New Municipal Advisor Regulations: Navigating

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A New Municipal Advisor Regulations: Navigating Complex Registration and Exemption Rules Understanding SEC's Regulatory Framework, MSRB Guidance, and Best Practices for Muni-Bond Market Course of Dealings THURSDAY, MAY 22, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David Y. Bannard, Partner, Foley & Lardner, Boston Ellen L. Marks, Partner, Latham & Watkins, Chicago Stephen P. Wink, Partner, Latham & Watkins, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 New Municipal Advisor Regulations Navigating Complex Registration and Exemption Rules David Y. Bannard Foley & Lardner LLP

6 Rule Background and Current Status Background Dodd-Frank amended the Exchange Act of 1934 (15 U.S.C. 78o-4) to add a new requirement that municipal advisors register with the SEC and MSRB (October 2010) September 2013, the Commission adopted final rules for municipal advisor registration Final Rules were to be effective on January 13, 2014 January 13, 2014; the SEC temporarily stayed the Final Rules until July 1, 2014 Final Rules interpret the definition of municipal advisor and interpret exclusions and exemptions 6

7 Rule Background and Current Status (cont.) SEC staff issued Frequently Asked Questions (FAQ) and responses on January 16, 2014 Address questions in various categories The Advice Standard Exemptions For Responses to RFPs/RFQs For Independent Registered Municipal Advisors/Investment Advisers/Underwriters Advice Post-Issuance 7

8 Who Is A Municipal Advisor? A person that Provides advice On behalf of a municipal entity or obligated person Regarding Municipal financial products, or Issuance of municipal securities or Undertakes a solicitation Unless exempted or excepted 8

9 Standards Applicable to Municipal Advisers Entity must register with SEC and MSRB; must list and provide information regarding individuals providing advisory services Owe fiduciary duty to municipal issuers or duty of care to obligated persons Cannot underwrite securities where provided municipal advisor services Record retention requirements MSRB has issued draft Rule 42 and a Regulatory Notice regarding establishing professional qualifications for Municipal Advisors for comment MSRB has said it will issue additional requirements similar to those applicable to broker-dealers 9

10 Unpacking the Definition - Advice No bright line definitions Does not include information of a general nature Does not include factual information without opinions, views or a recommendation Recommendation for action or not acting is advice Information tailored to the specific needs, objectives or circumstances of a borrower is advice Payment of compensation not relevant to whether information constitutes advice 10

11 Unpacking the Definition - Solicitation Engaged by third party to Recommend that party to a Municipal issuer or obligated person 11

12 Unpacking the Definition Municipal entity: state or local governmental entity with power to issue bonds Obligated person: non-governmental person ultimately obligated to pay debt service, excluding credit enhancers Issuance of municipal securities: both activities and timing construed broadly Structure, timing, terms and other matters Applies throughout life of an issue Potential exception for Obligated Person that has not commenced discussions with conduit issuer Municipal financial products: investment of the proceeds of municipal securities 12

13 Exemptions from Serving as a Municipal Advisor Public officials and employees Underwriters Registered investment advisors Attorneys Engineers Accountants Banks Swap dealers Registered commodity trading advisors But only within limited scope as defined by SEC Note: Other participants in municipal financings not addressed in SEC guidance 13

14 Exceptions to Municipal Advisor Requirements Responses to RFPs/RFQs Participation by an Independent Registered Municipal Advisor ( IRMA ) IRMA providing advice on same aspects of matter (limited scope) No association with relying party within 2 years Borrower states in writing that it is represented by IRMA and it is relying on IRMA Disclosure from relying party to both Borrower and IRMA that it is not a municipal advisor and owes no fiduciary duty to Borrower 14

15 How Could the Rule Affect the Marketplace? Limits advice that may be provided Advice limited by scope of engagement Use of disclaimers and waivers in presentations and agreements Early engagement or pre-engagement agreements Change in business models Creates uncertainty and risk for market participants 15

16 How to Keep Information Flowing Use of IRMA exception Independently monitor the market seek general information Engage financing team early Use of pre-engagement letters Document compliance retain copies of all communications, use disclaimers Beware of overlap between service areas; e.g., banks with dealer affiliates, underwriters providing swap advice 16

