be provided to certain redevelopment authorities created in response to the closure or realignment of a military installation such as Charleston Naval Base. These fees are equal to five percent of state employee withholding taxes paid to employees of the federal government located at such bases.
TAX REVENUES FOR TOURISM (Sections 35 and 36 of the Act)
The Act increases from 20 to 50 percent the amount of local accommodations and hospitality tax revenues that cities and counties without a high concentration of tourist activity may spend on certain tourism-related activities.
REPEAL OF ACT 150 OF 2010 (Section 37 of the Act)
The Act repeals Act 150 of 2010. Act 150 provided a tax credit equal to one-half of income taxes paid by S-corporations with a capital investment of $500 million and at least 400 jobs. The amount of the credit was to be paid to the Coordinating Council by use for a city or council for public infrastructure relating to the qualifying project.
REPEAL OF OUTDATED BASE CLOSURE PROVISIONS (Section 38 of the Act)
The Act repeals certain outdated statutory provisions related to the closure of the Charleston Naval Base.
EFFECTIVE DATES (Section 39 of, and elsewhere in, the Act)
The Act takes effect on January 1, 2011, subject to a number of exceptions, as described below.
The Act provides that the following sections take effect upon approval of the Act by the Governor:
Section 6 (all of the Big Fee changes)
Section 8 (Small Fee—certain nuclear facility changes; 10-year increase in benefit period)
Section 9 (Small Fee—certain nuclear facility changes)
Section 15 (Volume cap reallocation)
Section 25-28 (Renewable Energy Manufacturing Act)
Section 37 (repeal of Act 150 of 2010)
Section 38 (repeal of certain outdated Code sections)
Some sections have their own effective date provisions, including the following:
Section 2 (Small Fee). $5 million minimum for Small Fee multi-company deals. Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such $5 million minimum.
Section 3 (Small Fee). 10-year increase in benefit period. Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such 10-year increase.
Section 4 (Small Fee). Real property valuation. Effective for countywide reassessments after 2010.
Section 6 (Big Fee). All Big Fee Changes. Effective upon approval by the Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase. Changes in real property valuation are effective for countywide reassessments after 2010.
Section 8 (Simple Fee). Certain nuclear facility changes. 10-year increase in benefit period. Effective upon approval of Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase.
Section 10 (Simple Fee). Real property valuation. Effective for countywide reassessments after 2010.
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Thomas O. Mason
Williams Mullen Clark & Dobbins, McLean, VA
In an effort to jumpstart the United States economy and improve our national infrastructure, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”) was passed into law in February of 2009. The Recovery Act made $275 billion available for government contracts, grants and loans. It is only natural that the breadth and value of projects funded by the Recovery Act would pique the interest of government contractors and commercial contractors alike. As a consequence, companies that are new to contracting with the federal government may be lured by Recovery Act funds. However, the decision to enter into the world of federal procurement should not be taken lightly. It is a landscape fraught with unique requirements that can become traps for the unwary. Thus, before a company heeds the call of Recovery Act funds, that company should arm itself with the tools and information necessary to successfully perform a government contract without opening itself to unnecessary liability. A few recent changes to federal procurement law exemplify the unique requirements placed on a government contractor and the ever-evolving nature of those requirements. The following paragraphs summarize these recent changes and the government’s increasing emphasis on the oversight and transparency of government contractors.
The Federal Acquisition Regulations (FAR) codify the policies and procedures by which executive agencies contract for supplies and services in exchange for appropriated funds. The FAR will be applicable to most contracts issued by executive agencies using Recovery Act funds. Effective Dec. 12, 2008, the FAR was amended to impose mandatory disclosure requirements on contractors and subcontractors. The new regulations require contractors and subcontractors to disclose to the agency Office of the Inspector General (with a copy to the contracting officer) whenever the contractor has “credible evidence” of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations, or a violation of the civil False Claims Act, in connection with the award, performance or closeout of a contract performed by the contractor or a subcontract awarded thereunder. FAR § 3.1002 & 52.203-13.
In addition, the regulations implement changes to the FAR’s rules concerning the suspension and debarment from federal contracting of irresponsible contractors. Specifically, a knowing failure to “timely disclose credible evidence” of certain violations of federal criminal law, the civil False Claims Act or significant overpayments on government contracts—until three years after final payment on any federal government contract awarded to the contractor—creates a new basis for suspension and debarment. FAR § 9.407–2.
