64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 What Does the Municipal Advisor Rule Mean to You? Tammie Beckwith SchallmoAnne NobleNate Fretz Managing Director CSBO PMA Securities Stifel Ball Chatham CSD #5

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Table of Contents Background Roles of Parties Duties of Parties Municipal Advisor (MA) Rule Implementation –Who is an MA? –What is Advice? –When is Advice OK? The MA Rule in Effect 1

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Financial Crisis of 2008 Part of the fallout of the financial crisis of 2008 was Congress’ enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act (DFA). DFA caused a review of practices in the municipal marketplace and required the SEC to define municipal advice. 2

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 The Dodd Frank Act & the MA Rule The DFA resulted in the creation of the Municipal Advisor Rule (MA Rule). Among other things, the MA Rule required that non-broker dealer financial advisors, included under the new term “municipal advisors,” to be registered for the first time, and be subject to new regulations, qualifications and testing. With those regulations comes the requirement that the MA has a fiduciary duty to the issuer, which means it must put the issuer’s interest before its own. 3

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 The Dodd Frank Act For underwriters, the DFA reaffirmed its fair dealing requirements, but now requires various disclosures of its role to districts. The DFA also imposed limitations on the type of information that can be communicated by underwriters to districts prior to engagement and recognition by the issuer of acceptance of the fair dealings relationship with the district. 4

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Roles of Parties DFA works to define the role of the independent Municipal Advisor non-broker dealer financial advisor, which had never previously been defined or supervised by the financial industry regulators. Defining the role of Municipal Advisor is difficult because certain services of an MA and underwriter can and do often overlap. 5

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Roles of Parties 1 A bond issuer must have (in most cases): –Bond Counsel who opines on the legality of the bonds; –An underwriter who, at a minimum, buys the bonds and resells them to investors; A bond issuer can choose to have: –A separate, Independent Registered Municipal Advisor who advises on the bond structure, timing and process; –Disclosure Counsel who assists with ensuring the appropriate information is disclosed to investors. 1 Does not include rating agency, bond registrar, underwriter’s or local counsel, escrow agent, verification agent, etc. 6

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Roles of Parties - Underwriter The underwriter is the firm that, at a minimum, buys the bonds from the district and then markets and sells the bonds to investors. The underwriter can and often provides the services to take the bond process from start to finish – rating, legal document review, bond structuring, timing, etc. The underwriter continues to have the same “fair dealing” responsibility to both the issuer and the investor. 7

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Underwriter - Duties Primary duty is to publicly offer the bonds in a competitive process. MSRB Rule G-17 requires underwriters to “deal fairly” with all customers. Customers include the issuer of the bonds (the district) as well as the investors buying the bonds. Underwriters are also subject to broad anti- fraud prohibitions. 8

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Roles of Parties – Municipal Advisor The municipal advisor takes the lead on many services except selling the bonds, including advising and assisting the District in formulating and executing a debt financing plan; Assists the District in determining the appropriate method of sale and selection of an underwriter, if negotiated sale; May prepare the Official Statement (the OS is still the issuer’s disclosure document) and rating agency presentation and assists on other steps in bond process. The MA performs these services with a fiduciary duty to the district. 9

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Municipal Advisor Duties Due to the Dodd-Frank Act, a municipal advisor has a fiduciary duty to act in the best interest of its client –Disclose all material conflicts of interest –Review and provide inquiry into reasonable financial alternatives to the financing –Act in the issuer’s best interest without regard to financial and other interests of the municipal advisor –The regulators are in the process of reviewing a new rule (G-42) to further define what it means to have and fulfill a fiduciary duty. 10

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Municipal Advisor Duties Municipal Advisors under the MA Rule have to: –register with the SEC and MSRB; –be subject to MSRB and SEC rules like underwriters 1 ; –comply with new testing, training, supervision requirements and regulations currently under development. 1 Broker-dealer MAs were previously subject to regulatory requirements. 11

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 MA Rule - Implementation The Municipal Advisor Rule (the “Rule”) is a rather lengthy 777 page rule that went into effect July Confusion and differing opinions abound while additional guidance is awaited from the regulatory agencies. The Rule regulates Municipal Advisors, Underwriters and their interactions and dealings with districts. 12

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Who is a Municipal Advisor? Anyone who: –Provides advice –to or on behalf of a municipal entity (district), –regarding a municipal financial product or an issuance of municipal securities. Compensation and intention are not required to be deemed a Municipal Advisor –Care should be taken giving or receiving advice from current or former school business professionals not registered. 13

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 What is Advice? Advice is a: –recommendation or call to action; –relating to bonds or other financing instruments; –that is particularized to the specific needs, objectives or circumstances of the district; –including bond structure, timing and terms. 14

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Non-Exempt Advice = Municipal Advisor So, anyone who provides advice without one of the exceptions to follow becomes a Municipal Advisor. –Exemptions for engineers, lawyers, commercial bankers, auditors as well as district staff and board members Once a firm has served as Municipal Advisor related to a particular bond transaction, they cannot move into role of underwriter. 15

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 What is not Advice? General information; Educational information; Professional qualifications; Factual descriptions and comparisons of financing alternatives; Level savings refundings; Advice provided after an underwriter is engaged. –Do not assume you cannot get input relating to bonds without engaging an underwriter or financial advisor or issuing an RFP – much qualifies as factual information. 16

