GFOA ISSUE BRIEF: SEC MUNICIPAL ADVISOR RULE (JAN 2014*) UPDATES TO THE ORIGINAL ISSUE BRIEF ARE NOTED IN ITALIC

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1 GFOA ISSUE BRIEF: SEC MUNICIPAL ADVISOR RULE (JAN 2014*) UPDATES TO THE ORIGINAL ISSUE BRIEF ARE NOTED IN ITALIC In September, the Securities and Exchange Cmmissin (SEC) gave final apprval t the definitin f municipal advisr (MA), and, this mnth, prduced supplementary Frequently Asked Questins abut the rule. The SEC municipal advisr rule specifies which activities will be cvered by the Ddd-Frank Act impsed fiduciary duty f a municipal advisr t its gvernment client, may result in the need fr new written representatins by issuers, and may limit the manner in which the underwriters and ther prfessinals interact with issuers. Additinally, frthcming rulemaking by the Municipal Securities Rulemaking Bard (MSRB) may cause further changes t the manner in which state and lcal gvernment are able t interact with the utside finance prfessinals. The SEC release may be fund at and the SEC FAQ may be fund at Mst imprtantly fr GFOA members, unlike the prpsed rule, all state and lcal gvernment emplyees, bard members, cmmittee members and thers are clearly exempted frm the rule when acting in their fficial capacity. The exemptin als applies t gvernment emplyees and fficials wh may have t participate n ther gvernment bards and cmmittees as part f their jb. The rule als specifically states that, if a gvernment fficial is als a municipal advisr utside f his r her gvernment respnsibilities (e.g., a part time city cuncil member may have a career as a financial advisr), thse prfessinals are still bund by the municipal advisr rules fr their wrk unrelated t their fficial gvernment capacity. Tp Items Issuers Need t Knw Abut the Rule The effective date has been extended frm January 13, 2014 t July 1, Municipal advisrs have an explicit fiduciary duty t their gvernment clients. Under the Rule, underwriters and ther prfessinals that d nt have a fiduciary duty t issuers will nt be able t prvide advice t gvernments unless certain exemptins are met. Fr instance, an underwriter may nt recmmend a specific type f financing t the issuer unless the issuer has a MA r has a RFP ut fr underwriting services related t a specific transactin. Underwriters will be able t cmmunicate with issuers abut general market issues, facts and ideas, hwever, unless an exemptin is met, they can nt advise a gvernment t take a specific actin. When an issuer has a MA n a transactin and wants t receive certain types f advice r recmmendatins frm the underwriter r ther prfessinals, the issuer will need t represent t the underwriter r ther prfessinals in writing that they have a MA. The SEC has stated that an issuer may pst this representatin n their web site as lng as the psting states that the representatin is intended t establish the independent MA exemptin. It is imprtant t nte that the GFOA s Best Practices strngly recmmend that gvernments hire a municipal advisr fr their bnd transactins (BPs Selecting a Financial Advisr, Selecting and Managing the Methd f Sale f State and Lcal Gvernment Bnds). Respnses t RFPs r RFQs (including mini RFPs) are nt cnsidered t be municipal advice. An RFP must be fr a specific bjective (e.g., ideas n hw t structure a particular issuance f municipal securities t finance an identified capital prject r prgram), althugh it des nt need t be a frmal prcurement. The SEC has recently stated that gvernments must send RFPs ut t at least three firms and/r the RFP may be psted n the gvernment s website, and the RFP must nt be ut fr respnse lnger than six mnths. Please nte that GFOA recmmends that all gvernments utilize an RFP prcess t engage prfessinals invlved in their bnd transactin (BPs Selecting a Financial Advisr, Selecting Underwriters). Advice n the issuance f municipal securities includes advice during the entire lifespan f the transactin frm the earliest pre-planning stages thrugh maturity r earlier redemptin. MAs will be mandated t take prfessinal exams, and adhere t frthcming MSRB rulemaking. Issuers that want advice n hw t invest mnies that are nt bnd prceeds r in escrws t pay fr bnds, may be requested by their brker t represent in writing that thse mnies are nt bnd prceeds r in escrws t pay fr bnds. Gvernment Finance Officers Assciatin-Federal Liaisn Center

