FGFOA Webinar Series “ The New Securities and Exchange Commission Municipal Advisor (MA) Rule”

1. FGFOA Webinar Series “The New Securities and Exchange Commission Municipal Advisor (MA) Rule” And “The New Securities and Exchange Commission Municipalities Continuing Disclosure Cooperation (MCDC) Initiative”

2. FGFOA Webinar Series Presenters John Cross, Securities and Exchange Commission Peg Henry, Jefferies Muni Legal Alexandra MacLennan, Squire Patton Boggs Ben Watkins, State of Florida Division of Bond Finance

3. Overview of the Final Municipal Advisor Registration Rules

4. Introduction and Background Response to Issues in 2008 Financial Crisis • Concerns arose in 2008 financial crisis about unregulated or unqualified financial advisors to municipal entities, advisors with conflicts of interest, issues involving pay-to-play, and advice on complex municipal derivatives in which municipal entities suffered significant losses.

5. Introduction and Background Statute and Purpose • In response to these concerns, in the Dodd-Frank Act, Congress added a broad new requirement that “municipal advisors” register with the Securities and Exchange Commission, effective October 1, 2010. • This municipal advisor provision aims to enhance protections to municipal entities and it imposes a new fiduciary duty on municipal advisors to act in the best interests of their municipal entity clients.

6. SEC Final Rules and Interpretive Guidance SEC Final Rules • SEC adopted final municipal advisor registration rules on September 20, 2013. Seehttp://www.sec.gov/rules/final/2013/34-70462.pdf. • These final municipal advisor rules went into effect on July 1, 2014.

7. SEC Final Rules and Interpretive Guidance SEC Interpretive Guidance • SEC Staff issued interpretive guidance on municipal advisor registration rules (“Frequently Asked Questions” or “FAQs”) on January 16, 2014 and May 19, 2014. See http://www.sec.gov/info/municipal/mun-advisors-faqs.shtml.

8. Municipal Advisor Rules Regulate Advisors to Municipal Entities—They Do Not Regulate Municipal Entities Regulated Persons • The municipal advisor rules regulate certain persons who provide advice to municipal entities and obligated persons on certain subjects. • The municipal advisor rules do not regulate municipal entities themselves.

9. Municipal Advisor Rules Regulate Advisors to Municipal Entities—They Do Not Regulate Municipal Entities Broad Exemption for Public Officials • The final municipal advisor rules have a broad exemption for public officials which covers any person (elected or appointed) serving as a member of a governing body, advisory board, committee, or similar official capacity of a municipal entity or obligated person to the full extent that these individuals act within the scope of their official capacities.

10. Municipal Advisor Rules Regulate Advisors to Municipal Entities—They Do Not Regulate Municipal Entities Broad Exemption for Public Officials • This exemption covers employees of municipal entities and obligated persons that act within the scope of their employment. • The May 2014 FAQS clarify further that this exemption also covers advice between employees of different municipal entities (e.g., state government agency and a municipality) that act within the scope of their employment.

11. Statutory and Regulatory Framework Statutory Municipal Advisor Definition • The Exchange Act defines the term “municipal advisor” to mean a person that: (1) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products (municipal derivatives, GICs, and “investment strategies”) 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 (2) undertakes certain solicitations of a municipal entity.

12. Statutory and Regulatory Framework SEC Registration Absent an Available Exemption. • Absent an available statutory or regulatory exemption, a municipal advisor must register with the SEC and is subject to certain training, qualification, and recordkeeping requirements.

13. Advice Standard General guidelines on what constitutes “advice” under the final rules: • Facts and Circumstances Standard. First, advice depends on all of the relevant facts and circumstances. • Advice Includes Particular Recommendations. Second, advice includes certain “recommendations” that are particular to the specific needs, objectives, or circumstances of a municipality. • Advice Does Not Include General Information. Third, advice excludes certain general information that does not involve a recommendation.

14. General Information is Not Advice Examples of “general information” that is not considered “advice”: • Information of a factual nature without subjective assumptions, opinions or views. • Information that is not particularized to a specific municipal entity or type of municipal entity. • Information that is widely disseminated for use by the public. • General information in the nature of educational materials.

15. Covers Advice on Three Subjects Under final rules, a person is required to register as a municipal advisor if the person provides advice on one of three subjects: • (1) issuance of municipal securities, including structure, timing, terms, and other similar matters with respect to such issuance (interpreted broadly time-wise, from early planning to bond redemption); • (2) investments of proceeds of municipal securities and the recommendation of and brokerage of municipal escrow investments under “investment strategies” definition; and • (3) municipal derivatives (swaps and security-based swaps).

16. Process for Determining Bond Proceeds Written Representation Process for Determining Bond Proceeds The final municipal advisor rules provide a process for determining whether funds to be invested are municipal bond proceeds: • A person may rely on a written representation made by a knowledgeable official of a municipal entity or obligated person regarding whether invested funds are municipal bond proceeds. A person must have “reasonable basis” for such reliance.

17. Process for Determining Bond Proceeds Nonexclusive Process • This process of reliance on written representations from municipal entities or obligated persons is not the exclusive means for determining whether invested funds are municipal bond proceeds. What Municipalities Should Expect • Municipalities should expect and appreciate that their investment advisors may seek representations from them about whether invested funds are municipal bond proceeds, because this affects whether advisors need to register with the SEC as municipal advisors.

18. Statutory and Regulatory Exemptions • The statutory municipal advisor provision includes a series of statutory exemptions to the definition of a municipal advisor. The final municipal advisor rules interpreted the statutory exemptions and also provided certain additional regulatory exemptions. The exemptions focus on certain identified activities of market participants as opposed to the status of market participants.

19. Statutory and Regulatory Exemptions • Broad exemption for public officials. As noted an earlier slide, the final rules include a broad exemption for public officials (both elected and appointed) and public employee who provide advice when acting within the scope of their official capacities. • The next several slides highlight certain exemptions that are relevant to municipal entities and how they obtain advice from their advisors.

20. Independent Registered Municipal Advisor Exemption • An important new exemption permits free flow of information between market participants and municipalities when the municipality is represented by an independent registered municipal advisor. • To qualify for this exemption, a market participant must receive a written representation from the municipality that the municipality (1) is represented by, and (2) will “rely on“ the advice of its independent registered municipal advisor. The May 2014 FAQS clarified that this “rely on” language means that the municipality must “seek and consider the advice, analysis, and perspective of its independent registered municipal advisor (but NOT that it must follow) such advice. A municipality may post a representation to this effect on its official website.

21. Independent Registered Municipal Advisor Exemption • Requires written disclosure to the municipality that person relying on exemption is not a municipal advisor and not subject to any fiduciary duty. • The independence test looks at certain entity-level and individual-level associations between the registered municipal advisor and the market participant for a two-year period. The individual-level analysis focuses in part on participation of certain individuals in municipal entity activities.

22. Underwriter Exclusion • Exclusion for brokers, dealers, and municipal securities dealers serving as underwriters. • Covers underwriter’s advice on the issuance of municipal securities (including structure, timing, terms, and other similar matters) from the time of engagement as underwriter on a particular transaction through the end of underwriting period.

23. Underwriter Exclusion • An issuer’s engagement of an underwriter may be on a preliminary basis, subject to conditions such as the approval by issuer’s governing body. • Does not cover advice on investment of proceeds or municipal derivatives.

24. Request for Proposal or Qualifications Exemption • Allows issuers to solicit ideas and advice from market participants in a competitive process. • Covers written or oral responses to an issuer’s request for proposals (RFP) or request for qualifications (RFQ) that targets 3 or more market participants; provided that the person does not receive separate direct or indirect compensation for advice provided as part of such response. • Covers written or oral responses to an issuer’s “mini-RFP” that targets 3 or more pre-screened or pre-qualified recipients. • No formal procurement process is required.

25. Other Statutory and Regulatory Exemptions Set forth below is a brief summary of other exemptions to the municipal advisor definition: • Registered investment advisers—covers SEC-registered investment advisers that provide investment advice. • Registered commodity trading advisors—covers CFTC-registered commodity trading advisors that provide advice related to swaps. • Banks—covers certain identified traditional banking activities (e.g., deposits, extensions of credit, loans, and direct purchases of municipal securities for their own account).

26. Other Statutory and Regulatory Exemptions Set forth below is a brief summary of other exemptions to the municipal advisor definition: • Attorneys—covers legal advice and traditional legal services, but not attorneys that hold themselves out as financial advisors or financial experts. • Accountants—covers accountants that provide audit or other attest services, prepare financial statements, or issue letters for underwriters. • Engineers—covers engineering advice.

27. Implementation of Final Municipal Advisor Rules SEC Implementation. • The SEC’s final municipal advisor rules went into effect on July 1, 2014. Municipal advisors are required to register with the SEC using the final registration forms on a staggered basis over a four-month phase-in period, beginning on July 1, 2014. • Information regarding firms registered with the SEC as municipal advisors under the final rules and associated individuals will be publicly available on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) .

