build partnerships THE DODD-FRANK ACT: WHAT DO THE MUNICIPAL ADVISOR RULES MEAN FOR ISSUERS OF MUNICIPAL SECURITIES INCLUDING BONDS?

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1 build partnerships THE DODD-FRANK ACT: WHAT DO THE MUNICIPAL ADVISOR RULES MEAN FOR ISSUERS OF MUNICIPAL SECURITIES INCLUDING BONDS?

2 September 20, 2013 marked the official adoption by the Securities and Exchange Commission ( SEC) of its final rules for municipal advisors ( Final Rules), as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further, the SEC released additional guidance in May of While underwriters have long been regulated by the SEC and other regulatory bodies, the regulation of municipal advisors pursuant to the Final Rules is new. The Final Rules will take effect on July 1, Issuers of municipal securities will likely notice changes. While the Issuer is not required to hire a municipal advisor, the Final Rules require registration of municipal advisors, define who is a municipal advisor and impose certain limitations on underwriters. While the Issuer is not required to hire a municipal advisor, the Final Rules require registration of municipal advisors, define who is a municipal advisor and impose certain limitations on underwriters. Under the Final Rules, certain entities must register as a municipal advisor with the SEC if they provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or if they undertake a solicitation of a municipal entity or obligated person. 1

3 Advice The term advice is an objective determination that depends on all of the relevant facts and circumstances. Advice includes, without limitation, a recommendation that is particularized to the specific needs, objectives, or circumstances of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, based on all the facts and circumstances. An important factor in this inquiry is whether, considering its content, context and manner of presentation, the information communicated to the municipal entity or obligated person reasonably would be viewed as a suggestion that the municipal entity or obligated person take action or refrain from taking action regarding municipal financial products or the issuance of municipal securities. Advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities ( general information exclusion). The SEC has provided certain examples of general information, including information of a factual nature without subjective assumptions, opinions, or views, and information that is not particularized to a specific municipal entity or type of municipal entity. The term advice is an objective determination that depends on all of the relevant facts and circumstances. 2

4 Marketing efforts are generally within the general information exclusion from advice. General Information Exclusion Marketing efforts are generally within the general information exclusion from advice. General information includes (i) factual information without subjective assumptions, opinions or views (even if particularized to a municipal entity or obligated person or type), (ii) information that is not particularized to a specific municipal entity or type of municipal entity, and (iii) certain widely disseminated or general educational material, in each case so long as the information or material does not include a recommendation that is particularized to the specific needs, objectives, or circumstances of the relevant municipal entity or obligated person. A statement would be viewed as a recommendation if it reasonably could be viewed as a call to action and reasonably would influence the municipal entity or obligated person to take action. To support the general information exclusion, issuers of Municipal Securities will likely see certain disclosures and disclaimers, in written materials that accompany communications to a municipal entity or obligated person including: (a) this person is not recommending an action to the municipal entity or obligated person; (b) this person is not acting as an advisor to the municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to the municipal entity or obligated person with respect to the information and material contained in this communication; (c) this person is acting for its own interests; and (d) the municipal entity or obligated person should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material. The Final Rules provide an exemption from being deemed a municipal advisor for any person providing a response in writing or orally to a request for proposals or qualifications from a municipal entity or obligated person for services in connection with a municipal financial product or the issuance of municipal securities. 3

5 Municipal Entity or Obligated Person States, political subdivision of States or municipal corporate instrumentalities are included as Municipal Entities. Obligated Persons generally mean conduit borrowers. An issuance of municipal securities begins at the first stage of the preissuance planning and continues to the final retirement date of the municipal securities. Municipal Securities/Issuance of Municipal Securities Municipal securities are broadly defined to include all types of bonds and other obligations of a municipal entity or obligated person. An issuance of municipal securities begins at the first stage of the pre-issuance planning and continues to the final retirement date of the municipal securities. Municipal Financial Products Municipal Financial Products include GICs, forward delivery agreements, investment strategies for and investments of the proceeds of municipal securities, municipal escrow investments and municipal derivatives. 4

6 Underwriter Exemption Issuers should expect to see obvious differences in how underwriters interact with them. As of July 1, 2014, underwriters will operate under a new set of regulations. Issuers should expect to see obvious differences in how underwriters interact with them. Issuers who have previously worked solely with an underwriter without a separate financial advisor may note more obvious changes as underwriters attempt to operate within the new regulations. Non-exempt advice includes (i) advice on investment strategies, (ii) advice on municipal derivatives, (iii) advice on competitive versus negotiated sales, and (iv) advice on a bond election campaign. The underwriter exemption only covers advice regarding traditional underwriting activities. For example, the exemption does not cover advice on investments, swaps or issues not specific to a particular issuance. The underwriter exemption begins once an underwriter is engaged as underwriter and terminated at the end of the underwriting period (typically the closing date). To qualify for the underwriter exemption, the underwriter must have an engagement to act as underwriter on a specific issuance of municipal securities. Inclusion in a pre-approved underwriting pool is not sufficient. Engagement letter may state that it is preliminary and non-binding, is subject to applicable procurement laws, formal governing body approval, final bond structuring and execution of a bond purchase agreement, may be terminated by either party without liability, and does not prevent the issuer from engaging other underwriters, or from selecting a different underwriting group. Oral or written acknowledgment of engagement from the issuer/obligated person is permitted. Preliminary, non-binding engagement is permitted so long as issuer/obligated person reasonably expects to formally engage the broker-dealer as underwriter. Multiple engagements are permitted, and there is no need to specify status as senior or co-manager. The underwriter exemption does not cover any nonexempt advice to municipal advisors. If non-exempt advice is given, the brokerdealer is subject to standard fiduciary duties of municipal advisors and is precluded from acting in any principal capacity in the transaction for which advice was provided. Other Exemptions Certain other exemptions exist for Independent Municipal Advisors, Officers and Employees of Municipal Entities, Banks, Registered Swap Advisors, Registered Investment Advisors, Accountants, Engineers and Attorneys. Each exemption is based on the facts and circumstances and is limited. For more information, contact Jeff Lewis, Jim Snyder, Enzo Incandela, Erik Long, or any member of Ice Miller s Public Finance Group. 5

7 Contact Jeff Lewis Partner Jim Snyder Partner This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader s specific circumstances. Enzo Incandela Associate Enzo.Incandela@icemiller.com Erik Long Associate Erik.Long@icemiller.com