Education and Outreach Seminar July 29, 2014 Chicago, IL
About the MSRB A self-regulatory organization created by Congress in 1975 Protects investors, municipal entities including issuers of municipal securities, obligated persons and the public interest Promotes a fair and efficient municipal market Municipal Securities Rulemaking Board 2 2
How the MSRB Fulfills its Mission Regulates municipal securities dealers and municipal advisors Operates market transparency systems including the EMMA website Conducts education, outreach and market leadership Municipal Securities Rulemaking Board 3 3
Today s Agenda Municipal Advisor Regulation Post July 1, 2014 Update on Market Structure Improvements and Enhancing Transparency New Tools on EMMA: Price Discovery and Trade Price Enhancements Municipal Securities Rulemaking Board 4 4
Presenters Dan Heimowitz, MSRB Board Chair Lynnette Kelly, Executive Director Ritta McLaughlin, Chief Education Officer Michael L. Post, Deputy General Counsel Justin Pica, Director of Product Management Market Transparency Guest Panelists Ben Watkins, Government Finance Officers Association Steve Apfelbacher, National Association of Independent Public Finance Advisors Municipal Securities Rulemaking Board 5 5
Opening Remarks Dan Heimowitz Chair, Municipal Securities Rulemaking Board
Municipal Advisor Regulation, Post July 1 Lynnette Kelly, MSRB Executive Director Ben Watkins, GFOA Steve Apfelbacher, NAIPFA
3 Rs of Municipal Advisor Regulation What is the role of a municipal advisor? What are the responsibilities of a municipal advisor? What relationships does a municipal advisor have that could affect provision of their services? Municipal Securities Rulemaking Board 8 8
Origins of Municipal Advisor Regulation Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 charged MSRB with developing regulatory framework for municipal advisors to: Protect state and local governments and other municipal entities that engage the services of a municipal advisor Promote a fair and efficient market Preserve municipal market integrity Municipal Securities Rulemaking Board 9 9
Key Obligations of Municipal Advisors Federal fiduciary duty to state and local government clients Fair dealing with all persons Registration with SEC and MSRB Municipal Securities Rulemaking Board 10 10
Regulatory Framework MSRB is developing a comprehensive regulatory framework that includes: Development of rules governing the professional conduct of municipal advisors Establishment of a professional qualifications program that ensures municipal advisors are qualified in their duties Extensive education and outreach to municipal advisors on duties and obligations Municipal Securities Rulemaking Board 11 11
MSRB Draft Rules for Municipal Advisors Core standards of conduct rule (MSRB Rule G-42) Supervision and compliance obligations (MSRB Rule G-44) Professional qualifications for municipal advisors (MSRB Rule G-3) Pay-to-play rule (forthcoming draft amended MSRB Rule G-37) Gifts and gratuities (forthcoming draft amended MSRB Rule G-20) Municipal Securities Rulemaking Board 12 12
MSRB Education and Outreach Seminar Chicago July 29, 2014 The Securities and Exchange Commission s New Municipal Advisor (MA) Rule Ben Watkins, Director Florida Division of Bond Finance Chair, GFOA Debt Committee 13
MA Rule Critique Regulatory Quagmire No Bright Lines Far Too Complicated / Cumbersome Thank Goodness for FAQs 14
MA Rule GFOA Alert Educates Issuers With Overview of Rule Highlights Key Points Focus on Mitigating Adverse Impact of MA Rule on Communication / Interaction with Dealers Major Emphasis on Implementing Exemptions 15
MA Rule Exemptions Model Language Developed with SIFMA RFP GFOA post on website Best suited for pre-qualified pools Pre-Engagement Letter of Intent No issuer liability or cost Can terminate / change mind IRMA Exemption Will be most used Send letter to dealer or post on website Alternative name MA or not issuer control Rely on FAQs 16
MA Rule Issues With Implementation Contracts with MAs Basis of Compensation Investments IRMA Exemption Two Year Look Back Who should evaluate? Role of MA Issuer Maintains Control 17
MA Rule Considerations Going Forward Dealer Compliance Policies and Procedures Additional Cost to Executing Business MSRB Rules Oversight / Enforcement Changes in Market Practices Need for Sophisticated Issuer Exemption 18
The Municipal Advisor Rule: Post July 1, 2014 Steve Apfelbacher Ehlers President On Behalf of the National Association of Independent Public Finance Advisors 7/28/2014 19
Dodd-Frank Act NAIPFA supports Congressional action to legislate Municipal Advisors Why? History of municipal market participants using their issuer relationship for their self gain at the expense of taxpayers and ratepayers Municipal Advisors have fiduciary duty to issuers which establishes clarity in who issuers can trust Securities Exchange Commission (SEC) since determined Municipal Advisor Registration Requirements 20