17 Conclusions Public Finance industry will change. More documentation will be required and some may be duplicative. Substantial compliance requirements could add cost and time to transactions. Procedures in dealing with smaller issuers likely to change the most (least likely to utilize RFP process and engage IRMAs). Education is essential and key: From legal/compliance personnel to the public finance bankers and From the public finance bankers to the municipal entity and obligated person clients. 17

18 Thank you David Y. Bannard Foley & Lardner LLP 111 Huntington Avenue Boston, MA Telephone: (617)

19 Municipal Advisor Regulations: Impact on Derivatives Transactions Ellen L. Marks May 22, 2014 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Copyright 2014 Latham & Watkins. All Rights Reserved.

20 Municipal Advisor Swap Dealer Exemption Swap dealers that are registered with the Commodity Futures Trading Commission (CFTC) and their associated persons who recommend a municipal derivative or a trading strategy that involves a municipal derivative, do not have to register as municipal advisors provided that they are not acting as an advisor to the municipal entity or obligated person. Acting as an advisor : Looks to the CFTC s external business conduct rules for swap dealers Swap dealers are required to treat municipal entities and obligated persons as special entities as defined under the Commodity Exchange Act, whether or not they would otherwise meet the definition Swap dealers can transact with special entities as defined under the Commodity Exchange Act without being subject to the heightened requirements for acting as an advisor if three conditions are met: The swap dealer does not express an opinion as to whether the special entity should enter into the swap. The special entity represents in writing that it is not relying on advice from the swap dealer and that it has an independent advisor. The swap dealer discloses in writing that it is not undertaking to act in the special entity s best interests 20

21 Not all Swap Dealers are Swap Dealers The Dodd-Frank Act requires that swap dealers register with the Commodity Futures Trading Commission (CFTC) and security-based swap dealers register with the Securities and Exchange Commission (SEC), subject to certain exceptions. The applicable registration regime depends on the products in which the dealer transacts (see Not all Municipal Derivatives are Swaps ). The municipal advisor swap dealer exemption applies only to CFTC-registered swap dealers, and does not cover dealers relying on exemptions or security-based swap dealers (whether or not registered). Key swap dealer exemptions: De minimis exemption: Not more than $8 billion in notional amount of swaps dealing activity in prior twelve-month period Not more than $25 million in notional amount of swaps dealing activity with special entities in prior twelve-month period IDI loan exemption: available only to insured depository institutions that enter into swaps in connection with the origination of loans (does not extend to security-based swaps) 21

22 Not All Municipal Derivatives are Swaps Municipal Financial Products: Municipal derivatives, guaranteed investment contracts and investment strategies. Municipal Derivatives: The definition of municipal derivative includes both swaps as defined under the CEA and security-based swaps as defined under the Securities Exchange Act. Swaps: The CEA defines the term swap broadly to cover, among other things, instruments such as interest rate swaps, physical commodity swaps, currency swaps, equity swaps, swaps on broad-based indexes, and, in some cases, credit default swaps. The term swap also encompasses most option contracts, including swaptions the option to enter into a swap. As a result of a determination by the Department of the the Treasury, swap does not include foreign exchange forwards and foreign exchange swaps, but these may still be investment strategies. Security-based swap. A security-based swap is a swap primarily based on a narrow-based security index, a single security or loan, or the occurrence, non-occurrence or the extent of occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based securities index. Most credit derivatives will be security-based swaps. Investment strategies which term includes plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments may include foreign exchange forwards and forward exchange swaps, even though those are not swaps under the CEA. 22

23 Special Entities A special entity includes: a Federal agency; a State, State agency, city, county, municipality, or other political subdivision of a State or; certain employee benefit plans; certain governmental plans or any endowment. While municipal entities are likely to be special entities, obligated persons often will not be special entities (but must be treated as if they are to use the swap dealer exemption) A registered swap dealer transacting with a special entity is subject to heightened requirements. Among other things, the swap dealer: Must have reasons to believe that the special entity has a qualified representative that satisfies certain criteria. Must have disclosed in writing the capacity in which it is acting in connection with the swap e.g., advisor or counterparty. When Acting as Advisor If a swap dealer acts as an advisor to a special entity, it must make a reasonable determination that any swap it recommends is in the special entity s best interest. 23

