The Municipal Advisor Registration Rules

1. NAHEFFA 2014 Fall ConferenceBig Sky, MontanaThe SEC’s Municipal Market InitiativesNoreen White, Acacia Financial Group, Inc.Kreg Jones, D.A. Davidson & Co.Dan Bacastow and Jim Burr, Chapman and Cutler LLPSeptember 10, 2014 1

2. The Municipal Advisor Registration Rules

3. Overview • The Municipal Advisor Registration Rules are not about regulating municipal advisors, they are all about regulating the interactions between municipal market participants and issuers and borrowers. • A big (777-page), messy rule-making that has produced misinformation and confusion. • There are varying interpretations of the rules, and different firms are taking different compliance positions. • Some consistency is provided by GFOA and SIFMA model documents. 3

4. Background • The Dodd-Frank Act authorized the SEC to adopt rules for the registration of municipal advisors and the MSRB to adopt rules governing municipal advisors. • The SEC issued proposed municipal advisor registration rules in late 2010 and final rules in September 2013. • The rules became effective on July 1, 2014.

5. Municipal Advisors: • Must register with the SEC and the MSRB. • Have a fiduciary duty to their municipal entity clients, and a fair dealing obligation to their obligated person clients. • Are subject to substantially the same SEC disciplinary rules as municipal securities dealers. • Will be subject to a comprehensive regulatory regime established by the MSRB. • Rulemaking is now in process.

6. Fiduciary Duty and Fair Dealing Obligation • The fiduciary duty requires the advisor to act in the best interests of its client, and to put the client’s interests ahead of its own. • Fair dealing obligations are determined under MSRB Rule G-17, and generally include full disclosure and fair execution. • Advisors are also subject to broad anti-fraud prohibitions.

7. Who is a Municipal Advisor? • Anyone who: • Provides advice • to or on behalf of a municipal entity or obligated person, • regarding a municipal financial product or an issuance of municipal securities. • A person that meets this three-part test is a municipal advisor even it doesn’t intend to serve as a financial advisor.

8. What is Advice? • A recommendation that is particularized to the specific needs, objectives, or circumstances of a covered entity with respect to a covered transaction, including structure, timing, terms and similar matters. • A “call to action”with respect to a covered transaction. • A communication that is individually tailored to a covered entity or a targeted group of covered entities about a covered transaction, can be viewed as an implied recommendation that constitutes covered advice.

9. What is not Advice? • General information: • Professional qualifications and experience • General market and financial information • Factual descriptions and factual comparisons of alternative financing structures • “Efforts to Win Business” communications: • Some focused information can be provided, but traditional pitch materials have to be modified, non-advisory role must be disclosed. • Arm’s-Length Communications • Discussions and negotiations by a person acting in a principal capacity in a business transaction.

10. Who are Municipal Entities and Obligated Persons? • Municipal entity: Any State, political subdivision of a State or a municipal corporate instrumentality of a State or of a political subdivision of a State. • Obligated person: Same meaning as Rule 15c2-12. Most often will be conduit borrowers. • Providers of credit and liquidity facilities and the federal government are not obligated persons.

11. What is an Issuance of Municipal Securities? • Municipal securitiesinclude all types of tax exempt, tax advantaged and taxable bonds, notes and other securities issued or guaranteed by municipal entities. • An issuanceof municipal securities: • for municipal entities, begins at the first stage of the pre-issuance planning, • for obligated persons, begins when it contacts a municipal entity to issue bonds on its behalf, and • continues to the final retirement date of the securities. • No grandfathering for outstanding bonds, they are issuances of municipal securities under the rules.

12. What are Municipal Financial Products? • GICs, forward delivery agreements, investment strategies for and individual investments of: • the proceeds of municipal securities (broadly defined by reference to arbitrage rules), and • municipal escrow investments • Municipal derivatives: • includes swaps and security-based swaps • to which a municipal entity is a counterparty (including swaps unrelated to the issuance of municipal securities) • to which an obligated person is a counterparty (but only in connection with an existing or proposed issue of municipal securities).

13. What Exemptions are Available? • Blanket Exemptions • RFPs and IRMA • Activity-based Exemptions • Officers and Employees of Munis and OPs • Broker-dealers serving as underwriters • Banks • Registered Swap Advisors (CTAs) • Swap Dealers • Registered Investment Advisors • Accountants and Engineers • Attorneys

14. Exemption for RFP Responses • The municipal advisor rules exempt all adviceincluded in a response to an RFP or RFQ. • To qualify, an RFP must: • State a particular objective; • Be open for a reasonable period (no more than six months); and • Be a competitive process (sent to at least three market participants). • More open-ended “mini-RFPs” are permitted on selected questions or topics.

15. IRMA Exemption • The municipal advisor rules exempt all advice and recommendationsgiven by any person to a covered entity that is represented by an Independent Registered Municipal Advisor. • This exemption is subject to conditions: • The IRMA must be engaged with respect to same aspects of a municipal financial product or municipal securities issuance. • The IRMA and the person relying on exemption must have been “independent” of one another for the previous two years. • Municipal entity or obligated person must represent in writing that it is represented by and will relyon advice of its IRMA.