Municipal Advisor (MA) Definition Observations 21 Frequent issuers and infrequent issuers equally impacted Rule does not just impact MA s Rule impacts all market participants including issuers New behaviors/practices will need to be established Parts of the rule will have more significant impact in different states and markets Limits advice by other professionals unless exemption utilized Bond Counsel Engineers Accountants Local bankers Vendors recommending financing options
Municipal Advisor (MA) Definition Observations Advice Underwriter is able to provide more limited also Can not provide advice on certain topics Can not provide advice unless retained Can not provide advice unless an exemption used Request For Proposal (RFP to 3 or more underwriters) Independent Registered Municipal Advisor (IRMA) Over time all underwriters will be selected more for capabilities and not just relationship Yet unclear the final impact of various Municipal Securities Rulemaking Board (MSRB) MA Rules 22
MA Firm Requirements How do MA firms comply? What client service is MA advice? Who at the firm is a MA? Security and Exchange Commission (SEC) Registration of MA Firm and MA I s Maintain specific Books and Records Municipal Securities Rulemaking Board (MSRB) Duties of Non-Solicitor MA s (Contracts, Disclosures) Fiduciary Duty (Duty of Care and Duty of Loyalty) Client Suitability Know Your Client 23
MA Firm Requirements Municipal Securities Rulemaking Board (MSRB) Supervisory and Compliance Obligations (Internal Structure) Professional Qualifications (Test and Continuing Education) MSRB Fees (Cost of regulation) Pay to Play (Political Contributions) Advertising Gift Limits 24
How SEC/MSRB Rules Affects Issuers MA s engagements will be more formal Written engagement with scope of service defined/compensation Written/ongoing disclosure of conflicts and affiliations Unless excluded by written engagement, MA s likely be obligated to review options and make suitability recommendation Independent Registered Municipal Advisor(IRMA) Prediction- IRMA will become common practice for those the use a MA but MA needs to be engaged to use IRMA 25
How SEC/MSRB Rule Affects Issuers What exemptions will you use? How will the issuer execute those exemptions? What is the role of the MA if an IRMA exemption is used? If MA is not participating in all advice discussions, how do you keep the MA informed to meet their regulatory obligation? Will issuer have point person who has authority to bind issuer for: MA written agreement and ongoing MA disclosures? Underwriter engagement (Final and preliminary)? IRMA or RFP exemption? 26
How SEC/MSRB Rule Affects Issuers Bond purchaser cannot invest bond proceeds so what does an issuer do to avoid this problem? Is a MA involved earlier in your project because of the limitations the rule puts on advice from other professionals? Should issuers use an underwriter MA for a competitive sale knowing that they will lose a bidder on their competitive sale? 27
Summary All municipal market participants need to be aware of the MA rule and change our behavior/practice There were significant abuses the rule is attempting to correct These changes are in the best interests of most of the 50,000 municipal market debt issuers This is good for taxpayers and ratepayers 28
Municipal Advisor Regulation Post July 1, 2014 Lynnette Kelly, MSRB Executive Director Ben Watkins, GFOA Steve Apfelbacher, NAIPFA
Break
Rulemaking Update on Market Structure Improvements and Enhancing Transparency Michael L. Post, MSRB Deputy General Counsel
Improving Municipal Market Structure and Transparency Developing best-execution standard for municipal securities transactions Considering disclosure of pricing reference information related to matched trades and alternatives 32
Best Execution Benefits of complementing existing fair pricing obligations of municipal securities dealers with a best-execution standard: Buttress pricing protections Bolster obligations Improve execution quality for customers Promote fair competition among dealers resulting in increased market efficiency 33
Draft Rule G-18: Best-Execution Overview Dealers must use reasonable diligence to obtain the most favorable terms available to their customers under prevailing market conditions: Guidance on reasonable diligence Provisions specific to broker s brokers and customer instructions Exception for municipal fund securities and transactions for sophisticated municipal market professionals (SMMPs) Requires written policies and procedures and periodic review of these policies and procedures Generally consistent with FINRA Rule 5310 on Best- Execution, but tailored to the characteristics of the municipal market 34
Best-Execution Obligation Use reasonable diligence to ascertain the best market for the security Market may include broker s brokers, alternative trading systems or platforms or other counterparties, including a dealer itself acting as a principal, among others Buy or sell in that market so that the price to the customer is as favorable as possible under prevailing market conditions 35
