School District’s
& RECENT
Municipal Bond
Regulatory Changes
Full disclosure & transparency in bond issue and debt transactions
PRESENTED BY
Joel Cracchiolo
& Friends
Changing Regulatory Environment
Municipal Securities
•
•
•
In response to the “Great Recession”
of 2008 the Dodd-Frank Wall Street
Reform and Consumer Protection Act
was approved in 2010.
The Act contains over 400 new rules
/ changes to financial regulatory
environment with the purpose of
protecting municipal entities.
The Municipal Securities
Rulemaking Board’s
(MSRB)responsibilities expanded to
include the protection of state local
government issuers as well as
investors.
Basic Definitions
•
•
Securities & Exchange Commission (SEC) –
est. 1934 by Congress during the peak year
of the Depression. Designed to restore
investor confidence in capital markets by
providing investors and the markets with
reliable information and clear rules of
honest dealing.
MSRB – est. 1975 as a self-regulatory
organization governed by broker-dealers
with mission to protect investors. Develop
rules regulating underwriting, trading and
selling municipal securities.
Basic Definitions cont…
•
•
•
Financial Advisor – municipal securities
professional whom acts as agent for the
government unit, assisting it in determining
its debt structure, when to market
securities and preparation of documents
for sale.
Underwriter – securities professional acting
as a purchaser in a private placement.
Fiduciary Duty – obligation to act in the
best interest of another party.
Who amongst us already has these reg. changes
on their radar?
Raise your HAND
TOP Three (3) General Rule
UPDATES
to be aware of…
MSRB Rules
The MSRB establishes rules that securities firms, banks and municipal
advisors must follow when engaging in municipal securities transactions
and advising investors and state and local governments.
Rule categories
•
General
•
•
•
•
•
•
G3
G17
G23
Administrative
Definitional
Link - http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules.aspx
Permanent Registration Regime
Required for Municipal Advisors
Rule G-3 - requires a MA to permanently register with the SEC if it
provides advice on the issuance of municipal securities or about certain
“investment strategies.”
•
•
•
Prior to the passage of the Dodd-Frank Act, municipal advisors were not required
to register with the SEC.
Employees and appointed officials of municipal entities exempt from
registration.
Full list of registered advisors available at the SEC website & MSRB’s
municipal advisor registration page at
•
•
https://tts.sec.gov/MATR/index.html
http://www.msrb.org/msrb1/pqweb/MARegistrants.asp.
Who amongst us has visited the registration site
and looked at registered vendors?
Raise your HAND
Fiduciary Duty Imposed on
Municipal Advisor
(includes financial advisors)
Rule G-17 requires underwriter to identify responsibility to deal
fairly at all times with both issuers and investors, and disclose potential
conflicts
Implementation of Rule began on July 1, 2014.
•
Rule limits the ability of parties without a fiduciary duty to the issuer
from offering “advise” to the issuer. This is expected to fundamentally
change the communication practices between issuers and underwriters
that have existed to date.
Who KNEW the implementation date has passed?
Raise your HAND
Underwriters Prohibited from
Serving as Financial Advisors
Rule G-23 - primary purpose to prevent conflicts of interest.
•
•
Federal law now formally segregated the provision of advice from
the execution of transactions by prohibiting a single firm from
performing both roles on a single financing.
Precludes a broker-dealer that serves as a financial advisor from
switching to an underwriter regardless of whether the issue is sold
through a negotiated or competitive sale.
•
•
Previously allowed broker-dealers to serve as financial advisor and then
switch to an underwriter as long as the firm received written consent to do
so.
Under MSRB Rule G-23, a firm acting as an issuers municipal advisor is not
allowed to resign in order to serve as an underwriter for the proposed bonds.
This is the BIG ONE
“G 23-Top Items School Districts Need
to Know about the Rule”
Per GFOA Issue Brief dated Jan. 2014
•
•
•
The types of conversations that school districts can have with
professionals is more limited in nature than what has traditionally
occurred.
When a school district has a bond finance transaction and wanted to
receive proposals and/or advice, the school district will need to
represent to all involved in the transaction, in writing.
A financial advisor retained on a contingent basis may offer a full
range of advice with a written fiduciary agreement.
Exceptions to G-23
Rule provides exceptions for underwriters to communicate
with issuer about specific transactions:
1.
2.
3.
Independent Municipal Advisor Exception
RFP/RFQ Exception
Underwriter Exception
Independent Municipal Advisor
Exception #1
Issuers may obtain advice from an underwriter when it has
retained an independent registered MA and has represented in
writing to the underwriter that it will rely on MA for advice.
•
•
Issuers may make such written communication directly to
the underwriter or may post it on its website. GFOA
recommends that issuers post the information on its website.