2 Belw is a 2-page summary f the rule, as well as mre detailed discussin f the varius prvisins. Please nte that thrughut this dcument the term municipal entities refers t state and lcal gvernments and ther plitical subdivisins within a state, as well as ther types f entities as summarized n page 4. Wh is a municipal advisr? HIGHLIGHTS OF RULE A municipal advisr is a persn wh prvides advice t a state r lcal gvernment n municipal financial prducts r the issuance f municipal securities. N cmpensatin is required. Certain firms that are cmpensated by unrelated brker-dealers, financial advisrs, r investment advisrs t slicit business frm municipal entities r bligated persns including state and lcal pensin plans, lcal gvernment investment pls, ther participant-directed investment prgrams r plans, and state and lcal gvernments are als municipal advisrs. Underwriters, attrneys, engineers, accuntants, investment advisrs, cmmdity trading advisrs and swap dealers are nt cnsidered municipal advisrs when meeting the exemptin standards explained belw. This includes when the issuer has made a written representatin that it has hired an independent financial advisr fr the transactin. What is advice? A recmmendatin n financial prducts entered int by state and lcal gvernments ( municipal financial prducts ) r the issuance f municipal securities is advice if the infrmatin cmmunicated t the municipal entity is reasnably viewed as a call t actin t be taken by the issuer. That wuld be the case if an underwriter r ther prfessinal recmmends a curse f actin that is particularized t the gvernment s needs. Advice n the issuance f municipal securities includes advice thrughut the life f an issue f municipal securities, frm the pre-issuance planning stage fr a debt transactin invlving the issuance f municipal securities until the bnds mature r are redeemed. Advice n municipal financial prducts includes advice n swaps, GICs, and investment strategies (i.e., the investment f bnd prceeds r municipal escrws established t pay fr bnds). Investment strategies with respect t the investment f ther state and lcal funds are exempted frm the rule. What is the duty f a municipal advisr? Municipal advisrs have a fiduciary duty t their state and lcal gvernment clients. They have a mre limited duty f Fair dealing t their bligated persn clients (e.g. cnduit brrwers) if the bligated persn is nt a state r lcal gvernment. Fair dealing in this cntext means that a prpsal must be fairly presented and executed. The material terms and risks f the prpsal must be disclsed. Wh is exempt frm the definitin f municipal advisr? State and lcal gvernment emplyee and fficial exemptin. All state and lcal emplyees, gverning bdy members, and ther fficials are exempt frm municipal advisr regulatin t the extent that they act within the scpe f their emplyment r fficial capacity. When a gvernment has an independent municipal advisr exemptin. State and lcal gvernments that are represented by independent municipal advisrs may receive advice frm underwriters and thers n the issuance f municipal securities r municipal financial prducts as lng as an independent municipal advisr is prviding advice t the issuer n the same aspects f the municipal financial prduct r issuance f municipal securities AND the municipal entity represents in writing it is relying n their wn municipal advisrs. Nte: This exemptin is nt limited t underwriters. The rule des nt specify wh has t prvide the representatin n behalf f the municipal entity. 2 Gvernment Finance Officers Assciatin-Federal Liaisn Center

3 RFP exemptin. Firms respnding t RFPs, include mini RFPs, may respnd t the RFP with recmmendatins and advice withut becming municipal advisrs. The SEC stated in its 1/10/14 FAQs that an RFP must be fr a specific bjective (e.g., ideas n hw t structure a particular issuance f municipal securities t finance an identified capital prject r prgram), althugh it des nt need t be a frmal prcurement, may nt be ut fr respnses lnger than six mnths, and must be sent t at least three firms and/r psted n the gvernment s website. Underwriter exemptin. Underwriters may prvide advice n the structure, timing, terms, and similar matters cncerning a transactin under the underwriter exemptin nly during the perid f time beginning when they are engaged fr a particular transactin and ending at the end f the underwriting perid (the later f clsing r the date the underwriter n lnger has an unsld balance) (see page 6). The SEC s 1/10/13 FAQs further detail by example the types f infrmatin that an underwriter can and can nt prvide. The SEC has als stated in thse FAQs that an underwriter and issuer may sign an engagement letter r letter f intent early in the prcess, in rder fr the underwriter exemptin t apply. That letter may subject t cnditins, such as frmal apprval f the selectin f the underwriter by the gverning bdy r finalizing the structure f the issue f municipal securities. It may als state the engagement is nnbinding and that it can be terminated by either party. It may als limit the liability f the parties t the engagement letter. Nte: Underwriters may als prvide further advice when the gvernment has hired an independent MA and meets the requirements fr that exemptin r when within the RFP exemptin applies. Underwriters may als prvide many ther types f infrmatin t municipal entities (including general market infrmatin and infrmatin abut their qualificatins) that des nt rise t the level f advice withut acting as a municipal advisr. Others. As discussed further belw, the rule als prvides specific exemptins fr attrneys, engineers, accuntants, registered investment advisrs, cmmdity trading advisrs, registered swap dealers, and mst banking activities. When des the rule take effect? The rule is effective July 1, Permanent registratin f municipal advisrs by the SEC will start in July In the interim, the temprary registratin rule expiratin date has been extended t December 31, It is imprtant t nte that further MSRB rulemaking n issues such as fiduciary duty, plitical cntributins, fair dealing, gifts and gratuities, supervisin, and prfessinal qualificatins will need t be cmpleted befre specific rules are in place fr these prfessinals. Hwever, a fiduciary duty standard is already in place, per the Ddd-Frank Act, althugh it has yet t be specifically defined in final rulemaking by the MSRB. Municipal advisrs are already required t register with the SEC and the MSRB. A state r lcal gvernment can determine whether a firm is registered as a municipal advisr by the MSRB by ging t A list f firms registered with SEC as municipal advisrs may be fund by ging t The GFOA wishes t acknwledge the assistance that Peg Henry f Jefferies LLC prvided in the preparatin f this brief. 3 Gvernment Finance Officers Assciatin-Federal Liaisn Center

4 DETAILED SUMMARY OF RULE Definitin f Municipal Advisr A municipal advisr is a firm and its assciated persns that prvides advice, with r withut cmpensatin, t municipal entities r bligated persns n the issuance f municipal securities r municipal financial prducts. The term municipal advisr als cvers thse persns wh, are cmpensated t slicit business n behalf f an unrelated brker-dealer, municipal advisr r investment advisr t be hired fr the transactin r t prvide investment advice. Nte: Advice n investments f bnd prceeds and municipal escrws is cnsidered advice n municipal financial prducts, nt advice n the issuance f municipal securities. State and lcal gvernments shuld cnsider that when cnsidering the exemptins described belw. Definitin f Municipal Entity Municipal entity means any State, plitical subdivisin f a State, r municipal crprate instrumentality f a State, including: any agency, authrity, r instrumentality f the State, plitical subdivisin, r municipal crprate instrumentality; any ther issuer f municipal securities; and any plan, prgram, r pl f assets spnsred r established by the State, plitical subdivisin, r municipal crprate instrumentality r any agency, authrity, r instrumentality theref, including: public pensin funds, lcal gvernment investment pls ther state and lcal gvernmental entities r funds participant-directed investment prgrams r plans such as 529, 403(b), and 457 plans. Charter schls are cnsidered municipal entities unless all f the funds they are pledging fir a bnd transactin cme frm surces ther than gvernment entities. Definitin f Advice Advice includes a recmmendatin that is particularized t the specific needs, bjectives, r circumstances f a municipal entity r bligated persn with respect t municipal financial prducts r the issuance f municipal securities, including with respect t the structure, timing, terms, and ther similar matters cncerning such financial prducts r issues, based n all the facts and circumstances. This culd include materials that an underwriter presents cntaining subjective infrmatin abut their views regarding the interest rates it can achieve fr an underwriting f the issuer s securities. Additinally, an underwriter may nt prvide guidance t an issuer withut an exemptin when determining whether an event is material fr purpses f cntinuing disclsure cmpliance. The underwriter exemptin will nt cver such advice. Additinal infrmatin n what is and is nt advice may be fund in the SEC s 1/10/14 FAQs. Please nte that it is the respnsibility f utside prfessinals, e.g. underwriters, t adhere t these rules, nt the issuer. Advice des NOT include: Infrmatin f a factual nature withut subjective assumptins, pinins, r views. Infrmatin that is nt particularized t a specific municipal entity r type f municipal entity, with a call t actin. Infrmatin that is widely disseminated fr use by the public, clients, r market participants ther than municipal entities r bligated persns. General infrmatin in the nature f educatinal materials. 