Independent Financial Advisors MUNICIPAL BONDS REGULATORY & MARKET UPDATE

Transcription

1 Independent Financial Advisors MUNICIPAL BONDS REGULATORY & MARKET UPDATE

2 Municipal Armageddon

3 Municipal Armageddon Hundreds of Billions of Dollars will default Meredith Whitney

4 Failed Prediction? A Record $20 Billion Defaults According to Richard Lehman, publisher of the Distressed Debt Securities Newsletter.

5 Failed Prediction? Decline in Defaults Excluding: American Airlines Tobacco Debt Land backed, health care and conduit

6 Rating Downgrades The Super Downgrade Club Super Downgrades = at least 3 rating notches 196 Super downgrades from June 2010 to August 2011 Generally due to economy or lack of disclosure

7 Yields Plummet Defaults didn t materialize Treasury yields declined Issuance declined

8 Yields Plummet Issuance Declined 10 Year Low Negotiated sales down 36% Competitive sales down 18.5% All issues down 32%

9 Bond Elections Pass Voters approved 72% of bond issues

10 Sept. 2 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Yields Plummet THE 20-BOND INDEX 5.50% 5.30% 5.10% 4.90% 4.70% 4.50% 4.30% 4.10% 3.90% 3.70% 3.50% Aug-11 Jul-11 Jun-11 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11

11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 Yields Today 5.50% 5.30% 5.10% 4.90% 4.70% 4.50% 4.30% 4.10% 3.90% 3.70% 3.50% THE 20-BOND INDEX LAST 24 MONTHS - BY WEEK Nov-11 Oct-11 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sept. 2 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

12 5/1/11 7/1/11 9/1/11 11/1/11 1/1/12 Credit Spreads Narrowed MUNICIPAL MARKET DATA INDEX 20th YEAR MATURITY BY RATING GRADE 8.25% 7.75% 7.25% 6.75% 6.25% 5.75% 5.25% 4.75% 4.25% 3.75% 3.25%. 2.75% 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09 11/1/09 1/1/10 3/1/10 5/1/10 7/1/10 9/1/10 11/1/10 1/1/11 3/1/11 Date AA A BAA Rates

13 Regulatory Update Dodd Frank Act Municipal Provisions GASB Funding Regulates Municipal Advisors New SEC Office of Municipal Securities GAO Study on Municipal Disclosure SEC Report on Municipal Securities

14 GASB GASB Funding GOA Completed a Report on Funding Lack of adequate GASB funding $5.3 million loss in 2009 SEC to establish GASB funding FINRA to impose fees on securities dealers

15 Municipal Advisors Dodd-Frank Act Regulates Municipal Advisors A person that provides 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. Municipal Advisory Services

16 Municipal Advisors Who Is a Municipal Advisor? Individuals that provide Municipal Advisory Services Firms of Independent Financial Advisors Broker-dealers when serving as Financial Advisors

17 Municipal Advisors Who Is NOT a Municipal Advisor? 1. A broker, dealer, or municipal securities dealer serving as an underwriter. 2. Investment advisers registered under the Investment Advisers Act of Commodity trading advisors registered under the Commodity Exchange Act. 4. Attorneys offering legal advice or providing services that are of a traditional legal nature. 5. Engineers providing engineering advice. 6. Accountants that prepare audits or financial statements.

18 Municipal Advisors Who May Be a Municipal Advisor? APPOINTED OFFICIALS

19 SEC Office of Municipal Securities Office to Administer Rules For Munis Now Part of Division of Trading and Markets No Funding for New Division

20 GAO Study on Disclosure More Disclosure

21 SEC Staff Report The State of the Municipal Securities Markets Additional disclosure Request for Legislation Direct Regulation of Munis

22 Regulatory Update MSRB s New Rules 5 New Rules for Municipal Advisors Fees Gifts and Gratuities Political Contributions Fiduciary Duty Interpretation Conduct Withdrawn MSRB Rule G-23

23 MSRB Rule G-23G Financial Advisor Can t Also Serve as Underwriter No switching roles No exemption for competitive bidding Issuers consent does not allow switching

24 MSRB Rule G-23G Underwriter s Must Disclose The primary role of an underwriter is to purchase, or arrange for the placement of, securities in an arm s-length commercial transaction between the issuer and the underwriter and that the underwriter has financial and other interests that differ from those of the issuer.

25 Looking Ahead Disclosures Imposed on Issuers Disclosures Imposed on Underwriters Interest Rates Loss of Tax Exemption

26 MSRB Rule G-17 G Amendment If Approved - Underwriter s Must Disclose: Deal fairly with issuers and investors Role is to purchase and distribute securities Not required to act in the best interest of the issuer Balance fair pricing between issuer and investor Underwriter may not recommend that the issuer not retain a Municipal Advisor

27 MSRB Rule G-17 G Amendment If Approved - Underwriter s Must Disclose: Conflicts of Interest Compensation contingent on closing Material aspects of the transaction risk to issuer

28 Where Will Rates Go Next On January 25 the Federal Open Market Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

29 Muni Bond Yields May Remain Low 20-BOND BUYER INDEX COMPARED TO 20 YEAR TREASURY BONDS Rate 7.00% 6.75% Municipal 6.50% Treasury 6.25% 6.00% 5.75% 5.50% 5.25% 5.00% 4.75% 4.50% 4.25% 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% Date

30 Loss of Tax-Exemption Bipartisan Policy Center s Report Bowles-Simpson Report Obama s Job Bills Obama s Budget

31 Further Information Contact: Joy A. Howard Administration Drive Suite 7 St. Louis, Missouri (314) Visit: