The SEC’s new Municipal-Advisor Rules, 17 CFR § § 240.15Ba1-1 to 15Ba1-8 were to become effective Monday, January 13, 2014 but that morning were delayed until July 1. SEC Rel. 34-71288. Adopted last September, SEC Rel. 34-70462, the Rules will implement Dodd-Frank § 975 and require registration (firm-only, not individuals) and impose fiduciary duty upon MA’s (and their control affiliates), subjecting MA’s to SEC, FINRA and MSRB rules regarding:
Gifts & Entertainment
Books & Records
Compensation and Contracts
MA or Not?
1. Advice (facts & circumstances; recommendation; call to action – same as FINRA suitability standards)
• excludes general widely-disseminated material (like FINRA Rule):
“Information of a factual nature without subjective assumptions, opinions, or views;
“Information that is not particularized to a specific municipal entity or type…
“Information that is widely disseminated for use by” non-municipals / public
“General information in the nature of educational materials”
Adopting Rel. at 45. The staff endorsed a more expansive view in FAQs issued January 10.
• excludes statement of qualifications responding to RFP (unless separately compensated)
2. Issuance municipal securities (conception to grave) or
Investment proceeds (same as IRS standard) of municipal securities, including investment strategies for proceeds or escrow funds, or municipal financial products (e.g. muni derivatives)
Solicitation of municipality or obligated person (OBO others, not self or affiliates; for compensation direct or indirect)
3. Status-Based Exemptions. The Rules do not apply to:
a. Municipal entities or obligated persons, their employees and board members (when acting within course and scope)
b. General RFP responses “to get hired”
c. “IRMA” Advice to client having an independent registered MA (two-year affiliation conflict look-back), with written bilateral non-reliance disclosures and client’s affirmative representation is relying on independent MA (like FINRA institutional-client safe harbor)
4. Activities-Based Exclusions.
a. Banks acting as such re: municipal clients
b. Underwriters only to extent of traditional underwriting activities integral to the particular underwriting from engagement to “end of underwriting” (MSRB Glossary).
(1) Advice re structure, timing, terms of particular issuance
(but not investment strategies or derivatives);
and advice or assistance with…
(2) Rating strategies preparation and presentations;
(3) Investor Relations road-shows and assistance for this issue;
(4) Retail order periods and institutional marketing of negotiated deals;
(5) OS preparation;
(6) Closing details and negotiations (e.g. documents, certificates, opinions);
(7) CUSIP, registration and DTC issues;
(8) Post-sale reports;
(9) Structuring refunding escrow cash flow requirements (but not investment of proceeds)
Dirty Dozen: Advice on…
(1) Investment strategies;
(2) Municipal derivatives (including valuation);
(3) Method of sale (whether competitive or negotiated);
(4) Whether to approve or authorize an issuance;
(5) Bond election campaigns;
(6) Non-issue-specific analysis or strategic advice on financing options, debt capacity, portfolio impact, variable assumption scenarios, etc.
(7) Assisting issuers with conducting competitive sales;
(8) Financial feasibility analyses of new projects;
(9) Budget planning and analysis re debt issuance;
(10) Overall rating strategies beyond a given issuance;
(11) Overall financial controls beyond a given issuance;
(12) Forming, issuing and evaluating RFP/RFQs.
Adopting Rel. at 164-68.
c. Swap dealers acting as such
d. RIA acting only as RIA (not MA)
e. CPA as audit or attest (but not tax or arbitrage)
f. Attorney acting as attorney (but not financial specialist)
g. Engineer acting as engineer