28. Implementation of Final Municipal Advisor Rules Municipal Securities Rulemaking Board (“MSRB”) Implementation The MSRB is developing rules for municipal advisors on subjects, including: • The fiduciary duty owed by municipal advisors to act in the best interests of their municipal entity clients and what that entails. • MSRB registration, supervisory obligations, professional qualifications and training, pay-to-playrestrictions, and fees.

29. Certain Additional Information on Municipal Advisors • Municipal Advisor Final Registration Forms Received (Available After July 1, 2014): http://www.sec.gov/edgar/searchedgar/companysearch.html • SEC Staff FAQs: http://www.sec.gov/info/municipal/mun-advisors-faqs.shtml. • SEC Office of Municipal Securities:http://www.sec.gov/municipal • MSRB: http://www.msrb.org/MSRB-For/Municipal-Advisors.aspx

30. MA Rule – GFOA Alert • GFOA’s Website – GFOA.org • Click on Products & Services – News and Announcements • MA Rule Alert – published May 14, 2014 contains links to the following: • 10-page issue brief on the Rule • Full text of the MA Rule • SEC’s FAQs on the MA Rule • GFOA Best Practices updated to reflect MA Rule changes

31. MA Rule – GFOA Alert • Content of Alert: • Provides background/overview of MA Rule and alerts issuers to key points: • Rule does not regulate governments – provides exemption for state and local government employees, board and committee members when acting in their official capacity • Regulates MAs and places a fiduciary duty on them • Only professionals with a fiduciary duty to state and local governments may provide “advice”, unless an exemption is met

32. MA Rule – GFOA Alert • Content of Alert, Continued: • Discusses interaction between underwriters and issuers after July 1, 2014 and clarifies how SEC defines “advice” and “Municipal Advisor” • Discusses how “advice” from underwriters is construed with respect to the investment of bond proceeds • Discusses the appropriate use of exemptions to the MA Rule and provides model document language for governments to use for each exemption

33. MA Rule – GFOA Best Practices • GFOA Best Practices: • MA Rule is consistent with GFOA Best Practices, which recommend use of a municipal advisor except in circumstances where the government has sufficient in-house expertise to consider and develop bond transactions • GFOA revised three Best Practices in 2014 to incorporate language relative to the MA Rule: • Selecting and Managing the Engagement of Municipal Advisors • Selecting and Managing the Engagement of Underwriters for Negotiated Bond Sales • Selecting and Managing the Method of Sale of Municipal Bonds

34. SIFMA Model Documents With GFOA assistance, the Securities Industry and Financial Markets Association (SIFMA) has developed model documents to help UWs implement the exemptions from the Rule. Available at www.sifma.org/MAForms • IRMA representation with UW reciprocal disclosures • Engagement letter with attached G-17 disclosures • RFP/RFQ language • UW exemption for remarketing agents • Disclosure/disclaimers • Bond proceeds certificate

35. Issues with Implementation of IRMA Exemption • Determining whether the independence tests are met is the biggest challenge • Issuers frequently do not name their individual advisors in their IRMA representations • The independence tests must be monitored in case prior dealer employees move from one MA firm to another • Independence tests are problematic in the case of large MA firms • Must UWs track whether non-muni employees move to MA firms?

36. Issues with UW Exemption • Most difficult to implement for non-profits • They do not always have municipal advisors and usually do not do RFPs • They are the least educated about the Rule • If engagement letter preceded the Rule, but the transaction is ongoing, must the G-17 disclosures be made to satisfy the exemption if G-17 would not have required them?

37. Guidance on “Advice” Guidance on what is and is not “advice” has proved very useful. Pitch books can provide enough information to get a client interested in signing a preliminary engagement letter. Key will be Financial Industry Regulatory Authority (FINRA)’s interpretation of “advice”. Many dealers have a pitch book review process.

38. Issues with Advice on Investment of Bond Proceeds • Very slow process to identify accounts • Systems for account opening and identification must be changed • Brokers must be trained. Some firms are closing accounts with bond proceeds because of compliance concerns. • Lack of guidance on what it means for a broker to have a fiduciary duty is a concern • Waiting on revised Municipal Securities Rulemaking Board (MSRB) Rule G-42.