4 Gvernment Finance Officers Assciatin-Federal Liaisn Center

5 Advice n the issuance f municipal securities includes advice thrughut the life f an issue f municipal securities, frm the pre-issuance planning stage fr a debt transactin invlving the issue f municipal securities until thse securities are redeemed r mature. Advice n municipal financial prducts is defined n page 9 f this summary. Fiduciary Duty A municipal advisr has a fiduciary duty t its municipal entity clients. Fiduciary duty is generally understd t encmpass a duty f lyalty and a duty f care. MSRB has prpsed rulemaking related t fiduciary duty, which may be fund at Under the duty f lyalty, a fiduciary is required t act in its client s best interests withut regard t its wn financial r ther interests. The fiduciary is als required t disclse cnflicts f interest that might impair its ability t fulfill its duty f lyalty and nt t undertake engagements if it cannt manage thse cnflicts. Certain cnflicts may be determined t be unmanageable and will nt be allwed. Under the duty f care, a fiduciary must be qualified t undertake its engagement and cnsider alternatives t thse presented t the client that might better serve its client s interests. Exemptins t Definitin f Municipal Advisr The SEC muni advisr rule prvides certain exemptins t the definitin f municipal advisr. They are based n activities rather than status. State and lcal gvernment emplyee and fficial exemptin. The rule excepts frm the definitin f municipal advisr [a]ny persn serving as a member f a gverning bdy, an advisry bard, r a cmmittee f, r acting in a similar fficial capacity with respect t, r as an fficial f, a municipal entity t the extent that such persn is acting within the scpe f such persn s fficial capacity and any emplyee f a municipal entity t the extent that such persn is acting within the scpe f such persn s emplyment. A similar exemptin applies t emplyees and fficials f bligated persns (e.g., cnduit brrwers). Exemptins fr certain prfessinals. Attrneys. The rule exempts attrneys prviding legal advice r prviding services that are f a traditinal legal nature with respect t the issuance f municipal securities r municipal financial prducts t clients f such attrneys that are municipal entities, bligated persns, r ther participants in the transactin. The exemptin des nt apply t the extent an attrney represents himself r herself as a financial advisr r financial expert regarding the issuance f municipal securities r municipal financial prducts. Engineers. The rule exempts engineers t the extent that they are prviding engineering advice. Exempted activities include feasibility studies, cash flw analyses, and similar activities t the extent they d nt include advice beynd the engineering aspects f a prject. The exemptin des nt cver activities in which an engineer prvides advice t a municipal entity r bligated persn regarding municipal financial prducts r the issuance f municipal securities. Accuntants. The rule exempts an accuntant t the extent that the accuntant is prviding audit r ther attest services, preparing financial statements, r issuing letters fr underwriters fr, r n behalf f, a municipal entity r bligated persn. 5 Gvernment Finance Officers Assciatin-Federal Liaisn Center

