Now that the SEC Municipal Advisor rule limits the advice that not-for-profit hospitals can get from broker-dealers, financial leaders should determine how to best maintain communications by reviewing their information needs and the various exceptions to the new rule.


The new SEC Municipal Advisor rule that went into effect on July 1 will significantly limit communications between not-for-profit hospitals and broker-dealers. Hospitals that rely on bond underwriters for advice need to understand what they will need to do to continue getting ideas from the marketplace.

What Is the Rule?

The Securities & Exchange Commission (SEC) Municipal Advisor rule (MA rule) that took effect on July 1 has been described as one of the most radical changes to affect the municipal bond markets in the last several decades.

The rule requires firms that advise municipal borrowers to register as municipal advisors, and it defines advice broadly to include most communications that traditionally take place between broker-dealers and borrowers.

As are other municipal borrowers, not-for-profit 501(c)(3) hospitals are directly affected, yet most are still unaware of exactly how. The MA rule works in two steps:

  • Firms that discuss customized municipal financial products with borrowers are deemed to provide advice and must first register as municipal advisors.
  • A municipal advisor cannot sell or profit from the products it recommends.

The end result of the rule is that broker-dealers that want to sell products (such as bond underwriting) must stay clear from any communications the SEC deems as advice. This is going to be a problem because of how broadly advice is defined.

What Is “Advice?”

Surprisingly far-reaching, the SEC defines advice as a suggestion or recommendation to buy a municipal financial product or issue municipal securities, if tailored to the borrower’s specific needs. This definition captures most of the traditional presentation materials, pitch books, and ongoing written and verbal discussions between broker-dealers and their prospects. Under the rule, these communications are now considered advice and prohibited if the broker-dealer wants to sell the financial products and services they present.

This throws a massive roadblock in the way of underwriters, since their ability to get an audience usually depends on developing solutions to address specific needs. The more customized the information is to a borrower’s situation, the more likely the SEC will view it as advice.

Given the consequences of crossing the line, most underwriters have already taken the position that they will cease all communications that may be construed as advice rather than compromise their ability to sell financial products, risk fines, or even face the loss of their broker-dealer license.

Are There Exceptions?

The SEC recognizes that not all communications create conflicts of interest and the rule features several exceptions:

IRMA exemption. A broker-dealer can pitch ideas if the hospital has hired an independent registered municipal advisor (IRMA). The hospital must state in writing that it will rely on the advisor’s advice, the scope of the advisor’s engagement must cover the products to be discussed, and the broker-dealer must provide a written disclosure (with a copy to the advisor) that the firm is not acting as a municipal advisor. The advisor need not be present for discussions to take place.

General information exclusion. A broker-dealer can present general information without it being considered advice. General information includes firm qualifications, market updates, and basic information about various debt financing structures. General information cannot be customized to the borrower’s specific situation. This option has limited benefit primarily because most borrowers expect to discuss their specific situation and have little time to spend on generalities. Some underwriters may also be concerned that what starts as a general presentation, could evolve into discussing a specific situation, which the exclusion does not cover.

Underwriter exclusion. A broker-dealer who has been contractually engaged to serve as bond underwriter for a particular transaction is permitted to provide advice related to that transaction. This option is somewhat of a chicken-and-egg for borrowers who want to hear ideas from various broker-dealers before deciding on what to do and whom to do it with. Even once an underwriter is engaged, communications with other firms are still subject to the rule.

RFP exemption. A broker-dealer can respond to a request for proposals (RFP) if the RFP states a specific objective, is sent to at least three firms or publicly posted, and is not for an indefinite period of time. The SEC considers up to three months reasonable for a mini-RFP, and up to six months for a full RFP. The specific objective requirement makes this option impractical for borrowers that don’t know what they’re looking for until they see it.

Other exemptions. The SEC has also provided a bank exemption where banks can discuss the terms of tax-exempt bank direct placements they plan on purchasing. However, discussions cannot be extended to other securities beyond what the bank would purchase for its own account. This could be problematic for a bank that is planning to present a comparison of a bank placement to a public bond offering.

Discussions with banks about traditional facilities, such as term loans, lines of credits, and mortgages, are allowed as they do not fall within the SEC’s definition of municipal financial products.

There is also an attorney and engineer exclusion to the rule.

How Hospitals Are Affected?

The MA rule targets broker-dealers, not borrowers, so hospitals do not face penalties if an underwriter advises them without first registering as municipal advisor or qualifying under one the exemptions.

However, unless the broker-dealer qualifies under one of the exceptions, hospitals can no longer receive debt structuring ideas and related financial advice from underwriters.

Many hospitals should be in position to help broker-dealers qualify under the IRMA exemption to the rule. Approximately 75 percent of all municipal bond issues had a financial advisor involved in 2011 (based on par amount), according to a 2012 article in The Bond Buyer. In the healthcare sector, most of the larger hospitals and health systems have a financial advisor. To take advantage of the IRMA exemption, the hospital will need to make sure that the financial advisor retainer covers the services to be discussed and that the financial advisor role is properly disclosed to underwriters. Some borrowers have started posting this disclosure on their websites, which eliminates the need to disclose to each solicitor individually.

Smaller hospitals may not fare as well under the rule. Most do not have a financial advisor on retainer and are dependent on outside parties for ideas. For them, as for any hospital without a financial advisor, the rule could be an opportunity to revisit the costs and benefits of bringing in an independent advisor.

What Is the Best Approach?

Hospitals used to getting ideas from underwriters must now decide which exclusion/exemption to go for under the rule. Doing nothing will cause the phone to stop ringing and deprive some hospitals of cost-saving opportunities. While the majority of market participants—including bond underwriters—agree that the IRMA exemption is the most flexible option to continue discussions, each borrower’s situation is different.


Pierre Bogacz is managing director, HFA Partners, Tampa, Fla., and a member of HFMA's Florida and Georgia Chapters.

Chris Rea is managing director and chartered financial analyst, HFA Partners.

For more information, see the final SEC MA rule, as well as the frequently asked questions.

Publication Date: Thursday, July 10, 2014