The state Livestock Nutrient Management Bond Program (program) was developed as part of the Agribusiness Bond Program. Its goal is to provide loans to livestock producers for use in a livestock nutrient management facility. The South Dakota Value Added Finance Authority (board) issues tax-exempt bonds in the name of the state to finance the capital expenditures. Under IRS regulations substantially all the loan proceeds must be spent on the particular tax exempt ‘purpose.’ Only expenditures made for the particular purpose qualify. Funds not used for the exempt purpose are disqualified from federal tax exemption. According to the IRS that ‘purpose’ is a solid waste disposal facility which may dispose of waste in an environmentally compliant and safe manner.
The problem with the loan program is that the board has not adopted rules to manage the bond and loan program. I discussed this general policy error in a prior column. In this opinion piece I discuss a particular issue about which the board does not manage the program in a scrupulous manner.
For smaller loans the program uses banks. For larger program loans a registered broker-dealer, investment banker or remarketing agent, although acting as a creditor, often provides an important working relationship while the board is acting as bonding authority. These specialists can enhance the ability of the board to approve environmentally compliant working capital for the bond and loan program. The board as well as borrowers would naturally rely on the skill and expertise of such specialists in the course of putting together any new transaction.
I will use here a prior authorized loan as an illustration of how the board could write rules to assure it has complete information on issues which should be material to the lending process. In a recent program loan the board worked with a broker-dealer and authorized a multimillion dollar program bond and loan with an operator. All necessary papers were signed and the loan was opened. Concerning this loan I do not suggest this example loan was a bad loan or was an illegal loan. Nor do I suggest the acts of the parties relating to the loan were illegal, unethical or not in compliance with any rules. Rather, I provide my comments as a means of discussing an issue about which the board could improve the Livestock Nutrient program.
The broker-dealer of the loan used as an illustration, prior to the loan, and without admitting or denying a securities regulator’s allegations, delivered a letter of acceptance, waiver and consent to a securities regulator. That regulator then issued the broker-dealer a fine, sanctions and censure based on a violation of securities rules, all in a matter unrelated to the loan used as an illustration. And later the broker-dealer of the loan used as an illustration, prior to the loan, and without admitting or denying allegations voluntarily settled a different rules violation and delivered a letter of acceptance, waiver and consent to the same regulatory authority. The regulator then issued the broker-dealer a fine based on a violation of a securities rule, all also in a matter unrelated to the loan used as an illustration. And later the broker-dealer, in a separate matter, without admitting or denying allegations volunteered an offer of settlement with the Securities and Exchange Commission for activity that occurred, prior in time to the loan used as an illustration, in violation of federal securities law. The Commission accepted the offer of settlement and issued an agreed upon cease and desist order, a fine and required an undertaking to review the broker-dealer’s procedures, all on matters unrelated to the loan used as an illustration.
The South Dakota board has no established rules or written due diligence requirements regarding the approval of a broker-dealer, investment banker, or remarketing agent who might be looking to work with parties on a proposed new program loan. I know of no written board policy or rule requiring disclosure of the qualifications and history of such specialists. Looking at the board’s statutory and regulatory authority and looking at the standard lending documents and bond language used by the board, I am inclined to think that a few years back when this program was first established, the state was in a hurry to take a road trip but neglected to fill the car all the way up with fuel before it left. Neither the state-drafted bond language nor the financing agreement terms provide for a specialist’s disclosure or good-standing information.
Several states require the upfront disclosure of a specialist’s registration status. And a national organization, the Government Finance Officers Association, recommends disclosure of regulatory censure and litigation matters. Wisconsin by way of example requires that similar specialists who will be working with the state submit a statement disclosing settlements, sanctions, litigation and possible conflicts of interest. Borrowers should have a right to know, and the state board should have an obligation to learn, about relevant registration information before a new bond is issued and before a new loan is put on the books.
David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law.