These new regulations amend FAR 52.203-13, which currently requires contractors and subcontractors to maintain written codes of conduct and to establish business ethics and compliance programs and internal control systems. These requirements remain in effect under the new regulations, including a narrow exception for small businesses and commercial item contracts relieving such contractors from the requirement to establish business ethics and compliance programs, and internal control systems. However, the new regulations expand the framework for the business ethics awareness and compliance programs and internal control systems. With respect to the business ethics awareness and compliance program, the new regulations require the contractor to take reasonable steps to communicate the program periodically, through training and other means of dissemination. The new regulations require that this training be provided not only to the contractor’s employees and principals, but also to its agents and subcontractors. With respect to the internal control system, the new regulations build upon the prior framework to require the assignment of responsibility for the system at “a sufficiently high level and adequate resources” to ensure effectiveness of the compliance program and internal control system. The new regulations also require that the contractor’s internal control system encompass periodic reviews of company business practices, policies and procedures to include monitoring and auditing to detect criminal conduct, periodic evaluation of the effectiveness of the compliance program and internal control system and the periodic assessment of the risk of criminal conduct.
The new regulations are evidence of constant and increasing oversight of the contractors and subcontractors who do business with the government, as well as the mounting emphasis on transparency and ethics in government procurement. Further, the regulations require an internal infrastructure that contractors not currently doing business with the government may not have. With the government’s increased use of criminal proceedings and suspension and debarment to enforce contractual requirements, it is critical that contractors understand their obligations under these regulations and implement an effective business ethics awareness and compliance program and internal control system.
Even if a contractor implements an effective business ethics and compliance program and internal control system, however, what constitutes reportable evidence of a False Claims Act (FCA) violation under the mandatory disclosure rule has been further complicated by a recent district court opinion. In United States v. Science Applications Int’l Corp., No. 04-1543 (D.D.C. Sept. 14, 2009), the court affirmed a jury decision that held Science Applications International Corporation (SAIC) liable under the FCA for failing to disclose organizational conflicts of interest (OCI) that impacted its contracts with the Nuclear Regulatory Commission (NRC). The Federal Acquisition Regulation provides that an OCI exists when, because of activities or relationships with other persons or organizations, a person or organization is unable or potentially unable to render impartial assistance or advice to the government. FAR § 2.101. The FAR requires contracting officers to identify and evaluate potential OCIs as early in the acquisition process as possible. FAR § 9.504.
Specifically, the United States sued SAIC for breaching its no-OCI obligation under its NRC contracts by engaging in relationships with organizations that created an appearance of bias in the technical assistance and support provided to the NRC. The government also alleged that the contractor’s no-OCI certification and requests for payment under the contracts violated the FCA. The jury found that SAIC had violated the FCA by knowingly presenting false claims for payment or approval by the government and making, using or causing to be made false records or statements for approval of payments based upon the failure to provide information regarding potential OCIs affecting the contracts. The district court affirmed the application of the FCA to a contractor’s failure to provide information on potential OCIs pursuant to a contract clause. The two NRC contracts incorporated regulations that require the contractor to warrant that it had no OCI that, in part, would diminish its capacity to give impartial, technically sound, objective assistance and advice or would result in a biased work product. The regulations further required the contractor to disclose any OCIs discovered after entering the contract.
This opinion raised two issues for contractors doing business with the government. First, the decision reflects a contractor’s potential exposure to a FCA violation for failing to disclose the existence of an OCI pursuant to contract requirements. The mandatory disclosure rule also makes it clear that the contractor has an additional obligation to disclose an FCA violation as soon as it has “credible evidence.”
Second, the decision reinforces the need for contractors to maintain current and complete information on company business interests. Applicable federal regulations provide that an
OCI may arise where the contract’s requirements conflict with a contractor’s business interests, affecting the ability of the contractor to perform the contract requirements impartially. The district court found in part that SAIC had failed to track its business interests sufficiently to prevent the occurrence of an OCI.
Identifying an OCI often involves a subjective analysis of varying interests and relationships held by the contractor and their impact upon the performance of contract requirements. This assessment becomes more difficult as the scope and variety of those interests and relationships grow, particularly for larger contractors that hold different business units or contracts within a single business unit.
The court’s decision in SAIC shows that it is critical that contractors maintain current and complete information on business or financial relationships that are relevant to contract performance as a prerequisite to doing business with the federal government. The simplest approach to fulfill this obligation is to create an internal database or repository of all business or financial interests on a company-wide basis, including all affiliated entities and subsidiaries. Such interests include the company’s products or services, the company’s contracts to provide the products or services, and the identities of the company’s customers and competitors. The contractor should ensure that the database is updated periodically to reflect any changes to its interests. The contractor can use this database to compare the requirements of a specific contract against its current financial interests to determine whether performance of the contract requirement would create an OCI.
The mandatory disclosure rule and the OCI requirements at issue in SAIC are simply examples of the unique considerations of government contracting, but they are hardly an exhaustive list of those considerations. The move to a more transparent procurement system, coupled with an increasing willingness to use criminal proceedings, civil proceedings, and suspension and debarment as a means to enforce contracts, makes it more important than ever for a contractor to approach federal government contracts with educated caution. Although the funds provided by the Recovery Act of 2009 are intended to jumpstart the economy, acquiring those funds could prove hazardous to those contractors unfamiliar with the unique requirements of government contracts, like those contained in the FAR. The potential for increased infrastructure and oversight costs should also be an important factor for a commercial contractor considering a federal government contract.
