The Many Faces of Disclosure

John O. RenkenHawkins Delafield & Wood LLP

San Francisco

Recent Developments in Municipal Securities Disclosure“Municipal Advisors” under the Dodd-Frank Act

Developments Relating to the Municipal Securities Market

• SEC Enforcement Actions• Federal Legislation• Governmental Accounting Standards Board

(GASB) Pension Accounting Proposal• National Association of Bond Counsel Pension

Disclosure Project

Hawkins Advisories

• “SEC Adopts Rules for Asset-Backed Securities,” January 25, 2011

• “Municipal Advisor Registration – Effect of Proposed Rules on Issuer and Obligor Boards,” January 12, 2011

• “SEC Proposes to Exempt Municipal Securities from Risk Retention Rules,” March 30, 2011

Recent SEC Enforcement Action

• State of New Jersey (August 2010)– Misleading disclosures relating to:• Underfunding of pension plan• Reason(s) for underfunding• Potential effect(s) of underfunding

– Change from market value valuation method to actuarial valuation method

– SEC found that the actuarial valuation did not accurately present the current value of the pension plans

Recent SEC Enforcement Action

• State of New Jersey (con’t)– “Due to a lack of disclosure training and

inadequate procedures relating to the drafting and review of bond disclosure documents, the State made material misrepresentations and failed to disclose material information regarding [pension obligations] in bond offering documents.”

Recent SEC Enforcement Action

• Key takeaways:– SEC focus on the accuracy of financial (here,

pension) disclosure– SEC emphasis on• Written disclosure controls• Disclosure training

Federal Legislation

• Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act

• H.R. 6484, Public Employee Pension Transparency Act

• Tax Exemption/Tax Credit Proposals

Dodd-Frank Act• Municipal Securities Rulemaking Board Changes– Including registration of “Municipal Advisors”

• Governmental Accounting Standards Board Changes• Within the SEC– Creation of Office of Municipal Securities (New)– Creation of Office of Credit Ratings (New)

• Securitization– Risk Retention

Exemption for municipal securities under March 30, 2011 SEC proposed rule

– Disclosure• Derivatives and Swaps

Municipal Advisors

Prior to Dodd-Frank:– Securities Exchange Act of 1934• “Brokers”• “Dealers”

– Investment Advisers Act of 1940• “Investment Advisers”

“Broker”

“Any person engaged in the business of effecting transactions in securities for the account of others.”

Section 3(a)(4) of the SecuritiesExchange Act of 1934

“Dealer”

“Any person engaged in the business of buying and selling securities for such person’s account”

Section 3(a)(5) of the SecuritiesExchange Act of 1934

“Investment Adviser”

“Any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing or selling securities.”

Section 202(a)(11) of the Investment

Advisers Act of 1940

Municipal Advisors

Under Dodd-Frank:– Required to register with the SEC– Fiduciary duty between “municipal advisor” and

the municipal entity for which it is acting as a municipal advisor

– “Municipal advisors” subject to additional anti-fraud provisions

Section 975 of the Dodd-Frank Act

Municipal Advisor Registration

SEC adopted Rule 15Ba2-6T (an “interim final temporary rule”) to enable municipal advisors to satisfy the statutory requirement to register with the SEC

Effective October 1, 2010

Expires December 31, 2011

Municipal Advisor Fiduciary Duty

“A municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor, and no municipal advisor may engage in any act, practice or course of business which is not consistent with a municipal advisor’s fiduciary duty or that is in contravention of any rule of the [MSRB].”

Exchange Act Section 15B(c)(1)

Municipal Advisor Anti-Fraud

“No municipal advisor shall make use of the mails or any means or instrumentality of interstate commerce to provide advice to or on behalf of a municipal entity or obligated person with respect to financial products, the issuance of municipal securities or to undertake a solicitation of a municipal entity or obligated person, in connection with which such municipal advisor engages in any fraudulent, deceptive or manipulative act or practice.”

Exchange Act Section 15B(a)(5)

Municipal Advisor

“a person (who is not a municipal entity or an employee of a municipal entity) that (i) provides advice to or on behalf of a municipal entity or an obligated person with respect to municipal financial products [“municipal derivatives,” “guaranteed investment contracts” or “investment strategies”] 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; or (ii) undertakes solicitation or a municipal entity.”

Section 975 of the Dodd-Frank Act

Municipal Advisor Exclusions

The following are not “municipal advisors”:– A broker, dealer or municipal securities dealer serving

as an underwriter– An investment adviser registered under the

Investment Advisers Act of 1940– Attorneys offering legal advice or providing services

that are of a “traditional legal nature”– And, by the exclusion within the defined term:

• Municipal entity• “Employees” of a municipal entity

Municipal Advisor Exclusions“Employee”:

– Dodd-Frank does not define “employee”– SEC views in the Proposing Release:

• Should include any elected member of the governing body of the municipal entity

• Should include appointed members if they are ex officio members by virtue of holding an elective office

• “The Commission does not believe that appointed members of a governing body of a municipal entity that are not elected ex officio members should be excluded from the definition of ‘municipal advisor’.”

– No clarification with respect to the application of “employee” to obligated persons

Scope of “Municipal Advisor”

What we notice about the new defined term:– Unlike “broker,” “dealer” and “investment adviser,”

there is no requirement that a “municipal advisor” be engaged in the business or receive compensation

– Included within the definition are those who advise “obligated persons,” in this context including:• Multifamily developers• Health care systems• Universities

“Municipal Advisor” Challenges– Failure to recognize that the governing board of a

municipal entity (or an obligated person) cannot be a municipal advisor to such entity

– Distinction between• Elected board members of municipal entities; and• Non-elected board members of municipal entities and all

employees and governing body members of obligated persons

is inappropriate– Overbreadth of “providing financial advice”

• Adoption of approving resolution?• Questions of the financing team during board meeting?