6 Exemptins fr certain prfessinals, cntinued Registered investment advisers. The rule exempts federally-registered investment advisers and their assciated persns t the extent they are prviding investment advice. Investment advice des nt include advice cncerning whether and hw t issue municipal securities, advice cncerning the structure, timing, and terms f an issuance f municipal securities and ther similar matters, advice cncerning municipal derivatives, r a slicitatin f a municipal entity r bligated persn, even if such activities are under an advisry agreement. State-registered investment advisers are nt cvered by this exemptin. Remarketing agents. Standard remarketing agent services are nt advice. Hwever, the agent can nt prvide a recmmendatin, pinin, r view n a primary ffering. A primary ffering is nt limited t the riginal issuance f VRDOs. It can als include interest rate mde cnversins and credit r liquidity substitutins. Cmmdity Trading Advisrs. The rule exempts CFTC-registered swap advisrs t the extent they are prviding swap advice. Swap Dealers. The rule exempts CFTC-registered swap dealers that are nt acting as an advisr t a municipal entity r bligated persn under the prvisins f the Cmmdity Exchange Act. Bank Exemptin. Banks are exempted frm the definitin f municipal advisr t the extent they prvide advice n: investments that are held in a depsit accunt, savings accunt, certificate f depsit, r ther depsit instrument issued by a bank; any extensin f credit by a bank t a municipal entity r bligated persn, including the issuance f a letter f credit, the making f a direct lan, r the purchase f a municipal security by the bank fr its wn accunt; funds held in certain sweep accunts; r any investment made by a bank acting in the capacity f an indenture trustee r similar capacity. The bank exemptin des nt apply t the extent that banks are prviding advice t municipal entities r bligated persns n the issuance f municipal securities r municipal financial prducts, including swaps Underwriter Exemptin. The underwriter exemptin applies when a dealer has been engaged t underwrite a particular issue f municipal securities and cntinues until the end f the underwriting perid fr that issue. "Private placements" f municipal securities are treated like underwritings fr purpses f this rule. The underwriter exemptin allws the underwriter t prvide advice in these specific areas in a nn-fiduciary capacity: Advice regarding the structure, timing, terms, and ther similar matters cncerning a particular issue f municipal securities (except as therwise prvided belw). Preparatin f rating strategies and presentatins related t the issue being underwritten. Preparatins fr and assistance with investr rad shws and investr discussins related t the issue being underwritten. Advice regarding retail rder perids and institutinal marketing if the issuer has decided t engage in a negtiated sale. Assistance in the preparatin f the POS and OS. Assistance with the clsing f the issue, including negtiatin and discussin with respect t all dcuments, certificates, and pinins needed fr the clsing. Crdinatin with respect t btaining CUSIP numbers and the registratin with DTC. Preparatin f pst-sale reprts fr the issue. Structuring f refunding escrw cash flw requirements, but nt the recmmendatin f and brkerage f particular municipal escrw investments. 6 Gvernment Finance Officers Assciatin-Federal Liaisn Center

7 Underwriter Exemptin, cntinued The underwriter exemptin des NOT allw the underwriter t prvide advice in the fllwing areas: 1 Advice n what methd f sale (cmpetitive sale r negtiated sale) an issuer shuld use fr an issue f municipal securities. Pre-selectin activities (e.g., RFP respnses r ther business slicitatin activities). Advice t an issuer as part f an underwriting pl when the firm has nt been selected t be the underwriter n a specific issue. Advice t an issuer when the firm has been selected as underwriter fr a perid f time but nt fr a specific issue. Advice n municipal financial prducts, as defined later in this summary. Advice n whether a gverning bdy f an issuer shuld apprve r authrize an issue f municipal securities. Advice n a bnd electin campaign. Advice that is nt specific t a particular issue f municipal securities fr which a firm is serving as underwriter and that invlves analysis r strategic services with respect t verall financing ptins, debt capacity cnstraints, debt prtfli impacts, analysis f effects f debt r expenditures under varius ecnmic assumptins, r ther impacts f funding r financing capital prjects r wrking capital. Assisting issuers with cmpetitive sales, including bid verificatin, true interest cst (TIC) calculatins and recnciliatins, verificatins f bidding platfrm calculatins, and preparatin f ntices f sale. Preparatin f financial feasibility analyses with respect t new prjects. Budget planning and analyses and budget implementatin issues with respect t debt issuance and cllateral budgetary impacts. Advice n an verall rating strategy that is nt related t a particular issue f municipal securities fr which a firm is serving as an