MSRB Proposed Rules and Interpretations NALHFA 2011 Annual Educational Conference May 20, 2011

 Prohibits a financial advisor to an issuer with respect to the issuance of municipal securities from: –Underwriting, privately purchasing or acting as placement agent in the transaction –Acting as remarketing agent for such issue  Eliminates the requirement that compensation must be received for a financial advisor relationship to exist Rule G-23: Proposed Amendment to Prohibit Financial Advisors from Underwriting and Remarketing 2

 Exceptions: –May act as placement agent to place issue with a governmental entity as part of a plan of financing by the governmental entity on behalf of the issuer; provided, that the dealer does not receive any compensation:  for such placement or  for underwriting any contemporaneous related financing transaction undertaken by the governmental entity –May purchase issue from underwriter so long as such purchase is not made to circumvent the purpose and intent of Rule G-23 –May act as successor remarketing agent for the issuer one year after financial advisory relationship has been terminated Rule G-23: Proposed Amendment to Prohibit Financial Advisors from Underwriting and Remarketing 3

 Interpretive Guidance: –A dealer providing advice to an issuer with respect to the issuance of municipal securities is presumed to be a financial advisor –To overcome presumption a dealer must clearly identify itself as an underwriter from earliest stages of relationship –Underwriter’s subsequent actions may cause it to be considered a financial advisor –Financial advisory relationship does not exist when, acting as an underwriter, the underwriter renders advice to an issuer with respect to the issuance of municipal securities MSRB Notice (February 9, 2011) Rule G-23: Proposed Amendment to Prohibit Financial Advisors from Underwriting and Remarketing 4

 Prohibits municipal advisors from giving or permitting to be given, directly or indirectly, any thing or service of value, including gratuities, in excess of $100 per year  Exceptions: –Occasional gifts of meals or tickets to theatrical, sporting, and other entertainments hosted by the municipal advisor –Legitimate business functions sponsored by the municipal advisor –Gifts of reminder advertising Proposed Amendment of Rule G-20 Gifts and Gratuities for Municipal Advisors 5

 Prohibits a municipal advisor from: –engaging in municipal advisory business with a municipal entity for compensation for a period beginning on the date of a non- de minimus (for municipal advisor professionals (MAPs)) political contribution and ending two years after all municipal advisory business has terminated –soliciting third-party business from a municipal entity for compensation, or receiving compensation for the solicitation of third-party business from a municipal entity, for two years after a non-de minimus political contribution Rule G-42: Pay to Play Rules for Municipal Advisors 6

 Prohibits a municipal advisor and MAP from: –soliciting or coordinating contributions to officials of municipal entities with which it is engaging or seeking to engage in municipal advisory business or from which it is soliciting third- party business –soliciting or coordinating payments to political parties of states or localities with which it is engaging in, or seeking to engage in municipal advisory business or from which it is soliciting third- party business MSRB Notice (January 14, 2011); comments were due February 25, 2011 Rule G-42: Pay to Play Rules for Municipal Advisors 7

 In the conduct of their municipal advisory activities, municipal advisors must: –Deal fairly with all persons –Not engage in any deceptive, dishonest, or unfair practice Amendments approved by the SEC on December 23, 2010 Rule G-17: Amendment to Include Municipal Advisors 8

 Application of Rule G-17 for dealers in their interactions with municipal entities –Representations must be truthful and accurate and may not misrepresent or omit material facts –Implied representation that the price paid by underwriter bears a reasonable relationship to prevailing market price –Direct and indirect compensation can not be excessive –Must disclose conflicts of interest –Must honor an issuer’s directions concerning retail order periods –No lavish gifts to issuer personnel MSRB Notice (February 14, 2011); comments were due April 11, 2011 Rule G-17: Proposed Interpretative Guidance for Underwriters 9

 Municipal Advisors that serve obligated persons –Fair dealing:  appropriateness  due care  disclosure of conflicts  informed consent  forms of compensation –Deceptive, dishonest, or unfair practices:  misrepresentations  excessive compensation  kickbacks and other payments Rule G-17: Proposed Interpretative Guidance for Municipal Advisors (Obligated Persons and Solicitations) 10

 Municipal Advisors soliciting business from municipal entities on behalf of others –Fair dealing:  disclosure of material facts about solicitation  material information about products or services –Deceptive, dishonest, or unfair practices:  kickbacks  lavish gifts and gratuities MSRB Notice (February 14, 2011); comments were due April 11, 2011 Rule G-17: Proposed Interpretative Guidance for Municipal Advisors (Obligated Persons and Solicitations) 11

 Draft Rule: –In the conduct of its municipal activities on behalf of municipal entities, a municipal advisor shall be subject to a fiduciary duty, which shall include a duty of loyalty and a duty of care. Rule G-36: Proposed Fiduciary Duty of Municipal Advisors 12

 Duty of Loyalty –Conflict of interest  disclosure obligation  informed consent –must be from an official of the municipal entity with authority to bind the municipal entity by contract  unmanageable conflicts –Compensation  excessive compensation  forms of compensation Rule G-36: Proposed Fiduciary Duty of Municipal Advisors 13

 Duty of Care –Necessary qualifications –Consideration of alternatives –Duty of inquiry –Duty of care does not make the financial advisor a guarantor Rule G-36: Proposed Fiduciary Duty of Municipal Advisors 14

 Municipal advisors may be retained for limited engagement –Should be reflected in engagement letter or written communication –Limitations must be disclosed prior to commencement of engagement MSRB Notice (February 14, 2011); comments were due April 11, 2011 Rule G-36: Proposed Fiduciary Duty of Municipal Advisors 15

This document has been prepared by Chapman and Cutler LLP attorneys for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Accordingly, readers should consult with, and seek the advice of, their own counsel with respect to any individual situation that involves the material contained in this document, the application of such material to their specific circumstances, or any questions relating to their own affairs that may be raised by such material. © 2010 Chapman and Cutler LLP 16