39. Questions/Discussion

40. Overview of the Municipalities Continuing Disclosure Cooperation Initiative

41. What is the MCDC Initiative? • On March 10, 2014, the SEC Enforcement Division announced the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative to provide issuers and underwriters the opportunity to self-report instances of material misstatements in bond offering documents regarding the issuer’s prior compliance with its continuing disclosure obligations. • The deadline for self-reporting is September 10, 2014. • This initiative is the first of its kind in the municipal market and is viewed as “gift” by the SEC Division of Enforcement, however, the initiative is causing much angst among underwriters and issuers.

42. Municipal Securities Regulation • In order to appreciate the seriousness of this initiative and provide perspective, an overview of the federal regulatory landscape in the municipal market might be helpful. • The Securities Act of 1933 regulates primary market transactions. • The Securities Exchange Act of 1934 primarily regulates secondary market transactions.

43. Municipal Securities Regulation • The U.S. Securities and Exchange Commission, created under the 34 Act to enforce federal securities laws. • The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. • The main purposes of the 33 Act and the 34 Act can be reduced to two common-sense notions: • Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. • People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.

44. Municipal Securities Regulation • Municipal securities are generally exempt from the registration requirements of the 33 Act. • Governmental entities are generally exempt from the reporting requirements of the 34 Act. • Not exempt from the anti-fraud provisions of the 33 Act and the 34 Act. • The SEC derives its powers over the municipal marketplace by virtue of its ability to regulate municipal broker-dealers and its power to enforce the anti-fraud provisions. • Over the past 20 years the municipal market has grown significantly and with that growth has come a heightened interest in the market by the SEC. • SEC enforcement activity in the municipal market is becoming more frequent and is not limited to investigations after default (Washington Public Power Supply System) or bankruptcy (Orange County, CA).

45. Municipal Securities Regulation • In July 2012, the SEC published a report of the status of the municipal market that included several recommendations to improve both disclosure in the municipal market and transparency for pricing in the secondary market trading. • SEC Commissioners have stated on numerous occasions that Congress should repeal the so-called “Tower Amendment” to provide the SEC full regulatory authority over municipal issuers, including the ability to provide corporate style, line-item, disclosure. • The Tower Amendment prohibits the SEC from establishing a full-blown regulatory regime for municipal securities by restricting the SEC’s authority over municipal issuers. • The SEC is moving its agenda forward through increased enforcement actions.

46. Overview of Disclosure Requirements • Disclosure is generally divided into two areas: • Primary disclosure made when bonds are first issued or remarketed. This disclosure is typically made in an “official statement” or “OS”. The OS will contain, among other matters, financial information, operating data, a description of the security for the bonds being offered, as well as a description of the continuing disclosure covenants an issuer has agreed to comply with for the bonds being offered. • Continuing disclosure made on an annual or other periodic basis under a Continuing Disclosure Agreement pursuant to Rule 15c2-12 or otherwise. Includes both annual filings of financial information and operating data and event notices. • Primary responsibility for the accuracy of the OS and continuing disclosure filings lies with the issuer. This responsibility cannot be delegated to outside consultants.

47. Overview of Disclosure Requirements • Rule 15c2-12 requires the OS to include a description of any instances in the past 5 years where the issuer has failed to comply in all material respects with its continuing disclosure undertakings entered into for any other bonds.

48. SEC Enforcement • SEC enforcement actions against municipal issuers are generally brought under either Section 17(a) of the 33 Act or Section 10(b) of the 34 Act and Rule 10b-5 thereunder. • Section 17(a) of the 33 Act prohibits obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. • A fact is material if there is a substantial likelihood that a reasonable investor would have viewed the information as “having significantly altered the ‘total mix’ of information available.” • Negligence is sufficient to prove violations of Section 17(a)(2) or (3) of the 33 Act.

49. SEC Enforcement • Section 10(b) of the 34 Act and Rule 10b-5 contain similar prohibitions and also require that the incorrect or omitted fact be material. • In addition, these provisions require a showing that defendants or respondents acted with “scienter,” or a culpable state of mind. • The scienter requirement for antifraud violations may be satisfied by a showing of recklessness as well as a showing of guilty knowledge and intent. The state of mind may be shown by circumstantial evidence. • Recklessness has been defined as “extreme departure from the standards of ordinary care, and which represents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.”

50. West Clark Community Schools • West Clark Community Schools (July 29, 2013) - Issuer told investors in a 2007 official statement that is was in material compliance with all previous continuing disclosure undertakings when it had failed to make any annual filings. The SEC charged the issuer with violation of anti-fraud rules stating that prior compliance with continuing disclosure undertakings was material.