United States: Exemptions May Ease Pain Of Advisor Rule

Last Updated: July 8 2014
Article by Justin S. Cooper

The SEC's Municipal Advisor Rule, adopted in September, continues to provoke conversation in the public finance industry. As the July 1 implementation date looms, industry participants are particularly concerned about the Rule's potential to inhibit, or effectively prevent, broker-dealers from communicating freely with issuers and obligated persons (i.e. conduit borrowers) unless certain exclusions or exemptions from the rule are met.

The rule treats any broker-dealer who provides advice to an issuer or borrower with respect to municipal securities as a "municipal advisor," with the dual consequences that the broker-dealer automatically incurs a fiduciary duty to the advisee and cannot be an underwriter on the transaction with respect to which the advice was provided. One of the most fundamental and important aspects of the Rule, therefore, is the definition of the term "advice." In essence, advice constitutes making a recommendation to a municipal entity, including an obligated person, relating to municipal securities. For example, recommending a refunding transaction would constitute "advice" under the Rule.

One sees immediately how this framework may disrupt the normal conduct of business in the municipal marketplace: investment bankers routinely approach issuers and borrowers and present ideas and recommendations regarding possible transactions. Many issuers and borrowers value the analysis and advice they receive in this manner, particularly since bankers often perform this work on speculation rather than charging fees for their analysis and recommendations. Banks and bankers are unlikely in the future to be willing to offer this service if doing so will disqualify them from acting as underwriters and potentially expose them to legal liability.

So, what is to be done? If investment bankers and other broker-dealers are to continue to be able to communicate and work relatively freely with issuers and borrowers, they need to fit within one of the exclusions or exemptions provided for in the Rule. Of the various possible exclusions and exemptions, a handful are particularly likely to be applicable to the underwriter-issuer/borrower relationship described above.

The Underwriter Exclusion

Broker-dealers serving as underwriters do not have to register as municipal advisors and are excluded from the Rule if their advisory activities involve the structure, timing and terms of a particular issue of municipal securities. Key elements of the underwriter exclusion are that it requires a formal engagement, that it exists for a finite period of time, and that it exists for finite purposes.

The exclusion begins when the issuer or borrower engages the underwriter on a particular transaction and continues until the end of the underwriting period for that transaction. Engagement may be accomplished by way of a formal engagement letter or, potentially, something less formal such as an exchange of e-mails, provided that the record is sufficiently clear as to the particular issuance or proposed issuance of securities in question and certain other terms of the engagement. Note that a broker-dealer firm that is selected to be part of a pool of potential underwriters, without being selected for a specific deal, is not viewed as serving as an underwriter on a particular issuance of municipal securities and therefore does not meet the requirements for the exclusion.

In addition to being time-limited, the underwriter exclusion is finite in that it permits the underwriter to provide only certain types of advice on a non-fiduciary basis. These include, in each case only with respect to the particular proposed issuance of municipal securities for which the broker-dealer has been engaged, advice regarding structure, timing and terms, preparation of rating strategies and presentations, assistance with investor "road shows" and investor discussions, advice regarding retail order periods and institutional marketing, assistance in the preparation of offering documents, and assistance with the closing of the issue. Certain other types of advice, such as advice on investment strategies, advice on municipal derivatives, and advice on whether to pursue a competitive or a negotiated sale, fall outside the Underwriter Exclusion and therefore may not be given on a non-fiduciary basis.

The RFP Exemption

The RFP (Request for Proposals) exemption provides a way for issuers and borrowers to solicit ideas, including "advice" as defined in the Rule, from market participants without making those market participants into municipal advisors. The issuer or borrower's RFP is required to identify clearly the objective of the issuer or borrower; it must be open for a specified period of time—the SEC suggested in its responses to "Frequently Asked Questions" on the Rule that a period of up to six months would be reasonable; it must involve a competitive process; and it must be sent to at least three reasonably competitive market participants or be publicly disseminated by posting on an official website. If these requirements are met, market participants may provide advice to the issuer or borrower in response to the RFP on a non-fiduciary basis and without being treated as municipal advisors.

The IRMA Exemption

The IRMA exemption provides a broad exemption from the definition of a municipal advisor for any person engaging in municipal advisory activities when the issuer or borrower is otherwise represented by an "independent registered municipal advisor" with respect to the matter at hand. A registered municipal advisor is "independent" of a proposed underwriter if it has not been associated with proposed underwriter within the previous two years.

For a broker-dealer to rely on the IRMA exemption, certain requirements must be met: the issuer or borrower must provide a written representation that it is represented by, and will rely on the advice of, a designated IRMA; and the broker-dealer must provide the issuer or borrower (with a copy to the IRMA) with written disclosure that the broker-dealer is not a municipal advisor with respect to the municipal financial product or issuance of municipal securities. The written disclosure from the broker-dealer must be made at a time and in a manner reasonably designed to allow the issuer or borrower to evaluate potential conflicts of interest, and in the case of a municipal entity (as opposed to an obligated person) it must contain certain additional language to the effect that the broker-dealer is acting in a non-fiduciary capacity.

A number of market participants view the IRMA Exemption as the broadest and most promising exemption available to issuers/borrowers to enable them to communicate relatively freely with investment bankers and other advisors. It remains to be seen whether and to what extent issuers, borrowers and potential advisors will work with these and other exclusions and exemptions after the Rule goes into effect and as authorities and best practices develop in this area.

Originally published in The Bond Buyer - 18 June 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
15 Nov 2018, Webinar, Newark, United States

We are now 6 months into this groundbreaking new law which has significant impact on businesses in and outside the EU.

15 Nov 2018, Webinar, Washington, United States

Over the last decade, a new phenomenon in the sports law arena has emerged: from improper drug dispensing to traumatic brain injury to publicity rights, class actions have become a popular vehicle for litigating sports-related claims.

15 Nov 2018, Webinar, New York, United States

In its fifteenth year, this program gives attendees access to more federal judges than any similar program and provides the opportunity to learn at an advanced level from the leading eDiscovery practitioners and academics from across the country.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions