WASHINGTON — Bond lawyers were wrong to suggest that South Miami’s disclosure of a bond-related tax settlement with the Internal Revenue Service triggered Securities and Exchange Commission enforcement action.
Documents show that the SEC’s investigation of South Miami’s disclosure failures pre-dated any knowledge the IRS had of the city’s tax law issues.
Lawyers raised the disclosure concerns at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop last week in Chicago. The lawyers thought the SEC’s settlement with South Miami over disclosure failures came after the city disclosed it had entered into two voluntary closing agreements with IRS to preserve the tax status of bonds that the IRS had determined should be taxable private activity bonds.
The lawyers suggested that maybe issuers should reconsider disclosing IRS settlements.
But IRS officials at the meeting said the SEC does not “pile on” after the IRS takes action.
A review of the bond documents shows that when the Florida Municipal Loan Council and South Miami, on July 19, 2010, requested a voluntary closing agreement to resolve tax issues over bonds, which were issued in 2002 and 2006, the SEC had already been investigating disclosure issues.
The 2002 and 2006 bonds were issued by the FMLC in conduit deals. Some of the proceeds were loaned to South Miami to finance the construction of mixed use retail and public parking structure in a commercial district. In March 2002, South Miami negotiated a lease agreement with the developer, under which the city would retain full control over the operation and maintenance of the parking portion of the project and all parking revenues. The developer would be responsible for the costs of the retail portion of the project. Its limited role was key to the bonds being tax-exempt.
On May 17, 2002, FMLC issued $49.8 million of Series A bonds, of which $6.5 million were loaned to the city to finance the project.
However, in June 2002, the city loaned the developer $2.5 million of proceeds, without consulting bond counsel or FMLC representatives. In 2005, the city attorney revised the lease agreement to lease the entire project to the developer without informing the bond counsel, the FMLC, or any other third party.
The FMLC issued more bonds in 2006 and loaned proceeds to South Miami for the project. The city, in its tax certificate with the FMLC, misrepresented that no more than 10% of the proceeds would be privately used and no more than 5% would be used to finance private facilities.
In fact, the city’s loan to, and revised lease with, the developer caused the bonds to be taxable private activity bonds. Bonds are PABs if more than 10% of the project is privately used and more than 10% of the debt service is from private payments. Bonds generally are also PABs if a loan is made to a private party that exceeds the lesser of 5% of the proceeds or $5 million. Once bonds are PABs, they are only tax-exempt if they are used for “qualified” projects. Parking facilities and retail projects are not qualified PAB projects.
The FMCL filed an event notice with the Municipal Securities Rulemaking Board’s EMMA system on July 19, 2010, in which it said it was requesting a voluntary closing agreement with the IRS to resolve the tax law violations.
The event notice also noted that the SEC had issued an order, essentially a subpoena, to obtain information about the financings from documents and transaction participants. The notice said the SEC staff was “alleging that in the underwriting, offering, sale and purchase of the bonds ... there may have been made false statements of a material fact or a failure to disclose material facts concerning, among other things, the tax-exempt status of the bonds.
Sources said the commission had to have already been probing the deals and to have presented SEC officials with information in order to obtain approval for the subpoena.
The event notice said the FMLC and South Miami had agreed to fully cooperate with the SEC’s investigation.