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McNair Law Firm, PA, Columbia
Under an amended Securities and Exchange Commission (SEC) rule, state and local governments that issue securities after December 1, 2010, will be expected to disclose the occurrence of more events related to a broader group of securities in a much shorter time frame than under the existing rule. Amendment to Municipal Securities Disclosure, 75 Fed. Reg. 33,100 (June 10, 2010) (to be codified at 17 C.F.R. pts. 240 and 241).
Background and significance
State and local governments issue municipal securities to finance schools, roads, water and sewer systems, hospitals, industrial development and much more. Municipal securities are exempt from the registration requirements of the Securities Act of 1933 and the reporting requirements of the Securities Exchange Act of 1934. However, SEC Rule 15c2-12 (the rule) prohibits any underwriter from buying or selling municipal securities unless that underwriter has reasonably determined that the issuer or borrower has agreed to disclose certain information, including annual financial statements, and give notice of events that may affect the trading price of the securities, such as ratings changes, redemptions, delinquencies and defaults.
The rule’s purpose is to provide transparency to the secondary market, in which investors buy and sell municipal securities after the underwriter’s initial purchase of those securities from the state or local government. While governments do typically enter into disclosure agreements with underwriters when securities are issued, not all governments follow through over the term of the securities, which may be years or decades, by regularly and promptly filing the information and event notices they promised to provide. There has been little enforcement of the rule against state or local governments because breaching a disclosure agreement is a breach of contract with the underwriter, not a direct violation of federal securities law by the state or local government.
The SEC is attempting to clarify and strengthen consequences for nondisclosure, to the extent it can do so without authority to regulate states and localities directly. In the agency interpretation accompanying the amended rule, the SEC asserts that it would be “very difficult” for an underwriter to reasonably determine that an issuer will comply with a proposed disclosure agreement when that issuer “has on multiple occasions during the previous five years failed to provide on a timely basis continuing disclosure documents … as required in a continuing disclosure agreement for a prior offering.” 75 Fed. Reg. at 33,124. Thus, the indirect sanction against state or local governments that do not file timely continuing disclosure documents is that underwriters will not work with them on subsequent securities issuances until disclosure is updated; otherwise, the underwriters would violate the rule.
Therefore, government entities that plan to issue securities, along with their counsel, should examine whether they have a history of compliant disclosure, and if not, then discuss how to get back on track. In addition, state and local governments should be aware that the recent changes to the rule will likely result in changes to their duties under future continuing disclosure agreements, compared to their duties under existing agreements. Whether a government is catching up on late disclosure or continuing to maintain exemplary compliance with the changing rule, there is likely to be an increase in the time and cost of preparing disclosure documents under the amended rule. The benefit is for investors in the secondary market: more up-to-date information relevant to their decisions to buy and sell municipal securities.
Brief description of changes
Disclosure of more events
The following events were not required to be disclosed under the old rule, but they must be disclosed under the amended rule: (1) tender offers; (2) bankruptcy, insolvency, receivership or similar events; (3) execution of a definitive agreement for the initiation, consummation or termination of a merger, consolidation, acquisition or sale of substantially all of the assets of the issuer or borrower, if material; and (4) appointment of a successor or additional trustee, or a trustee’s name change, if material.
Under the old rule, the following events had to be disclosed only if material, but the amended rule requires their disclosure regardless of materiality: (1) delinquencies in the payment of principal and interest; (2) unscheduled draws on debt service reserves or credit enhancements, reflecting financial difficulties; (3) substitution of credit or liquidity providers, or their failure to perform; (4) defeasances; and (5) rating changes.
Applicability to additional securities
Variable rate demand obligations (VRDOs) were not subject to the old rule. VRDOs are securities that bear interest at a rate that resets periodically, and holders of VRDOs have the option, at least as often as every nine months, to require the issuer or a specified third party to purchase the VRDOs at par value or more. It is unclear how many municipal VRDOs are being issued from year to year because until now, there has been no disclosure requirement for this market segment. The amended rule will apply to VRDOs issued on or after December 1, 2010.
More specific time frame
The old rule required the occurrence of events listed in the rule to be disclosed “in a timely manner,” without specifying a period within which an issuer or borrower had to comply. The result was that information about events was often stale by the time it was disclosed. The amended rule provides that notice must be given in a timely manner and not more than 10 business days after the event.
This brief treatment of some recent changes to the rule is not a complete catalog of continuing disclosure requirements under the rule. The final rule and interpretation are available at http://www.sec.gov/rules/final/2010/34-62184afr.pdf.
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