24 Final Municipal Advisor Rules Do Not Fit Well with Swap Dealer Regulation Industry protocols and procedures used to implement extensive new swaps regulations from the CFTC have focused on the definition of special entity in the CEA and on the products to which the CFTC rules apply. The requirement that swap dealers treat municipal entities and obligated persons as special entities requires a different status analysis than has been used to identify special entities and to ensure that heightened rules apply to them, making it harder for registered swap dealers to use the exemption. The exemption appears to be available to registered swap dealers transacting in municipal derivatives that are not swaps (e.g., security-based swaps), even when those are outside of the scope of CFTC regulations 24

25 The Proposed Rule G-42 Paradox Rule G-42(a) would impose a duty of care on municipal advisors with respect to obligated persons, and a fiduciary duty that includes a duty of loyalty and a duty of care with respect to municipal entities. More significantly, Rule G-42(f) would prohibit (subject to an exception that does not apply) a municipal advisor, and any affiliate of a municipal advisor from engaging in any transaction, in a principal capacity, to which a municipal entity or obligated person client of the municipal advisor is a counterparty. As a result, it appears that an entity engaged in dealing activity which involves acting in a principal capacity that registers as a municipal advisor will be unable to act as a dealer with respect to municipal entities or obligated persons (as will its affiliates). Thus, swap dealers and security-based swap dealers would be effectively prohibited from registering as municipal advisors and must rely on an exemption. 25

26 Ellen L. Marks Ellen L. Marks is a member of Latham & Watkins s Corporate and Finance Departments. She handles complex and innovative financial transactions and regulatory matters with a particular focus on securitization and structured finance. Expertise Ms. Marks handles complex and innovative financial transactions and restructurings with a particular focus on securitization and structured finance. She also handles financial regulatory matters, with an emphasis on swap regulations and securitization regulations, and has extensive knowledge of the federal securities laws, the federal banking laws and their related regulations, including changes resulting from the Dodd-Frank Act. Ms. Marks represents the Financial Services Roundtable s swaps working group. In that capacity she has drafted numerous comment letters to the Commodity Futures Trading Commission and the Securities and Exchange Commission relating to the implementation of Titles VII of the Dodd-Frank Act, including with respect to mandatory clearing, swap execution facilities, the definitions of swap dealers and major swap participants, and margin and capital requirements. Ms. Marks is also active in the Business Law Section of the American Bar Association, currently serving as Vice Chair of the Committee on Securitization and Structured Finance. She has chaired the drafting committees for numerous ABA projects and comment letters, including preparing Securitization in the Post-Crisis Economy: An ABA Business Law Section White Paper and comment letters to the Federal Deposit Insurance Corporation on its proposed securitization safe harbor and to the Securities and Exchange Commission on its proposed significant revisions of Regulation AB. Ms. Marks also serves as co-chair for the Structured Finance Industry Group s legal counsel committee. T E ellen.marks@lw.com Education MFA, Vermont College, 2002 JD, University of Michigan Law School, 1991 BA, Northwestern University, 1988 Bar qualifications Illinois Practices Capital Markets Securitization and Structured Finance Financial Regulatory Derivatives Industries Financial Institutions Thought Leadership CFTC Adopts Long-Awaited SEF Rule and Other Swaps Trading Rules Compliance Deadline Approaches for Leveraged Lending Final Guidance Affiliated Entities Find Little "Relief" from CFTC on Inter-Affiliate Swaps Regulation of Foreign Currency Transactions: The Intersection of the Treasury Determination, Swaps Regulation and the Retail Foreign Exchange Rules CFTC Issues Further Guidance for Cross-border Swaps US CFTC and EU Regulators Compliance Deadlines on Swap Regulations CFTC Issues a Flurry of No-Action Letters and Guidance as New Swap Regulations Become Effective Final Rule Issued Defining Certain Swap Products Swap Regulations: What End-Users Need to Know CFTC Issues New CPO and CTA Regulations CFTC Issues Proposed Interpretation of US Swaps Regulations The CFTC and SEC Finalize Swap Entity Definitions Final CFTC Rules Maintain Limited Trading Exemptions But May Require Many More Investment Advisers to Investment Funds to Register as CPOs and CTAs 26

27 Proposed MSRB Rule G-42 Stephen P. Wink May 22, 2014 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Copyright 2014 Latham & Watkins. All Rights Reserved.

