SEC Municipal Advisor Rule Overview and Key Elements to Consider for Washington Schools April 25, 2014 Presented by Mark Prussing Susan Musselman Fred Eoff Public Financial Management, Inc. 1200 Fifth Ave., Suite 1220 Seattle, WA 98101 (206) 462-8147 (206) 264-8900 fax
Goals for Discussion Regulatory Context of Municipal Advisors Who is a Municipal Advisor? What are the benefits of the Municipal Advisor Rule? What standards apply to Municipal Advisors? What is advice under the Rule? What are the available exceptions & exemptions under the Rule? General information exception IRMA exemption Underwriter exemption How will the Rule affect Borrowers and Municipal Advisors? What actions can a Borrower take in response to the Rule? The PFM Group 2
Regulatory Context of Municipal Advisors
Brief Background and Regulatory Context -- SEC In September 2013, the SEC promulgated a final registration rule (SEC Final Rule) which among other things: PFM s PRICING GROUP - Defined the categories of persons deemed municipal advisors - Established a permanent registration regime - Established broad recordkeeping requirements for municipal advisors - Provided that the examination of municipal advisory firms would be conducted by SEC and FINRA Effective on July 1, 2014 4
Brief Background and Regulatory Context -- MSRB Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 charged MSRB with developing regulatory framework for municipal advisors to: PFM s PRICING GROUP - Protect state and local governments and other municipal entities that engage the services of a municipal advisor - Promote a fair and efficient market - Preserve municipal market integrity 5
The Role of the Municipal Advisor SEC Perspective Fiduciary duty Better financing terms Improve capital formation Positive impact on taxpayers PFM s PRICING GROUP Regulatory oversight over standards, training and conduct -Source: SEC Registration of Municipal Advisors Release 6
What are some of the practical implications? The environment among underwriters, municipal issuers, and municipal advisors continues to develop in accordance with the final SEC MA rule (with ongoing interpretive guidance) and MSRB regulations and proposals. PFM s PRICING GROUP Interpretation of the rules, the exemptions, the corresponding standards are ongoing by Regulators and the financial community alike;. Regulatory bodies and industry participants will need to concentrate on the clarity of transactional roles, the transparency of interests, and formality of relationships. 7
What Standards Apply to Municipal Advisors? Municipal Advisors must be registered with the SEC and MSRB to provide advice to Borrowers Municipal Advisors owe a fiduciary duty to a municipal entity and a duty of loyalty to obligated persons which precludes the Municipal Advisor from serving in any role that could be adverse to the client MSRB has begun the process of proposing specific regulatory guidelines and requirements for Municipal Advisors to comply with in carrying out their activities 8
What is advice and who can provide it?
What is Advice under the Rule? Advice Individually Tailored Recommendations Not Advice Educational/Factual information Information that invites the borrower to act or refrain from acting Publically held information Subjective assumptions, opinions, and viewpoints Unspecific information or hypotheticals Adding a disclaimer or disclosure will factor into the SEC s review but will not protect against SEC action if it is determined advice was given regardless of the disclaimer or disclosure included. 10
General Information Not Considered to be Advice What is NOT advice under Rule 15Ba1-1(d)(1)(ii) Publicly held information (outside of municipal entities or obligated person) Unspecific Information (not specific to a particular municipal entity or type of municipal entity) Factual information (no assumptions/opinions/viewpoints) Educational material (instructional or explanatory info) 11
Rule of Thumb If the advice can be reasonably viewed as a specific suggestion or recommendation to the municipal entity to either act or refrain from acting with regard to municipal financial products or the issuance of municipal securities, then it is advice under the Rule. 12
What market participants are possibly effected by the Rule? Underwriters & Banks Registered Investment Advisers Attorneys, Engineers, Accountants, Public Officials and Employees Registered Commodity Trading Advisors & Swap Dealers 13
Key Exemptions from Registration Broker, dealer, or municipal securities dealers serving as an underwriter ( Underwriter Exemption Any person providing advice to a municipal entity that is represented by an independent registered municipal advisor ( IRMA Exemption ) Attorney providing traditional legal advice 14
Board Members Members of the municipal entity s governing body, advisory boards, committees, and anyone serving in a similar capacity with respect to the municipal entity and acting within the scope of their official capacity are NOT municipal advisors. 15
How will this effect Issuers and Municipal Advisors? Before Broker-dealers, underwriters, counsel, investment banks, and other market participants could contact Issuers about specific or customized analyses Municipal Advisor Rule - effective date After Only registered Municipal Advisors are able to provide the Issuer with specific and customized analyses (advice) unless an exemption or exception applies under the Rule 16
How may this affect Issuers? Issuers will be faced with the potential that underwriting firms could become disqualified from serving as underwriter if it is discovered that they inadvertently provided advice under the Rule. This is especially significant if it is late in the bond-issuance process. The PFM Group 17
The IRMA exemption - Who, Why, and How?
