Swap Transactions: What Is an IRMA? When Are IRMAs Necessary?
The Dodd-Frank Act
Mainly in response to abusive transactions in the early 2000s, Congress established a registration requirement for financial institutions trading as swap dealers in the swap market as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) in 2010.
Under the Act, any company that provides advice to a nonprofit organization regarding financial products, including swaps and caps, must register with the US Securities and Exchange Commission (SEC) as a municipal advisor. Many lenders interpret the Act to mean that discussions the lender has with a nonprofit about a swap or cap require that the lender be registered.
An Independent Financial Advisor
Lenders may forego registration by utilizing the Independent Registered Municipal Advisor (IRMA) exemption, which allows a lender to discuss or sell financial products to the nonprofit, regardless of the lender’s status as a registered municipal advisor, when a third party IRMA is hired to advise the nonprofit organization on the transaction.
To be an IRMA advising on the specific transaction being proposed, the advisor must act in the nonprofit’s best interest and be independent (disclosing to the nonprofit any potential conflicts and compensation received other than from the nonprofit). Importantly, the IRMA will have legal obligations to the nonprofit, including a fiduciary duty and a requirement to make a determination that the subject complex financial product is suitable. In fact, many lenders require a nonprofit to hire an IRMA before the lender will discuss a swap with the nonprofit.
The SEC mandates that an IRMA must be formally hired before any “advice” is provided by the lender to the nonprofit, unless the lender determines that the nonprofit is capable of analyzing the financial transaction on its own. What constitutes “advice” is dependent on the facts and circumstances of each interaction. For example, advice may include a particularized recommendation on timing, terms, or structures. On the other hand, the lender may provide general, factual information that does not constitute “advice.” This can include general market information, information on the types of debt financing structures, or information regarding government financing programs and incentives.
Implications of Non-compliance
Although non-compliance with the foregoing are violations of securities laws, the Act and related administrative decisions suggest that any violation would fall on the lender or the unregistered company providing advice to the nonprofit organization, not on the nonprofit organization. However, while an organization may not be held liable for these violations, there may be other ramifications.
Even if non-compliance does not present a legal concern to your organization, it is important to consider the public perception and your Board’s or senior management’s possible concerns about working with lenders or financial advisors who are not in compliance with securities laws or entering into complex financial transactions without the appropriate expert assistance. ArentFox Schiff’s Nonprofits & Associations team can provide guidance on these topics.