1. School District’s & RECENT Municipal Bond Regulatory Changes Full disclosure & transparency in bond issue and debt transactions PRESENTED BY Joel Cracchiolo & Friends

2. Changing Regulatory Environment Municipal Securities In response to the “Great Recession” of 2008 the Dodd-Frank Wall Street Reform and Consumer Protection Act was approved in 2010. The Act contains over 400 new rules / changes to financial regulatory environment with the purpose of protecting municipal entities. The Municipal Securities Rulemaking Board’s (MSRB)responsibilities expanded to include the protection of state local government issuers as well as investors.

3. Basic Definitions Securities & Exchange Commission (SEC) – est. 1934 by Congress during the peak year of the Depression. Designed to restore investor confidence in capital markets by providing investors and the markets with reliable information and clear rules of honest dealing. MSRB – est. 1975 as a self-regulatory organization governed by broker-dealers with mission to protect investors. Develop rules regulating underwriting, trading and selling municipal securities.

4. Basic Definitions cont… Financial Advisor – municipal securities professional whom acts as agent for the government unit, assisting it in determining its debt structure, when to market securities and preparation of documents for sale. Underwriter – securities professional acting as a purchaser in a private placement. Fiduciary Duty – obligation to act in the best interest of another party.

5. Raise your HAND Who amongst us already has these reg. changes on their radar?

6. TOP Three (3) General Rule UPDATES to be aware of… MSRB Rules The MSRB establishes rules that securities firms, banks and municipal advisors must follow when engaging in municipal securities transactions and advising investors and state and local governments. Rule categories General G3 G17 G23 Administrative Definitional Link - http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules.aspx

7. Permanent Registration Regime Required for Municipal Advisors Rule G-3 - requires a MA to permanently register with the SEC if it provides advice on the issuance of municipal securities or about certain “investment strategies.” Prior to the passage of the Dodd-Frank Act, municipal advisors were not required to register with the SEC. Employees and appointed officials of municipal entities exempt from registration. Full list of registered advisors available at t he SEC website & MSRB’s municipal advisor registration page at https://tts.sec.gov/MATR/index.html http://www.msrb.org/msrb1/pqweb/MARegistrants.asp.

8. Raise your HAND Who amongst us has visited the registration site and looked at registered vendors?

9. Fiduciary Duty Imposed on Municipal Advisor (includes financial advisors) Rule G-17 requires underwriter to identify responsibility to deal fairly at all times with both issuers and investors, and disclose potential conflicts Implementation of Rule began on July 1, 2014. Rule limits the ability of parties without a fiduciary duty to the issuer from offering “advise” to the issuer. This is expected to fundamentally change the communication practices between issuers and underwriters that have existed to date.

11. Raise your HAND Who KNEW the implementation date has passed?

12. Underwriters Prohibited from Serving as Financial Advisors Rule G-23 - primary purpose to prevent conflicts of interest. Federal law now formally segregated the provision of advice from the execution of transactions by prohibiting a single firm from performing both roles on a single financing. Precludes a broker-dealer that serves as a financial advisor from switching to an underwriter regardless of whether the issue is sold through a negotiated or competitive sale. Previously allowed broker-dealers to serve as financial advisor and then switch to an underwriter as long as the firm received written consent to do so. Under MSRB Rule G-23, a firm acting as an issuers municipal advisor is not allowed to resign in order to serve as an underwriter for the proposed bonds.

13. This is the BIG ONE

14. “G 23-Top Items School Districts Need to Know about the Rule” Per GFOA Issue Brief dated Jan. 2014 The types of conversations that school districts can have with professionals is more limited in nature than what has traditionally occurred. When a school district has a bond finance transaction and wanted to receive proposals and/or advice, the school district will need to represent to all involved in the transaction, in writing. A financial advisor retained on a contingent basis may offer a full range of advice with a written fiduciary agreement.

15. Exceptions to G-23 Rule provides exceptions for underwriters to communicate with issuer about specific transactions: 1. Independent Municipal Advisor Exception 2. RFP/RFQ Exception 3. Underwriter Exception

16. Independent Municipal Advisor Exception #1 Issuers may obtain advice from an underwriter when it has retained an independent registered MA and has represented in writing to the underwriter that it will rely on MA for advice. Issuers may make such written communication directly to the underwriter or may post it on its website. GFOA recommends that issuers post the information on its website. GFOA does NOT recommend that underwriters speak directly to the issuers municipal advisor unless specifically permitted by the issuer.