16. Municipal Entities and Obligated Persons • Board members, officials and employees of municipal entities and obligated persons are exempt so long as they are acting within the scope of their official duties. • Communications and negotiations between a conduit issuer and a conduit borrower regarding a bond issuance are non-advisory, arm’s-length commercial discussions that are not subject to the rules.

17. Underwriter Exemption • A broker-dealer/municipal securities dealer serving as an underwriter of an issuance of municipal securities is excluded from the MA definition. • Only covers advice and activities that the SEC deems to be “integral” to an underwriting. • Does not cover advice on investments, swaps or issues not specific to a particular issuance. • Begins once underwriter is engaged for a specific transaction and terminates on the closing date.

18. Swap Exemptions Swap Advisors • CTFC-registered commodity trading advisors are exempt, but may not provides advice unrelated to municipal derivatives. Swap Dealers • CFTC-registered swap dealers are also exempt, but are required to comply with the CFTC’s business conduct standards for transactions with “special entities.” • Must confirm that the municipal entity or obligated person has a “qualified independent representative” advising it on the swap transaction.

19. Issues and Considerations • Limitations on activity-based exemptions and the consequences of being an “accidental advisor” will push market participants to utilize blanket exemptions, especially the IRMA exemption. • Cooperation among market participants is important. • Issuers and borrowers can take steps to make exemptions available. • Broader RFPs, comprehensive financial advisor agreements and preliminary underwriter engagements promote freer communications.

20. Questions for Conduit Issuances • Is a financial advisor necessary on all deals? • Who is the financial advisor representing? • Can the FA represent both the issuer and the borrower? • Does a conduit issuer need its own FA? • If the IRMA exemption is not available, can underwriters still do what they need to do under the underwriter exemption? • What can issuers do to facilitate free communications and compliance with the rule?

21. Municipalities Continuing Disclosure Cooperation Initiative 21

22. One Rule for Municipal Securities Disclosure • Rule 15c2-12 was originally adopted in 1989 to require that underwriters of municipal securities obtain and review a “deemed final” Official Statement before they offer bonds to investors in a primary offering. • Amended in 1995 to require underwriters to confirm that the issuer or an obligated person has entered into a written undertaking to provide continuing disclosures. • While the Rule applies only to underwriters, it indirectly imposes disclosure and continuing disclosure requirements on issuers and obligated persons.

23. Official Statement Disclosures Required by Rule 15c2-12 • Financial and operating information, descriptions of the issuer and/or obligated persons and other information material to an evaluation of the offering. • A description of the continuing disclosure undertaking. • A description of any failures by the issuer or obligated person to comply in all material respects with prior continuing disclosure undertakings within the last five years.

24. Continuing Disclosures Required under Rule 15c2-12 • The filing of annual financial and operating information (audit report/update OS data). • The date by which annual information will be filed. • Notice within 10 business days of 14 listed events. • Timely notice of failure to file annual information by date specified in the undertaking.

25. Continuing Disclosure Compliance Concerns • SEC believes that issuers and obligated persons are not meeting their continuing disclosure obligations based on comments by market participants, industry roundtables and its own investigations. • Repeated warnings to municipal securities underwriters over the past few years regarding their obligations to confirm Rule 15c2-12 compliance by their clients. • SEC’s Report on the Municipal Securities Market (2012) called for Congress to give it direct authority to prescribe and enforce continuing disclosure requirements against issuers and obligated persons.

26. The MCDC Initiative and theSEC’s Anti-Fraud Powers • MCDC Initiative is brought under SEC’s authority to police anti-fraud violations under Section 17 of the Securities Act and Section 10 of the Exchange Act. • Broad prohibitions on false and misleading statements and omissions of material facts. • Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. • The Initiative is based on the SEC’s position that false statements about prior continuing disclosure compliance violate the anti-fraud provisions.

27. MCDC Initiative Basics • Announced on March 10, 2014; self-reporting deadlines are September 10 for underwriters and December 1 for issuers and obligated persons. • Self-reporting by issuers, obligated persons and underwriters of materially inaccurate statements in Official Statements regarding prior continuing disclosure compliance. • Standard settlement terms for those who self-report. • Issuers and obligated persons (conduit borrowers, guarantors and others) referred to together as “issuers.”

28. Scope and Process • The Initiative covers both negotiated and competitive underwritings. • Only entities (issuers and underwriters) can use the Initiative • SEC retains right to seek enforcement against culpable individuals. • Files will be processed in order of self-reporting. • SEC anticipates a 2-3 month process from self-reporting to finish.

29. The Carrot and the Stick • “The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets. We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative. Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.” • Andrew J. Ceresney, Enforcement Division Director

30. Self-Reporting Process • Participants self-report by completing and filing a questionnaire, which includes: • Name and contact information for lead underwriter, municipal advisor, bond counsel, underwriter’s counsel and disclosure counsel, • Any facts relating to the potentially inaccurate statements the participant deems relevant, and • A statement by the participant that it intends to consent to the standard settlement terms under the Initiative.