IRMA exemption What? Who? What is an IRMA exemption to MA Rule registration? An IRMA is an independent registered municipal advisor The SEC has defined within the MA Rule an IRMA exemption. PFM s PRICING GROUP An IRMA exemption exempts from the definition of an MA anyone engaging in municipal advisory activities if the client [municipal entity/ obligated person] is represented by an IRMA, provided that certain requirements are met. Who will most often rely on an IRMA exemption? Underwriters & Banks Attorneys, Engineers, Accountants Registered Commodity Trading Advisors & Swap Dealers The PFM Group 19
IRMA exemption Why created by the SEC? SEC Rule Release states that if a municipal entity/obligated person is represented by an independent registered MA (an IRMA ), then that municipal entity/obligated person may receive advice from an entity other than an MA (i.e., from an underwriter) PFM s PRICING GROUP Such interaction is deemed to be consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act. The SEC believes that the IRMA exemption allows parties to a municipal securities transaction and others who are not registered municipal advisors to share advice with municipal entities/obligated persons as long as the municipal entity/obligated person is represented by an IRMA with a fiduciary obligation. The PFM Group 20
IRMA exemption Why created by the SEC? Engagement of an IRMA (an independent registered municipal advisor) by a municipal entity/ obligated person indicates that the municipal entity / obligated person intends to rely on the advice of that advisor. So long as a municipal entity/obligated person is represented by and relies on an IRMA, the SEC believes it is appropriate to allow municipal PFM s entities/obligated PRICING GROUP persons to receive as much advice and information as possible from a variety of sources, even if the providers of such advice are not subject to a fiduciary duty. The PFM Group 21
IRMA exemption How does it work? For an IRMA exemption on which an Underwriter can rely: 1) IRMA (independent registered municipal advisor) must be providing advice on the same topic or transaction as the entity seeking to rely on the IRMA exemption. PFM s PRICING GROUP 2) A person (i.e. an underwriter) seeking to rely on an IRMA exemption must receive from the municipal entity/obligated person a representation in writing that it is represented by, and will rely on the advice of, an IRMA; 3) Such person (i.e. an underwriter) must provide the required disclosures to the municipal entity/ obligated person, and provide a copy to the municipal entity/ obligated person s IRMA. The PFM Group 22
The Underwriter Exemption
Underwriter Exemption - Who Statutory exemption for brokers, dealers, and municipal securities dealers serving as underwriters within the scope of an underwriting of such issuance of municipal securities Underwriter must have a relationship to particular transaction What does that mean? Exclusion does not cover 1. Advice from an underwriter prior to an election 2. Advice from an underwriter provided on an ongoing basis 3. Other activities determined by SEC 24
Underwriter Exemption within scope Within scope of exclusion for the transaction: 1. Advice for the specific transaction 2. Rating Agency preparations & strategies 3. Investor road shows 4. Advice on retail order period and institutional marketing 5. Assistance with Official Statements 6. Assistance with closing documents 7. Coordinate CUSIP and DTC 8. Prepare post sale reports 9. Structuring refunding escrow cash flow requirements but not including recommendation of and brokerage of escrow investments 25
Underwriter Exemption activities outside scope Outside scope of exclusion for the transaction: 1. Advice on method of sale (competitive, negotiated, or private placement) 2. Advice regarding authorization of a sale 3. Advice on bond election campaign 4. Financial analysis and strategic service advice not specific to transaction 5. Assisting issuers with competitive sales 6. Preparation of Financial Feasibility analysis related to a new project 7. Budget planning and analysis/budget implications related to debt issuance 8. Advice on overall rating strategy including actions taken between financings 9. Advice on overall financial controls not related to transaction 10. Advice for RFP s for underwriter or other professionals for a project financing including their compensation 26