17. RFP / RFQ Exception #2 Underwriters responding to an RFP/RFQ may include recommendations about specific financings without violating the MA Rule. For exemption to apply, RFP must no be outstanding for more than 6 months and issuer must widely distribute the RFP (to at least 3 competitive firms). Issuers that use a pool of underwriters may have to use a “mini- RFP” to received advise from underwriting firms included in the pool.

18. Underwriter Exception #3 This exception applies only if the underwriter has been selected to underwrite a specific transaction. An issuer may receive advice from a selected underwriter without having made a final decision to issue the bonds. In such a case, GFOA recommends signing a “letter of intent” with the underwriter to allow discussion of the transaction as it is being developed.

19. COMPLYING with G-23 MSRB UPDATED Rule

20. Things You Need to Know to COMPLY with G-23 MSRB UPDATED Rule (G-3 & G17 need to be aware and verify) Unless the issuer has sufficient in-house expertise and access to market information, GFOA recommends that issuers hire a Municipal Advisor prior to undertaking a debt financing. Joel adds available “TIME TO COMMIT” in addition to GFOA’s note above as a necessity to undertake the MA responsibilities in-house as well. Recognize that the role of the underwriter and the municipal advisor are separate roles and cannot be provided by the same party. Relationship between the issuer and the underwriter is one of a common purpose but also competing objectives, especially at the time of bond pricing. The underwriter is not the issuer’s municipal advisor and has no legal fiduciary duty to the issuer. Selection of an MA ( assuming not in-house person) should be on the basis of merit using a competitive process (RFP) and that issuers review those relationships periodically.

21. Request for Proposal (The competitive process) The RFP should include at least the following components: A clear and concise description of the scope of work, specifying the length of the contract. Clarity on whether the issuer reserves the right to select more than one municipal advisor or to form municipal advisory teams. A requirement that all fee structures be presented in a standard format. A requirement that the proposer provide at least three references from other public-sector clients, preferably from ones that the firm provided similar services. A description of the objective evaluation and selection criteria and explanation of how proposals will be evaluated.

22. Additional Considerations. Also consider the following in the MA selection process: Take steps to maximize the number of respondents. Allow adequate time for firms to develop their responses to the RFP. Two weeks should be appropriate for all but the most complicated RFPs. Establish evaluation procedures and a systematic rating process Clarify RFP responses Conduct interviews with proposers using a standard set of questions to promote consistency. Undertake reference checks. Document and retain the description & the rankings of each firm. Ensure that federal regulations and any state and local regulations, standards or policies related to the disclosure of gifts, political contributions, or other financial arrangements are met.

23. FEES The MA Fee is a direct cost paid by the issuer. A list of common direct costs related to a bond issue follow: Municipal Advisor Legal Counsel Bond Trustee Escrow Verification Agent Auditor Rating Agencies Printing/Distribution Costs Pricing Verification Agent

24. Basis of Compensation. Fees paid to MA can be on an hourly, retainer basis or contingent basis GFOA prefers the hourly and retainer based compensation. The fear is that contingent basis fees could provide potential incentive for the MA to provide advice that might unnecessarily lead to the issuance of bonds. GFOA recognizes, however, that this may be difficult given the financial constraints of many issuers. In the case of contingent compensation arrangements, issuers should undertake ongoing due diligence to ensure that the financing plan remains appropriate for the issuer’s needs. Issuers should include a provision in the RFP prohibiting any firm from engaging in activities on behalf of the issuer that produce a direct or indirect financial gain for the MA, other than the agreed-upon compensation, without the issuer’s informed consent.

25. A little input from my friends… OUR Peers Who have completed the RFP process (or NOT)

26. Contract for MA Services Issuers should have a written contract detailing the scope of services and basis of compensation. The contract development process should allow for reasonable negotiation over the final terms of the contract. A final negotiated contract should make clear those services that will be included within the basic municipal advisor fee and any services or reimbursable expenses that might be billed separately. Additionally, the contract should be clear that the municipal advisor will only receive compensation for work specifically authorized by the issuer to avoid incurring expenses for work not authorized by the issuer.

27. Further Discussion & Resources http://www.gfoa.org/selecting-and-managing-municipal-advisors