31. Global Settlement Terms • Forissuers and underwriters the Enforcement Division will recommend settlement terms to the SEC that include: • Consent to a cease and desist proceeding with no admission or denial of the SEC’s findings. • Cooperating with any subsequent SEC investigation regarding the reported false statements, including the roles of individuals and other parties. • Providing the SEC with a certification of compliance with the requirements of the cease and desist order on its first anniversary.

32. Settlement Terms for Issuers • Must establish continuing disclosure compliance policies and complete training of personnel within 180 days. • Comply with all existing undertakings and remedy all past delinquent filings within 180 days. • Disclose the settlement terms “in a clear and conspicuous fashion” in each official statement for the next five years. • The Enforcement Division will not recommend imposing a civil ($) penalty on issuers and obligated persons.

33. Settlement Terms for Underwriters • Retaining an independent consultant to review compliance and offer recommendations within 180 days. • Taking reasonable steps to implement the consultant’s recommendations. • Uniform civil penalties for all reported violations: • $20,000 per offering of $30,000,000 or less • $60,000 per offering of more than $30,000,000 • Civil penalties have tiered caps at $100k-500k (based on annual revenues) for all violations reported by an underwriter.

34. Review of Official Statements and Continuing Disclosure Filings • The Initiative covers inaccurate statements in official statements regarding continuing disclosure compliance, not compliance with the undertakings themselves. • The first steps to determine whether to participate: • Review past official statements for descriptions of compliance with previous continuing disclosure undertakings for the last five years, and • Review continuing disclosure filings during that period and determine whether the official statement descriptions were accurate.

35. What does the Official Statement say? • Under Rule 15c2-12, Official Statements are required to describe instances of failures to comply in all material respects with prior continuing disclosure undertakings. • Many Official Statements include an affirmative statement that the issuer has never failed to comply with a prior undertaking. • Some Official Statements say nothing about continuing disclosure compliance.

36. Timeframe • The period covered by the Initiative is determined by the statute of limitations for civil penalty actions by the SEC, which is five years from when the misleading disclosure occurred. • Official Statements dating back to 2009 would need to be reviewed. • Since Official Statements are required to disclose non-compliance with undertakings during the five preceding years (the “look-back”), disclosure filings back to 2004 may need to be reviewed.

37. Possible Scenarios:No Need to Self-Report • An issuer that did not have a material failure to comply with undertakings during the look-back period had no obligation to disclose anything in an Official Statement under either Rule 15c2-12 or the anti-fraud provisions. • An issuer that did have material failure(s) to comply with undertakings during the look-back period and accurately disclosed the failure(s) in each Official Statement met the requirements of both Rule 15c2-12 and the anti-fraud provisions.

38. Possible Scenarios:Consider Self-Reporting • An issuer that falsely stated in an Official Statement that it was in (material) compliance with its previous continuing disclosure undertakings. • An issuer that failed to disclose in an Official Statement its material failure(s) to comply with previous continuing disclosure undertakings.

39. Additional Issues and Considerations • Chief of SEC’s Municipal Securities Enforcement Unit has stated that the Initiative is intended to create a “modified prisoner’s dilemma.” • If one party self-reports, the other party has a bigger problem if it fails to self-report. • This tension between issuers and underwriters is a deliberate effort by the SEC to promote self-reporting by all issuers and underwriters.

40. Materiality Considerations • Two different materiality considerations are at play: • Was there “material” noncompliance with an undertaking that required disclosure? (financial statements one day late) • Was a false statement (or omission) regarding undertaking compliance information that a reasonable investor would consider material? • By the prisoner’s dilemma, the SEC is promoting over-reporting of disclosure failures, even those that may not be material.

41. Additional Considerations • SEC will recommend enforcement proceedings (cease and desist order) only for disclosure failures it considers material. • The SEC is emphasizing that the standard settlement terms are favorable in comparison to penalties it will impose on those who fail to self-report. • Different interests and considerations for issuers and underwriters. • Possibility of enforcement actions against individuals considered responsible for disclosure failures.

42. Additional Considerations • Conduit issuers are not expected to self-report. • Some issuers are contacting their borrowers: • Are you aware of the MCDC? • Do you expect to self-report? • Provide us a copy of what you send to the SEC. • Exchange of information between obligated persons and their underwriters is crucial. • Extension of reporting deadline gives obligated persons the opportunity to know whether their underwriters are self-reporting, but creates additional risks for underwriters.

43. Life After the MCDC • What should the “Continuing Disclosure” section of the OS say about past CDU compliance? • Only material non-compliance within the past 5 years is required to be disclosed. • How specific do the descriptions of events of non-compliance have to be? • Should non-compliance with voluntary CDUs also be disclosed? • Who has to verify the accuracy of the statements regarding past CDU compliance? • Should conduit issuers require or recommended that their borrowers adopt continuing disclosure compliance policies and procedures?