REGULATORY CHANGES IMPACT ISSUERS

During 2011 and for the next several years, how certain public finance participants operate and what processes they follow will change. The universe of changes are based on a wide ranging regulatory regime that will impact local governments issuing bonds. The regulatory regime most prominently includes the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") but is more encompassing and wider in scope than a single law. Besides changes due to Dodd-Frank municipal issuers are encountering more SEC enforcement actions through application of anti-fraud provisions. To bolster its enforcement efforts the SEC has increased municipal securities staffing and initiated a new Office of Municipal Securities. Other components of the revised regulatory environment include entities that you may not have heard of; but FINRA (Financial Industry Regulatory Authority) and CFTC (Commodity Futures Trading Commission) are getting more involved in municipal oversight.

As provided by Dodd-Frank, municipal advisors (also known as your financial advisor) must now be registered. Municipal advisors will be subject to rules currently being prepared, record retention requirements not yet specified, testing not yet constructed and continuing education requirements not yet developed. In fact, some ambiguity remains about what exactly a municipal advisor does but those unknowns primarily involve peripheral players. Essentially anyone advising on structure, timing or terms of municipal securities but not underwriting them is a municipal advisor. Those within the definition are now regulated but do not know how or to what extent.

As of October 1, 2010 municipal advisors have a fiduciary duty to their municipal issuer clients. Many municipal advisors previously had a fiduciary duty, or acted as if they did, but now that obligation is universal and will be defined. Even those that agree on little else about this evolving regulatory regime believe the imposition of fiduciary duty is beneficial and that it will likely include standards for the duties of loyalty and care Though we do not know the full extent of the impact of Dodd-Frank and the other elements of the overall regulatory regime, we do know more than we did a few months ago. Below are a few trends that may likely occur.

• There will be increased formality in the process of issuing debt and more complex relationships between finance team members. Roles may become more rigidly defined and guarded.
  
• More documentation may be required about business decisions made during a bond financing.
  
• There may be increased discussion of loyalties and conflicts of finance team members. Municipal advisors have a fiduciary duty to municipal issuer clients. Underwriting firms have a more limited duty of fair dealing to issuers and also have that same obligation to investors.
• There may be changes to Bond Purchase Agreements since underwriters may want to specify that they do not have a fiduciary duty. Municipal Advisor contracts may change to provide a more explicit Scope of Work and details related to fee structures.
• The cost of publically selling bonds may lead small issuers to direct placements with financial institutions.

The regulatory environment for public finance participants will continue to evolve. The pace of change has been extremely rapid for a field often characterized as arcane and conservative. As the regulators develop implementation provisions for Dodd –Frank, more certainty will be provided. Also, over time the scope and resulting impact of other regulatory reforms will become more certain. What is clear at this time is that municipal issuers are in for change and a period of transition to a new set of rules and new behaviors.