SEC RULES FOR MUNICIPAL ADVISORS

1. SEC RULES FOR MUNICIPAL ADVISORS NC Local Government Investment Association February 10, 2014

2. Traditional Parties in NC and their Roles • Issuer •  Bond Counsel •  Underwriter • Negotiated Sales • Competitive Sales • Sometimes Underwriter’s Counsel • Sometimes Trustee—publicly offered revenue bonds, COPs, LOBs • Sometimes Financial Advisor • Local Government Commission—peculiar to North Carolina • Maybe some other parties (bond insurers, credit enhancer, feasibility consultant, escrow agent)

3. The Financial Advisor or “FA” • Role in Competitive Sales • Assist Issuer in Long-Term Planning • Second Eye (in addition to LGC) on Market Pricing and Bond Structures • Often an investment banking firm, but sometimes a firm that specialized in just FA work • Until about 20 years ago, almost non-existent in North Carolina • Many Issuers in North Carolina looked to their Underwriter to perform duties that often are performed by the FA

4. The Blurring of the Lines

5. Synthetic Fixed Rate Transactions • 2000-2008 - Dramatic increase of the use of derivatives in general and the synthetic fixed rate transaction in particular • Issuer issues VRDOs or other variable interest rate Bonds (such as auction rate bonds) • Issuer enters into swap to receive variable rate payments. • Quite often, the party suggesting this transaction was also the underwriter, who was also the swap provider and at times the liquidity or credit provider.

6. The Pitch • Picture Book with squiggly lines and straight lines

7. Report Card by Professor Lee: • Basis Risk • Tax Law Risk • VRDO liquidity/credit enhancement risk • Counterparty bankruptcy risk • Termination risk-- risk of not being able to get out of a synthetic VRDO on about a break even basis • Disclosure of how profitable swaps were to providers • Emphasis that party proposing the most profitable part of the transaction is also the party that will provide that part A+ A+ D D F ? ?

8. Oversight • Early LGC policy that NC Issuers must have swap advisor, and had to meet a minimum credit threshold to enter into a swap. • Others, most notably Jefferson County, AL, did not have such requirements.

9. 2008 • Collapse of Lehman Brothers • Failure of the Auction Rate Market • Crisis among the Bond Insurers and Credit Providers • Unwinding swaps very expensive

10. The Regulatory Response • MSRB Rule G-17 • Dodd Frank Rules Requiring Extra Protection on Swaps with Certain Protected Entities • New Rules on Municipal Advisors

11. The MA Rule - How We Got Here • Section 975 of Dodd Frank amended the 1934 Act to add new requirement that “municipal advisors” register with the SEC; SEC charged with rulemaking to implement • Temporary rules adopted late 2010 • Final rules adopted September 2013 - Effective January 13, 2014 • Phased-in compliance – July 2014 – October 2014 • Distinct from MSRB Rules - G-17, G-23, Proposed G-42

12. The Rule Requires “a person (who is not a municipal entity or an employee of a municipal entity) that provides advice to or on behalf of a municipal entityor obligated person with respect to municipal financial products or the issuance of municipal securities, or that undertakes a solicitation of a municipal entity or obligated person” to register with the SEC as a municipal advisor.

13. Who is a Municipal Advisor? Who is explicitly included? • financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors Statutory Exclusions • underwriter, commodity trading advisors, attorneys, engineers Statutory Exceptions • accountants, public officials and employees, banks (mostly), swap dealers, investment advisors (mostly)

14. Exemptions and Exclusions • Underwriters limited from providing advice unless • Issuer has a registered municipal advisor • Issuer requests advice via RFP/RFQ • Banks allowed different treatment across divisions • Direct lending and Trustee work expressly excluded • Investment advice limited on bond proceeds only • LGC – Original rule was much broader - would have included LGC (and City Council/BOCs!) • Final Rule excluded public officials

15. What is “Advice”? Providing advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products 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 Solicitation of a municipal entity or obligated person

16. Information vs. Recommendation • Broad facts and circumstances analysis • Would a reasonable issuer believe the information was a suggestion to take or defer a particular action? • Disclaimer can help but not complete defense • If issuer-specific, more likely a recommendation • Refunding Analysis • If showing market rates with same structure ok • If restructuring, not ok

17. The Unintended Consequences • Rule is very broad • Extending to behaviors that weren’t necessarily bad • There will be more FAs • But not necessarily for the right reasons • Underwriting relationships changing most • Much more limited in what they can do for issuers outside of transactions • Long-standing NC model of UW/FA hybrid prohibited (but likely will continue with disclaimers)

18. Questions? G. Thomas Lee Womble Carlyle Sandridge & Rice, LLP 150 Fayetteville Street Suite 2100 Raleigh, NC 27601 Rebecca B. Joyner Parker Poe Adams & Bernstein LLP 150 Fayetteville Street Suite 1400 Raleigh, NC 27601