Underwriter Exemption - issuer interaction Can provide issuer information regarding its underwriting capabilities/experience as well as general market/financial information Cannot provide advice if underwriter is part of underwriting pool Could provide advice, if other exemptions apply: Issuer Request for Proposal process Use of Independent Registered MA (oral or written advice) 27
How will this effect Issuers and Underwriters? Before Analysis prior to an election Analyze repayment structures Tax rate projections Preliminary and Final Official Statements Bond rating strategy Bond rating presentation Market bonds to investors Closing assistance Debt Service Fund budget assistance Disclosure assistance Evaluate refinancing opportunities Other after-sale activities Municipal Advisor Rule - effective date After (With only Underwriter Exemption) Some of these services will be considered advice under the Rule and are not covered as part of the underwriter exemption. 28
IRMA vs. Underwriter Exemptions While issuers are not required to be represented by an Independent Registered Municipal Advisor, doing so can allow them to receive a broad scope of advice and services from underwriters and other financial professionals as compared to relying solely on the underwriter exemption IRMA Exemption Underwriter Exemption Capital Facilities Planning Financial Analysis Prior to a Bond Election Identification of Specific bond issue Bond Marketing and Sale Ongoing services Tax rate analysis Debt capacity analysis Taxpayer impact analysis Bold sale amounts and dates Projected tax impacts Recommendations on maximum term Review of bond election resolution Refunding recommendations Identification of bond issue amount and goals Method of sale recommendation Underwriter RFP, if desired Bond rating strategy Financial analysis related to that specific issue Assistance with official statement Participation in the bond rating Closing memo Debt Service Fund budget assistance Continuing disclosure Refunding analysis Overall bond rating strategy The PFM Group 29
How will this affect Issuers and Municipal Advisors? It is not the issuer s direct responsibility to comply with the MA Rule it is the responsibility of underwriters, municipal advisors, bond counsel, and other professionals to make sure they are in compliance or registered. The environment among underwriters, municipal issuers, and municipal advisors continues to develop in accordance with the final SEC MA regulations and MSRB rules and proposals. Interpretation of the rules, the exemptions, the corresponding standards are ongoing by Regulators and the financial community alike. Regulatory bodies and industry participants will need to concentrate on the clarity of transactional roles, the transparency of interests, and formality of relationships. 30
What actions can a Issuer take in response to the Rule? The following steps will enable a Issuer to maintain the flow of information in compliance with the Rule: Monitor the Market and Regulatory Environment Engage Financial Team Early Seek Legal Counsel 31
Questions? ( and hopefully answers) 32
Important Disclosures This presentation is only intended to provide you with an overview of the Municipal Advisor Rule at this particular time. As the Rule evolves, so will the corresponding regulatory interpretation and guidance relating to the Rule. This material is based on information obtained from sources generally believed to be reliable and available to the public, however Public Financial Management, Inc. cannot guarantee the accuracy, completeness or suitability of this content. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation regarding the application of the SEC Municipal Advisor Rule. All statements as to what may happen under certain circumstances are based on assumptions, some but not all of which are noted in this presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on the outcome. Please note that the information provided herein does not constitute legal advice and you must be sure to consult your attorney regarding your institution s specific circumstances. Public Financial Management, Inc. is a registered municipal advisor with the SEC and the MSRB under the Dodd-Frank Act of 2010. 33