Wisconsin Government Finance Officers Association Winter Conference December 1, Dodd-Frank &

Transcription

1 Wisconsin Government Finance Officers Association Winter Conference December 1, 2011 Dodd-Frank & Certain Related Rules Pertinent to Bond Financings Rebecca Speckhard & Jeff Peelen Quarles & Brady LLP (414) (414)

2 Agenda What is Dodd Frank? Dodd Frank s Broad Scope Larger Context for Municipal Securities Regulation New Protections for Municipal Entities Background: Parties to a Bond Financing / Definitions New Definition Municipal Advisor Municipal Advisors Registration Requirement New Rules Governing Professional Conduct Fiduciary Duty (Duty of Loyalty & Duty of Care) Underwriters No Fiduciary Duty Related Disclaimer Language Rule Against Role Switching Related Underwriter Identification Language

3 What is Dodd-Frank? Dodd-Frank refers to the Wall Street Reform and Consumer Protection Act, passed in response to the financial crisis that began in Fall of The Act broadly seeks to promote financial stability by improving accountability and transparency and by regulating a wide array of practices affecting financial services and consumers.

4 Dodd Frank s Broad Scope Title I - Financial Stability (Financial Stability Oversight Council, Office of Financial Research) Title II - Orderly Liquidation Authority Title III -Transfer of Powers to the Comptroller, the FDIC and the Federal Reserve Title IV -Regulation of Advisers to Hedge Funds and Others Title V - Insurance Title VI - Improvements to Regulation Title VII - Wall Street Transparency and Accountability Title VIII - Payment, Clearing and Settlement Supervision Title IX - Investor Protections and Improvements to the Regulation of Securities Title X - Bureau of Consumer Financial Protection Title XI - Federal Reserve System Provisions Title XII - Improving Access to Mainstream Financial Institutions Title XIII -Pay it Back Act Title XIV - Mortgage Reform and Anti-Predatory Lending Act Title XV Miscellaneous Provisions Title XVI - Section 1256 Contracts

5 Dodd Frank: Larger Context for Municipal Securities Regulation Title IX - Investor Protections and Improvements to the Regulation of Securities Section A -Increasing Investor Protection Section B - Increasing Regulatory Enforcement and Rules Section C - Improvements to the Regulation of Credit Rating Agencies Section D - Improvements to the Asset-Backed Securitization Process Subtitle E -Accountability and Executive Compensation Subtitle F - Improvements to the Management of the SEC Subtitle G - Strengthening Corporate Governance Subtitle H - Municipal Securities Subtitle I -Public Company Accounting Oversight Board, Portfolio Margining, Other Subtitle J - Securities and Exchange Commission Match Funding

6 Dodd Frank: New Protections for Municipal Entities The MSRB s Expanded Mission: Dodd-Frank expanded the mission of the Municipal Securities Rulemaking Board (the MSRB ) (which was created to write rules protecting investors and regulating broker dealers in the municipal securities market) to include the protection of municipal entitiesand conduit borrowers in the municipal securities market(i.e., municipal bonds). New MSRB Rules Governing Professional Qualifications and Conduct: The MSRB protects municipal entities by regulating the professional qualifications and conduct of municipal securities broker dealersand municipal advisors, and by operating market information systems that promote access to data and disclosure documents. There is No MSRB Direct Regulation of Municipal Entities: The MSRB does not regulate the activities of municipal entities or have jurisdiction over them For more information, see MSRB Protection of Municipal Entities and Obligated Persons, at:

7 Background: Parties to a Bond Financing / Definitions Financial Advisor A financial advisor is a consultant who advises an issuer on matters pertinent to a new issue of municipal securities, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. A financial advisor may also be employed to provide advice on subjects unrelated to a new issue of municipal securities, such as advising on cash flow and investment matters (e.g., investment of general funds or bond proceeds). Underwriter An underwriter is a broker dealerthat purchases a new issue of municipal securities from the issuer for resale in a primary offering. The underwriter may acquire the securities either by negotiated sale with the issuer or by award on the basis of competitive bidding. Placement Agent A placement agent is a broker dealeracting as agent that places a new issue of municipal securities directly with investors (e.g., a bank) on behalf of the issuer. Broker Dealer Broker dealer is a general term for a securities firm that is engaged in buying and selling securities for customers and also for its own account (as principal). See MSRB definitions, at:

8 New Definition: Municipal Advisor Proposed Definition of Municipal Advisor Definition: The term municipal advisor means a person (who is not a municipal entity or an employee of a municipal entity) (i) that provides adviceto or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or (ii) that undertakes a solicitation of a municipal entity. The term includes financial advisors, guaranteed investment contract brokers, thirdparty marketers, placement agents, solicitors, finders, and swap advisors that engage in municipal advisory activities... but excludes a broker, dealer, or municipal securities dealer serving as an underwriter... Controversy: The definition has been controversial and recently the SEC Chair has stated her view that the proposed definition is too broad. SEC's Schapiro Says Muni Advisor Definition is Too Broad -Bond Buyer, Sept. 16, 2011(noting complaints that the definition would include individuals appointed to state and local governing boards as well as traditional bank employees). As discussed below, related proposed rules have been put on hold while the definition is being reconsidered. See SEC Release , SEC Proposes Permanent Rule Requiring Municipal Advisors to Register, at and SEC Rule Proposal No , at

9 Municipal Advisor Registration Requirement Registration Requirement Municipal Advisors are required to register with the Securities and Exchange Commission and the MSRB. Previously, there was no registration requirement for financial advisors. Municipal entities are able to confirm whether a firm is registered as a municipal advisor by checking the MSRB s registered list ( or the SEC s registered list ( See Temporary Registration of Municipal Advisors, SEC Release No , available at:

10 Municipal Advisor New Rules Governing Professional Conduct (and Comparable Existing Rules Governing Broker Dealers) Existing Rules Applicable to Broker Dealers New Rules Applicable to Municipal Advisors Political Contributions MSRB Rule G-37 MSRB Rule G-42* (Proposed New Rule) Supervision MSRB Rule G-27 MSRB Rule G-44* (Proposed New Rule) Fair Dealing MSRB Rule G-17 MSRB Rule G-17* (Proposed Rule Change) Fiduciary Duty N/A MSRB Rule G-36* (Proposed New Rule) * Note that certain of these new rules or changes have been put on hold, to the extent they apply to municipal advisors, while the SEC considers narrowing the definition of municipal advisor. However, they are expected to be reintroduced shortly after any changes to that definition. See MSRB Withdraws Pending Municipal Advisor Rule Proposals, at see also MSRB Withdraws Municipal Advisor Rules, in The Bond Buyer,

11 Municipal Advisor s Role Fiduciary Duty Fair Dealing: Both financial advisors (under the new municipal advisor rules) and underwriters have the duty to deal fairly with all persons and are prohibited from engaging in any deceptive, dishonest or unfair practice. See MSRB Rule G-17 (and related proposed rule change). Fiduciary Duty: Under the new municipal advisor rules (proposed Rule G-36), in the conduct of its municipal advisory activities on behalf of municipal clients, municipal advisors(but not underwriters) are also subject to a fiduciary duty. This standard encompasses but exceeds and is a higher standard than Rule G-17 s fair dealing standard. The fiduciary duty consists of a duty of loyaltyand a duty of care. See MSRB Notice (August 23, 2011) MSRB Files Municipal Advisory Fiduciary Duty Rule and Interpretive Notice, available at:

12 Municipal Advisor s Role Fiduciary Duty (Duty of Loyalty and Duty of Care) Duty of Loyalty: The duty of loyalty requires the municipal advisor to act in the municipal entity s best interests without regard to financial or other interests of the municipal advisor. The duty of loyalty also requires the municipal advisor to make clear, written disclosure of all material conflicts of interest, and would prohibit the advisor from accepting an engagement if there are unmanageable conflicts (e.g., certain fee-splitting arrangements). Duty of Care: The duty of care requires the municipal advisor to act competently and provide advice to the municipal entity after making an inquiry into reasonably feasible alternatives to the financings or products being proposed. The duty of care also requires the municipal advisor to make reasonable inquiries into facts necessary to determine the basis for the municipal entity s chosen course of action, as well facts necessary to prepare certificates and to help ensure appropriate disclosures for official statements. See MSRB Notice (August 23, 2011) MSRB Files Municipal Advisory Fiduciary Duty Rule and Interpretive Notice, available at:

13 Underwriter s Role No Fiduciary Duty No Fiduciary Duty Although underwriters have the duty to deal fairly with all persons and are prohibited from engaging in any deceptive, dishonest or unfair practice (see MSRB Rule G-17), they do not have a fiduciary duty. See MSRB Notice (August 23, 2011) MSRB Files Municipal Advisory Fiduciary Duty Rule and Interpretive Notice, available at:

14 Underwriter s Role Related Disclaimer Language Disclaimer Language Trade organizations (like the Securities Industry and Financial Markets Association (SIFMA) and the Bond Dealers Association (BDA)) have recommended language for underwriters to use in marketing materials and legal documents (e.g., bond purchase agreements) to make their role and lack of fiduciary duty clear. No Advisory or Fiduciary Role. The Issuer acknowledges and agrees that: (i) Not a municipal advisor: the transaction contemplated by this agreement is an arm s length, commercial transaction between the Issuer and the Underwriter in which the Underwriter is acting solely as a principal and is not acting as a municipal advisor, financial advisor or fiduciary to the Issuer; (ii) No Fiduciary Duty: the Underwriter has not assumed any advisory or fiduciary responsibility to the Issuer with respect to the transaction contemplated hereby and the discussions, undertakings and procedures leading thereto (irrespective of whether the Underwriter has provided other services or is currently providing other services to the Issuer on other matters); (iii) No Other Obligations: the only obligations the Underwriter has to the Issuer with respect to the transaction contemplated hereby expressly are set forth in this agreement; and (iv) Issuer Has Consulted its Own Advisors: the Issuer has consulted its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it has deemed appropriate. See SIFMA Model Clarifying Statements for Municipal Securities Underwriters, at:

15 Rule Against Role Switching MSRB Rule G-23 Role Switching Prohibition: Under amendments to MSRB Rule G-23 following Dodd Frank, a broker dealer that serves as a financial advisorto an issuer for a particular bond issue is prohibited from switching roles and acting as underwriterfor the same bond issue. This rule will become effective November 27, When Does a Financial Advisor Relationship Exist? For this purpose, a financial advisor relationship will be deemed to exist whenever a broker dealer renders advice regarding the structure, timing, terms and other similar matters concerning the bond issue. However, a financial advisor relationship will not be deemed to exist when, in the course of acting as an underwriter, a broker dealer renders such advice. SeeMSRB Notice , SEC Approves Amendments to MSRB Rule G-23 Relating to the Activities of Financial Advisors, at:

16 Rule Against Role Switching Related Underwriter Identification Language Underwriter Identification Requirement: A broker dealer that clearly identifies itself in writing as an underwriter and not as a financial advisor from the earliest stages of its relationship with the issuer with respect to that issue (e.g., in a response to a request for proposals or in promotional materials provided to an issuer) will be considered to be acting as an underwriter under Rule G-23 with respect to that issue. The writing must make clear that the primary role of an underwriter is to purchase, or arrange for the placement of, securities in an arm s-length commercial transaction between the issuer and the underwriter and that the underwriter has financial and other interests that differ from those of the issuer. The dealer must not engage in a course of conduct that is inconsistent with an arm s-length relationship with the issuer in connection with such issue of municipal securities or the dealer will be deemed to be a financial advisor with respect to that issue and precluded from underwriting that issue by Rule G-23. On November 3, 2011, the MSRB issued Notice , which if approved by the SEC would require underwriters to make additional disclosures. (See MSRB Notice , at: Notices/2011/ aspx). SeeMSRB Notice , SEC Approves Amendments to MSRB Rule G-23 Relating to the Activities of Financial Advisors, at:

17 Additional Resources: MSRB Issuer Toolkit The MSRB has recently published an "Issuer Toolkit that contains educational materials for issuers, including short video entitled Six Things to Know When Issuing Municipal Bonds which discusses the following subjects: 1. MSRB registration is required for underwriters and financial advisors. 2. Underwriters and municipal advisors must provide accurate information related to the sale of bonds (Rule G-17) and must avoid conflicts of interest (e.g., Rule G-23 s prohibition on role switching). 3. Municipal advisors owe a fiduciary duty to their State and local government clients (underwriters do not). 4. State and local governments can use different approaches to financing capital projects to borrow at the lowest possible cost (competitive sale or negotiated sale). 5. State and local governments can use the Electronic Municipal Market Access ( EMMA ) system to communicate important information directly to investors. The site also has a video explaining how to use EMMA. 6. State or local government issuers can use EMMA to track bond trading. See MSRB State and Local Government Toolkit, at:

18 Questions?