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 When is Advice Ok from an Underwriter? Engaged Exemption Once an underwriter is engaged on a bond transaction, they can provide any and all advice related to that transaction during the period putting the financing in place. Preliminary, non-binding engagements permitted so long as issuer reasonably expects to formally engage the broker- dealer as underwriter. 17

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 When is Advice OK? RFP Exemption The Rule exempts all advice provided in response to a qualified Request for Proposals (RFP): –Must have a specific objective; –Must be sent to at least three qualified firms and/or be posted on district website; –Must be “open” for a reasonable period of time. 18

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 When is Advice OK? IRMA Exemption The Rule provides an exemption for any advice provided to a district who states in writing that: –the district is represented by and will rely upon the advice of its Independent Registered Municipal Advisor (IRMA) –IRMA role must relate to same bonds advice is addressing Underwriter must provide disclosures 19

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 MA Rule in Effect What has changed since the MA Rule went into effect? Receiving information related to borrowing options and refundings is not as simple as it used to be. Underwriters cannot provide advice and assistance relating to specific advice on bonds without meeting one of the exemptions: –Engaged –General and Factual information –RFP –Reliance upon an IRMA 20

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 MA Rule in Effect Use of a Municipal Advisor is your choice: –Decision regarding use of a municipal advisor should be made based on each district’s specific situation and goals. –You may choose to use a MA or not but will have to acknowledge the role of the underwriter and engage them to get assistance once you begin work on a bond sale. –You should expect advice from your underwriter relating to the relevant financing post engagement with or without the involvement of an MA. 21

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 MA Rule in Effect New disclosures and documentation: –Municipal Advisors and Underwriters will now have to more rigorously document being officially engaged; –Disclosures have to be made (and sometimes acknowledged) very early in the process regarding the roles of the parties. 22

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 MA Rule in Effect What you should do to get the help you need: –Know the roles and responsibilities of the parties; –Get professionals engaged early in the process; –Consider providing statement regarding reliance upon MA if you choose to use an MA; –Ask questions and consult your legal professionals as needed. 23

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Disclaimer The information contained herein is solely intended to suggest/discuss potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement. The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive. The information set forth herein was gathered from sources which we believe, but do not guarantee, to be accurate. Neither the information, nor any options expressed, constitute a solicitation by us for purposes of sale or purchase of any securities or commodities. Investment/financing decisions by market participants should not be based on this information. You should consider certain economic risks (and other legal, tax, and accounting consequences) prior to entering into any type of transaction with PMA Securities, Inc. or PMA Financial Network, Inc. It is imperative that any prospective client perform its own research and due diligence, independent of us or our affiliates, to determine suitability of the proposed transaction with respect to the aforementioned potential economic risks and legal, tax, and accounting consequences. Our analyses are not and do not purport to be appraisals of the assets, or business of the District or any other entity. PMA makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax, or accounting effects of consummating a transaction. PMA cannot be relied upon to provide legal, tax, or accounting advice. You should seek out independent and qualified legal, tax, and accounting advice from outside sources. This information has been prepared for informational and educational purposes and does not constitute a solicitation to purchase or sell securities, which may be done only after client suitability is reviewed and determined. Securities, public finance and institutional brokerage services are offered through PMA Securities, Inc. PMA Securities, Inc. is a broker-dealer and municipal advisor registered with the SEC and MSRB, and is a member of FINRA and SIPC. Prudent Man Advisors, Inc., an SEC registered investment adviser, provides investment advisory services to local government investment pools. All other products and services are provided by PMA Financial Network, Inc. PMA Financial Network, Inc., PMA Securities, Inc. and Prudent Man Advisors (collectively “PMA") are under common ownership. Securities and public finance services offered through PMA Securities, Inc. are available in CA, CO, FL, GA, IL, IN, IA, KS, MI, MN, MO, NE, OH, OK, PA, SD, TX and WI. This document is not an offer of services available in any state other than those listed above, has been prepared for informational and educational purposes only and does not constitute a solicitation to purchase or sell securities, which may be done only after client suitability is reviewed and determined. All investments mentioned herein may have varying levels of risk, and may not be suitable for every investor. For more information, please visit us at © 2015 PMA Securities, Inc. For institutional use only. 24

64 th ILLINOIS ASBO CONFERENCE AND EXHIBITIONS APRIL 29 – MAY 1, #iasboAC15 Disclosures These materials have been prepared by Stifel, Nicolaus & Company, Incorporated (“Stifel”) for discussion purposes only. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and are subject to change without notice. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel. Stifel’s Public Finance Department has prepared the attached materials to provide you with general information (as that term is defined in the SEC’s Municipal Advisor Rule) and we are not providing you with any advice or making any recommendation concerning the structure, timing or terms of any issuance of municipal securities or municipal financial products. To the extent that we provide any alternatives, options, calculations or examples in the attached information, we are not intending to express any view that you could achieve those results in any municipal securities transaction and those alternatives, options, calculations or examples do not constitute a recommendation that you should effect any municipal securities transaction. Stifel does not act as your municipal advisor. 25