SEC Approves Permanent Registration Rules for Municipal AdvisorsOctober 31, 2013
On September 18, 2013, the Securities and Exchange Commission (“SEC”) voted unanimously to adopt rules under Section 975 of the Dodd-Frank Act (“Dodd-Frank Act”) that require the permanent registration of municipal advisors. The rules clarify the meaning of terms such as “municipal advisor” and “advice,” provide clear standards for exemptions from the municipal-advisor definition, and impose certain recordkeeping and filing requirements on municipal advisors.
Municipal advisors provide advice to state and local governments issuing municipal securities – usually bonds or notes – to assist the issuers on decisions of when and how to issue these obligations and where to invest the proceeds from sales of the obligations. Unlike underwriters, any person acting as a municipal advisor has a fiduciary duty to the municipal entity under the Securities Exchange Act. Also, unlike other market intermediaries, municipal advisors were not required to register with the SEC before the Dodd-Frank Act. This left open the possibility that municipalities were receiving guidance from unregulated advisors with no standards for their training, qualification, or conduct. In the years prior to the financial crisis of 2008, many municipalities relied on advice from unregistered municipal advisors, leading to investments in complex derivative products that resulted in significant financial losses. Shortly after the passage of the Dodd-Frank Act, the SEC adopted a temporary registration scheme designed to prevent such losses to municipalities and their investors. The new SEC rules replace the temporary registration scheme with a permanent regime.
Who Is a Municipal Advisor?
A Municipal Advisor is defined in the Dodd-Frank Act as 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 obligated person with respect to municipal financial products or the issuance of municipal securities, or (ii) undertakes a solicitation of a municipal entity or obligated person.
A Municipal Entity is any state, political subdivision of a state, or municipal corporate instrumentality of a state.
An Obligated Person is any person, including an issuer of municipal securities, who borrows the proceeds of a municipal securities offering and is committed by contract or other arrangement to repay such funds.
The new rules address the definition of what constitutes “advice” from a municipal advisor, which was not explicitly defined in the Dodd-Frank Act. The rules clarify that the term is to be broadly construed, and whether a person is providing advice to a Municipal Entity or Obligated Person (including conduit borrowers such as colleges, universities, health systems, museums, secondary schools, and other related entities) depends on “all of the relevant facts and circumstances,” including whether the advice:
- Involves a “recommendation” to a Municipal Entity.
- Is particularized to the specific needs of a Municipal Entity.
- Relates to municipal financial products or the issuance of municipal securities.
Advice does not include providing certain information that is widely available to the public. The more particularized advice is to the specific needs of a Municipal Entity or an Obligated Person, the more likely it is to be defined as “advice” under the rules.
Exclusions from the Registration Requirement
The new rules also clarify who need not be registered as a Municipal Advisor. Exemptions from the definition of “Municipal Advisor” are based on the activities of the advisor instead of on the type of market participant involved. The following are exempt from registration requirements:
Public Officials and Employees of Municipal Entities/Obligated Persons
- Any person who is serving as a member of a governing body, advisory board, or committee of a Municipal Entity or Obligated Person is excluded from the definition of Municipal Advisor if acting within the scope of his or her official capacity. Additionally, any employee of a Municipal Entity or Obligated Person acting within the scope of his or her employment is excluded.
- So long as brokers, dealers, and municipal securities dealers are acting as underwriters and engaging in activities within the scope of an underwriting, such as providing advice on the structure, timing, and terms of a specific issue of municipal securities, they will not have to register as municipal advisors. However, any advice provided outside the scope of underwriting, such as advice on investments of proceeds of municipal securities or derivatives, is outside the scope of this exemption.
Those Represented by an Independent Registered Municipal Advisor
- An individual who would otherwise be considered a Municipal Advisor and who is working with an entity represented by an independent, registered Municipal Advisor, will not need to register so long as the following conditions are met:
- The independent advisor is representing the entity on the same issue;
- The individual receives a representation in writing from the entity stating that it is represented by, and will rely on the advice of, the independent Municipal Advisor; and
- The individual discloses to the entity that, by obtaining the foregoing representation, such individual is not a Municipal Advisor, and provides a copy of such disclosure to the independent advisor.
- Banks are excluded from the registration requirement with respect to certain products and services that are not believed to pose the risks the Dodd-Frank Act sought to address. Such services and products include:
- Any investments held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank;
- Any extension of credit to a Municipal Entity or Obligated Person, including the issuance of a letter of credit, the making of a direct loan, or the purchase of the municipal securities for its own account;
- Any funds held in a sweep account; or
- Any investment made by a bank acting in the capacity of an indenture trustee or in a similar capacity.
Registered Investment Advisers
- To the extent that investment advisers, registered under the Investment Advisers Act of 1940, are providing investment advice in that capacity, they will not have to register. For purposes of the rule, “investment advice” does not include advice concerning whether and how to issue municipal securities, advice on the structure, timing, and terms of a municipal securities issuance, advice on municipal derivatives, or a solicitation of a Municipal Entity or Obligated Person.
Attorneys, Engineers, Accountants, and Other Professionals
- Attorneys providing traditional legal advice need not register as Municipal Advisors. To the extent that an attorney represents himself or herself as a financial advisor or expert regarding municipal securities, he or she will need to register.
- Engineers advising on aspects such as feasibility studies, cash flow analyses, or other engineering matters do not need to register.
- Accountants providing auditing services, preparing financial statements, or issuing letters for underwriters are not required to register.
- Vendors that are not providing advice with respect to municipal securities, and actuaries providing actuarial services relating to plans containing only the proceeds of municipal securities, are also exempt from registering.
- Commodity trading advisors registered under the Commodity Exchange Act who are providing advice related only to swaps do not need to register as Municipal Advisors.
- Natural persons associated with a registered Municipal Advisor engaging in advisory activities solely on behalf of the Municipal Advisor are exempt from registration requirements. However, the SEC is requiring the municipal advisory firm to provide information regarding such natural persons.
The new rules impose recordkeeping requirements on Municipal Advisors. Records may be kept electronically and must be preserved for a minimum of five years. Different types of records have different requirements (e.g., corporate records may need to be preserved for three years after the termination of the business to which they relate). In addition, there are different recordkeeping requirements for municipal advisors located outside of the United States.
When Permanent Registration Is Required
Municipal Advisors that temporarily registered prior to October 1, 2014 are required to register on a staggered basis beginning July 1, 2014, with the registration period based on the advisor’s existing temporary registration number. New registrants that are required to register after October 1, 2014 must register under the temporary registration regime and then subsequently file under the permanent regime during the applicable filing period.
Registration is accomplished by filing Form MA. In addition, Form MA-1 must be filed for each natural person associated with the firm that is filing a Form MA. Form MA and Form MA-1 must be submitted electronically through EDGAR.