underwriter, including advice and actins taken n behalf f an issuer between financing transactins. Advice n verall financial cntrls that are nt related t a particular issue f municipal securities fr which a firm is serving as an underwriter. Advice regarding the terms f RFPs r RFQs fr underwriters r ther prfessinals fr a prject financing and advice regarding review f respnses t such requests, including matters regarding cmpensatin f such underwriters r ther prfessinals. Advice with respect t municipal derivatives Advice with respect t the investment f prceeds Helping an issuer determine if an event is material fr cntinuing disclsure cmpliance purpses. Prviding subjective infrmatin abut its views related t interest rates that it can achieve in an underwriting f the issuer s securities. Gvernments shuld enter int a letter f intent/letter f engagement with their underwriter at the beginning f a specific transactin in rder fr the underwriter exemptin t apply. 1 T avid being cnsidered a municipal advisr, a dealer that is prviding advice must be cvered by anther exemptin (i.e., the independent municipal advisr exemptin r the RFP exemptin). 7 Gvernment Finance Officers Assciatin-Federal Liaisn Center

8 Other Exemptins (these exemptins are nt limited t underwriters) Certain activities that invlve advice but d nt qualify fr the underwriter exemptin may qualify fr either the RFP exemptin r when the gvernment has hired an independent financial advisr. The RFP exemptin applies t respnses t issuer RFPs and RFQs. This exemptin als cvers respnses t mini-rfps sent by issuers t firms it has already selected as part f its underwriting pl. Gvernments must send ut RFPs t at least three firms and/r pst the RFP n their websites. The RFP must relate t a specific bjective (e.g., ideas n hw t structure a particular issuance f municipal securities t finance an identified capital prject r prgram), althugh it des nt need t be a frmal prcurement, and the RFP may nt be utstanding fr mre than six mnths. Additinally, if a gvernment has a pl f underwriters, in rder t receive additinal infrmatin abut a transactin that culd be cnsidered advice, the gvernment may issue a mini RFP t thse firms, which can nt be utstanding fr mre than three mnths. RFP respnses are subject t fair dealing, suitability, r ther standards even if the RFP exemptin applies. Issuer has hired an independent municipal advisr exemptin. When a gvernment has hired an independent municipal advisr, and has made that representatin knwn in writing t the prpsed underwriter r persn seeking t rely n the exemptin and/r has psted this declaratin n their web sites, the underwriter r persn may make prpsals that will be evaluated by the MA. Nte: The MA must have been hired t evaluate prpsals such as the ne the prpsed underwriter wants t present. An MA is independent f the prpsed underwriter if it has nt been an assciated persn f the prpsed underwriter within the last 2 years. Nte there is a difference between this test fr independence and that f the CFTC fr swap advisrs, which impses a 1-year test amng ther factrs. Fr an underwriter r ther types f prfessinals t rely n the issuer has hired an independent MA exemptin, the underwriter r ther firm must: ü Obtain a written representatin frm the issuer that it is represented by, and will rely n the advice f, an independent registered municipal advisr. The written representatin frm the issuer may be a declaratin psted n the issuer s web site as lng as the psting states that the representatin is intended t establish the independent MA exemptin. ü Prvide written disclsure t the issuer and its MA that, by btaining such representatin frm the issuer, the firm is nt a municipal advisr and is nt subject t the fiduciary duty established in Sectin 15B(c)(1) f the Exchange Act with respect t the municipal financial prduct r issuance f municipal securities. ü Such disclsure must be made at a time and in a manner reasnably designed t allw the issuer t assess the material incentives and cnflicts f interest that such persn may have in cnnectin with the municipal advisry activities. The level and timing f disclsure required may vary accrding t the issuer s knwledge r experience. Pssible Limits n the Rle f Underwriter when N Specific Exemptin Applies: If there is n specific exemptin that the underwriter r ther prfessinal may use (issuer has a MA, there is an RFP), then the underwriter r prfessinal may nt prvide advice n the issuance f municipal securities r municipal financial prducts t the issuer. It is imprtant t nte that GFOA s Best Practice recmmends that issuers hire a financial advisr. Relevant t this rule, ding s will allw the issuer t receive a greater amunt f advice frm underwriters and ther prfessinals. 8 Gvernment Finance Officers Assciatin-Federal Liaisn Center