28 Proposed Rule G-42 (a) Standards of Conduct. (i) A municipal advisor to an obligated person client shall, in the conduct of all municipal advisory activities for that client, be subject to a duty of care. (ii) A municipal advisor to a municipal entity client shall, in the conduct of all municipal advisory activities for that client, be subject to a fiduciary duty that includes a duty of loyalty and a duty of care. 28

29 Proposed Rule G-42 (b) Disclosure of Conflicts of Interest and Other Information. A municipal advisor must, at or prior to the inception of a municipal advisory relationship, provide the client with a document making full and fair disclosure of all material conflicts of interest, including disclosure of: (i) any actual or potential conflicts of interest of which it is aware after reasonable inquiry that might impair its ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client, as applicable; (ii) any affiliate of the municipal advisor that provides any advice, service, or product to or on behalf of the client that is directly or indirectly related to the municipal advisory activities to be performed by the disclosing municipal advisor; (iii) any payments made by the municipal advisor directly or indirectly to obtain or retain the client s municipal advisory business; (iv) any payments received by the municipal advisor from third parties to enlist the municipal advisor s recommendation to the client of its services, any municipal securities transaction or any municipal financial product; 29

30 Proposed Rule G-42 (v) any fee-splitting arrangements involving the municipal advisor and any provider of investments or services to the client; (vi) any conflicts of interest that may arise from the use of the form of compensation under consideration or selected by the client for the municipal advisory activities to be performed; (vii) any other engagements or relationships of the municipal advisor or any affiliate of the municipal advisor that might impair the advisor s ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client, as applicable; (viii) the amount and scope of coverage of professional liability insurance that the municipal advisor carries (e.g., coverage for errors and omissions, improper judgments, or negligence), deductible amounts, and any material limitations on such coverage, or a statement that the advisor does not carry any such coverage; and 30

31 Proposed Rule G-42 (ix) any legal or disciplinary event that is (a) material to the client s evaluation of the municipal advisor or the integrity of its management or advisory personnel; (b) disclosed by the municipal advisor on the most recent Form MA filed with the Commission; or (c) disclosed by the municipal advisor on the most recent Form MA-I filed with the Commission regarding any individual actually engaging in or reasonably expected to engage in municipal advisory activities in the course of the engagement. If a municipal advisor has disclosed a legal or disciplinary event on any form referenced in section (b) or (c) of this rule, the advisor must provide the client with a copy of the relevant sections of the form or forms. If a municipal advisor concludes that it has no material conflicts of interest, the municipal advisor must provide written documentation to the client to that effect. 31

32 Proposed Rule G-42 (c) Documentation of Municipal Advisory Relationship. A municipal advisor must evidence each of its municipal advisory relationships by a writing entered into prior to, upon or promptly after the inception of the municipal advisory relationship. The writing must be dated and include the form, basis and amount of compensation the information regarding conflicts of interest above the scope of the municipal advisory activities, including the specific undertakings with respect to the preparation of the OS means for termination 32

33 Proposed Rule G-42 (d) Recommendations. A municipal advisor must not recommend that its municipal entity or obligated person client enter into any municipal securities transaction or municipal financial product unless the advisor has a reasonable basis for believing, based on the information obtained through the reasonable diligence of the advisor, that the transaction or product is suitable for the client. In addition, the municipal advisor must discuss with its client: (i) the municipal advisor s evaluation of the material risks, potential benefits, structure, and other characteristics of the recommended municipal securities transaction or municipal financial product; (ii) the basis upon which the municipal advisor reasonably believes that the recommended municipal securities transaction or municipal financial product is suitable for the client; and 33

34 Proposed Rule G-42 (iii) whether the municipal advisor has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction or municipal financial product that might also or alternatively serve the client s objectives. With respect to a client that is a municipal entity, a municipal advisor may only recommend a municipal securities transaction or municipal financial product that is in the client s best interest. 34