GFOA does NOT recommend that underwriters speak
directly to the issuers municipal advisor unless specifically
permitted by the issuer.
RFP / RFQ
Exception #2
Underwriters responding to an RFP/RFQ may include
recommendations about specific financings without violating the
MA Rule.
•
•
For exemption to apply, RFP must no be outstanding for more than
6 months and issuer must widely distribute the RFP (to at least 3
competitive firms).
Issuers that use a pool of underwriters may have to use a “miniRFP” to received advise from underwriting firms included in the
pool.
Underwriter
Exception #3
•
•
This exception applies only if the underwriter has been selected
to underwrite a specific transaction.
An issuer may receive advice from a selected underwriter
without having made a final decision to issue the bonds. In such
a case, GFOA recommends signing a “letter of intent” with the
underwriter to allow discussion of the transaction as it is being
developed.
COMPLYING with G-23
MSRB UPDATED Rule
Things You Need to Know
to COMPLY with
G-23 MSRB UPDATED Rule
(G-3 & G17 need to be aware and verify)
•
Unless the issuer has sufficient in-house expertise and access to market
information, GFOA recommends that issuers hire a Municipal Advisor
prior to undertaking a debt financing.
•
•
Recognize that the role of the underwriter and the municipal advisor are
separate roles and cannot be provided by the same party.
•
•
Joel adds available “TIME TO COMMIT” in addition to GFOA’s note above as a necessity
to undertake the MA responsibilities in-house as well.
Relationship between the issuer and the underwriter is one of a common purpose but also
competing objectives, especially at the time of bond pricing. The underwriter is not the
issuer’s municipal advisor and has no legal fiduciary duty to the issuer.
Selection of an MA ( assuming not in-house person) should be on the
basis of merit using a competitive process (RFP) and that
issuers review those relationships periodically.
Request for Proposal
(The competitive process)
The RFP should include at least the following components:
•
•
•
•
•
A clear and concise description of the scope of work, specifying the length of
the contract.
Clarity on whether the issuer reserves the right to select more than one
municipal advisor or to form municipal advisory teams.
A requirement that all fee structures be presented in a standard format.
A requirement that the proposer provide at least three references from other
public-sector clients, preferably from ones that the firm provided similar
services .
A description of the objective evaluation and selection criteria and
explanation of how proposals will be evaluated.
Additional Considerations.
Also consider the following in the MA selection process:
•
•
•
Take steps to maximize the number of respondents .
Allow adequate time for firms to develop their responses to the RFP. Two
weeks should be appropriate for all but the most complicated RFPs.
Establish evaluation procedures and a systematic rating process
•
•
•
•
•
Clarify RFP responses
Conduct interviews with proposers using a standard set of questions to promote consistency.
Undertake reference checks.
Document and retain the description & the rankings of each firm.
Ensure that federal regulations and any state and local regulations,
standards or policies related to the disclosure of gifts, political contributions,
or other financial arrangements are met.
FEES
• The MA Fee is a direct cost paid by the issuer. A list of
common direct costs related to a bond issue follow:
•
•
•
•
•
•
•
•
Municipal Advisor
Legal Counsel
Bond Trustee
Escrow Verification Agent
Auditor
Rating Agencies
Printing/Distribution Costs
Pricing Verification Agent
Basis of Compensation.
•
Fees paid to MA can be on an hourly, retainer basis or contingent
basis
•
•
•
GFOA prefers the hourly and retainer based compensation. The fear is that
contingent basis fees could provide potential incentive for the MA to
provide advice that might unnecessarily lead to the issuance of bonds.
GFOA recognizes, however, that this may be difficult given the financial
constraints of many issuers. In the case of contingent compensation
arrangements, issuers should undertake ongoing due diligence to ensure
that the financing plan remains appropriate for the issuer’s needs.
Issuers should include a provision in the RFP prohibiting any firm from
engaging in activities on behalf of the issuer that produce a direct or indirect
financial gain for the MA, other than the agreed-upon compensation,
without the issuer’s informed consent.
A little input from my friends…
OUR Peers
Who have completed the RFP
process (or NOT)
Contract for MA Services
•
•
•
•
Issuers should have a written contract detailing the scope of services and
basis of compensation.
The contract development process should allow for reasonable negotiation
over the final terms of the contract.
A final negotiated contract should make clear those services that will be
included within the basic municipal advisor fee and any services or
reimbursable expenses that might be billed separately.
Additionally, the contract should be clear that the municipal advisor will only
receive compensation for work specifically authorized by the issuer to avoid
incurring expenses for work not authorized by the issuer.
Further Discussion
&
•
Resources
http://www.gfoa.org/selecting-and-managing-municipal-advisors