Reasonable Diligence Factors used to determine whether a dealer has used reasonable diligence include: Character of the market for the security Size and type of transaction Number of markets checked Information reviewed to determine the current market for the security or similar securities Accessibility of quotations Terms and conditions of the customer s inquiry or order 36
Reasonable Diligence (continued) Factors in draft Rule G-18 generally conform to the factors in FINRA s best execution rule (FINRA Rule 5310) Exception: Information reviewed to determine the current market for the security or similar securities is an additional factor not found in FINRA Rule 5310 Factors in draft Rule G-18 also guide the use of reasonable diligence when there are no available quotations for a security 37
Reasonable Diligence (continued) Failure to obtain the most favorable price does not necessarily mean that a dealer failed to use reasonable diligence A dealer s failure to maintain adequate resources is not an excuse for executing away from the best available market The level of resources required to be maintained will depend on the nature of the dealer s municipal securities business, taking into account its level of sales and trading activity 38
Best-Execution Policies and Procedures Dealers must have written policies and procedures that address how best-execution determinations will be made for securities with limited pricing information or quotations Dealers must document compliance with their policies and procedures Dealers must conduct periodic reviews of their policies and procedures for determining the best available market for execution of retail customer transactions 39
An Analogy 40
Other Elements of Best-Execution Draft Rule Interpositioning Timing Principal and Agency Transactions Executing Brokers Customer Instructions Sophisticated Municipal Market Professionals (SMMPs) Municipal Fund Securities 41
Pricing Reference Information Discussing regulatory approaches to enhance investor access to information about transaction pricing and the market Working closely with FINRA and SEC to develop an approach taking into account increased transparency for investors and the need for fair dealer compensation 42
Rulemaking Update on Market Structure Improvements and Enhancing Transparency Questions
New Tools on EMMA Justin Pica, MSRB Director of Product Management Market Transparency
The EMMA Website emma.msrb.org Launched by the MSRB in 2008 Serves as official, free and public source of trade data and disclosure information on virtually all municipal securities Provides a platform for issuers to communicate with investors 45
Information Available on EMMA Official Statements Trade Prices and Yields Ongoing Financial Disclosures Event Notices Advance Refunding Documents Credit Ratings Variable Rate Securities Information Interest rate resets Credit enhancement documents Market Statistics New issuance Trade statistics Disclosure statistics 529 Plan Disclosure Political contribution disclosure 46
Navigating EMMA Browse for information by: Issuer Security CUSIP View realtime market data 47
Issuer Homepages Pilot! EMMA Issuer Homepages display issuer information in a single location Geographic search More intuitive access to information on issuers for EMMA users emma.msrb.org/ IssuerHomePage Municipal Securities Rulemaking Board 48 48
Issuer Homepage Features Listing of bond issues Trade activity Pre-sale documents Official statements Financial and event disclosures Refunding escrows 49
Manage Issuer Homepages Customize and consolidate issuer information in a single location on EMMA Customize plain-english name of issuer and bond issues Edit issue list, contact information and website links Minimal annual maintenance needed receive email alert when new issue is added to an issuer homepage 50
Price Discovery Tool New EMMA feature aims to enhance municipal market price transparency Users can easily compare trade prices of securities with similar characteristics 51
Enhanced Trade Data Display See daily high and low price for individual securities Visualize historical trading trends for every security 52
Future Enhancements to Price Transparency on EMMA Seeking to expand pricing-related data available on EMMA by developing a proposed framework for collecting additional post-trade information for public display Exploring an approach for collecting and disseminating relevant pre-trade data Municipal Securities Rulemaking Board 53 53
Demonstration of New Tools on EMMA MuniPriceDiscovery.org
Closing Ritta McLaughlin, MSRB Chief Education Officer
MSRB Education Center New single location for free educational resources on the municipal market Available on msrb.org Access videos, fact sheets and resources about: Understanding the municipal market Using EMMA to make informed decisions Issuing municipal securities Municipal Securities Rulemaking Board 56 56
Contact the MSRB MSRB Online msrb.org emma.msrb.org MSRB Support 703-797-6668 Hours of Operation: 7:30 a.m. - 6:30 p.m. ET MSRBsupport@msrb.org MSRB Email Updates Subscribe at msrb.org Follow the MSRB on Twitter @MSRB_News 57