35 Proposed Rule G-42 (e) Review of Recommendations of Other Parties. When requested to do so by its municipal entity or obligated person client and within the scope of its engagement, a municipal advisor must undertake a thorough review of any recommendation made by any third party regarding a municipal securities transaction or municipal financial product. In addition, the municipal advisor must discuss with its client: (i) the municipal advisor s evaluation of the material risks, potential benefits, structure, and other characteristics of the recommended municipal securities transaction or municipal financial product; (ii) whether the municipal advisor reasonably believes that the recommended municipal securities transaction or municipal financial product is suitable for the client, and the basis for such belief; and (iii) whether the municipal advisor has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction or municipal financial product that might also or alternatively serve the client s objectives. 35

36 Proposed Rule G-42 (f) Principal Transactions. Except for an activity that is expressly permitted under Rule G-23, a municipal advisor, and any affiliate of a municipal advisor, is prohibited from engaging in any transaction, in a principal capacity, to which a municipal entity or obligated person client of the municipal advisor is a counterparty. 36

37 Proposed Rule G-42 (g) Specified Prohibitions. A municipal advisor is prohibited from: receiving excessive compensation or delivering an invoice for fees or expenses for municipal advisory activities that do not accurately reflect the activities actually performed or the personnel that actually performed those services; making any representation that is materially false or misleading; certain fee-splitting arrangements making payments solicitors other than registered municipal advisors 37

38 Stephen P. Wink Expertise Stephen Wink is a partner in the New York office of Latham & Watkins. Mr. Wink is a member of the firm's Corporate Department and of the Capital Markets, Financial Regulatory, Investment Funds and Mergers & Acquisitions Practices. His practice focuses on advising a wide range of market players including investment banks, hedge funds, private equity firms, exchanges, alternative trading platforms, transfer agents and other financial institutions on matters involving the regulation of broker-dealers and investment advisors, market regulation, and compliance and enforcement matters. Mr. Wink has in-depth knowledge and broad experience advising on the overlapping patchwork of regulations covering the financial Publications Co-Author, "Dually Registered Brokers and Advisers," The Review of Securities & Commodities Regulation, September 2013 Co-Author, "SEC Presence Exams - Field Observations," markets, including the laws and rules under the Securities Exchange Act of 1934 and the rules of the Financial Industry Regulatory Authority (FINRA) and other self-regulatory organizations. Mr. Wink is recognized by Chambers USA as one of the country s leading financial services broker dealer regulation lawyers. Mr. Wink provides regular commentary on regulatory initiatives and rule-making proposals on behalf of clients and trade associations. He has frequently obtained no-action relief and interpretive guidance on behalf of clients from various regulatory bodies, including the Securities and Exchange Commission and FINRA. Mr. Wink is a former member of various securities industry committees, including the Securities Industry and Financial PREA Quarterly, September 2013 Co-Author, "Risk Mitigation Practices for Derivatives Transactions, Inside Counsel, May 2, 2012 Co-Author, "7 Risk Mitigation Practices for Using Prime Markets Association s Federal Regulation Committee, the New York Stock Exchange's Compliance Advisory Committee and was Chair of the Bond Market Association's Municipal Legal Advisory Committee. Mr. Wink is a regular speaker at securities industry conferences. Mr. Wink spent nine years in-house as Executive Managing Director and General Counsel of First Albany Companies Inc., a fullservice investment bank, merchant bank and investment advisor. He began his career at Cleary, Gottlieb, Steen & Hamilton after serving as a law clerk to Judge George E. MacKinnon of the US Court of Appeals for the D.C. Circuit. Brokers," Inside Counsel, April 18, 2012 Co-Author, "The Review of Securities & Commodities Regulation, Inside Counsel, September 4, 2013 Partner, New York T E stephen.wink@lw.com Education JD, University of Notre Dame Law School, 1991 Magna Cum Laude; Editor-in-Chief: Notre Dame Law Review BS, State University of New York, Empire State College, 1983 Bar Qualification New York Practices Capital Markets Special Situations Mergers & Acquisitions Financial Regulatory Investment Funds Industries Financial Institutions 38