9 Obligated Persns Similar rules apply t advice prvided t bligated persns, althugh a municipal advisr des nt have a fiduciary duty t an bligated persn that is nt a municipal entity. An bligated persn is brader than the cncept f cnduit brrwer. It is defined under the SEC muni advisr rule the same way it is defined under SEC Rule 15c2-12. Rule 15c2-12 defines the term bligated persn t mean any persn, including an issuer f municipal securities, wh is either generally r thrugh an enterprise, fund, r accunt f such persn cmmitted by cntract r ther arrangement t supprt payment f all, r part f the bligatins n the municipal securities t be sld in the Offering (ther than prviders f municipal bnd insurance, letters f credit, r ther liquidity facilities). The federal gvernment is als nt cnsidered t be an bligated persn. If a client is nly cnsidering a cnduit financing as ppsed t sme ther frm f financing, the client is nt an bligated persn. A firm will nt be a municipal advisr t an bligated persn until the bligated persn has begun the prcess f applying t, r negtiating with, a municipal entity t issue cnduit bnds n behalf f the bligated persn. An entity is cnsidered an bligated persn nly when it is acting in its capacity as such. Fr example, a firm prviding advice t a nn-prfit hspital n the sale f a building that was nt financed with bnd prceeds and des nt therwise secure a cnduit brrwing f the hspital wuld nt be a MA. Municipal Financial Prducts Municipal financial prducts are municipal derivatives, GICs, and investment strategies. Investment strategies are advice n the investment f the prceeds f municipal securities and the recmmendatin and brkerage f municipal escrws. The SEC MA rule adpts the same definitin f prceeds as that f the IRS arbitrage rebate rules (i.e.): mnies derived by a municipal entity frm the sale f municipal securities, investment incme derived frm the investment r reinvestment f such mnies, any mnies f a municipal entity r bligated persn held in funds under legal dcuments fr the municipal securities that are reasnably expected t be used as security r a surce f payment fr the payment f the debt service n the municipal securities, including reserves, sinking funds, and pledged funds created fr such purpse, and the investment incme derived frm the investment r reinvestment f mnies in such funds. The mere fact that bnd prceeds are cmingled with ther funds des nt mean that they are spent fr tax purpses. Hwever, if certain investment prceeds are depsited in a cmmingled fund with substantial tax r ther revenues frm gvernmental peratins f a municipal issuer and reasnably expected t be spent within six mnths f the cmmingling, they will be treated as spent at the time f cmmingling. On whether amunt are prceeds, a firm may reasnably rely n the written representatins f a knwledgeable fficial f the municipal entity r bligated persn whse funds are t be invested regarding the nature f such funds. Municipal derivatives are swaps r security-based swaps with a cunterparty that is a municipal entity r bligated persn. Public Pensins Many f the placement agents and third-party marketers that slicit business frm public pensin funds n behalf f investment advisrs are cnsidered municipal advisrs. T be municipal advisrs they must receive cmpensatin fr sliciting business n behalf f an unrelated third party. The types f business cvered are investment advisry business, municipal securities business, and municipal financial prducts business. 9 Gvernment Finance Officers Assciatin-Federal Liaisn Center

10 Placement agents and third-party marketers d nt we a fiduciary duty t the pensin funds they slicit, because the pensin funds are nt their clients. Hwever, they d have a duty f fair dealing t the pensin funds and will be cvered by ther MSRB rules. Lcal Gvernment Investment Pls Many smaller lcal gvernments invest their funds in lcal gvernment investment pls. The same rules that apply t advisrs t pensin funds als apply t lcal gvernment investment pls. Therefre, thse firms that are paid t slicited investment advisry business frm LGIPs n behalf f unrelated third parties will be cnsidered municipal advisrs. 10 Gvernment Finance Officers Assciatin-Federal Liaisn Center