SEC Releases Final Rule on Registration of Municipal Advisors

by McCarter & English, LLP
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The U.S. Securities and Exchange Commission issued its final rule regarding registration and oversight of municipal advisors pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Release 34-70462 addresses a number of the concerns raised by commenters after the SEC issued its proposed rule in December 2010. The SEC and the municipal securities community have been operating under a temporary rule since September 2010. Registrations pursuant to the Final Rule will be phased in beginning July 1, 2014, based on registration numbers under the temporary rule, and the temporary rule will sunset on December 1, 2014.

Both the Proposed Rule and the Final Rule require municipal advisors to register on a permanent basis, to enable the SEC to obtain information to enhance its oversight of municipal advisors and their activities in the municipal securities market. In addition, because the information contained in the SEC registration forms will be publicly available, the SEC believes that “municipal entities,” including both issuers of municipal securities and conduit obligors with respect thereto, will be more informed when choosing a municipal advisor.

The Proposed Rule defined “municipal advisor” broadly and would have required, among other things, municipal advisor registration of appointed board members of municipalities and people providing investment advice on all public funds. The SEC received more than 1,000 comment letters on the proposal, most of which raised concerns about the broad reach of the Proposed Rule.

In response to the comments, the Final Rule streamlines the registration process, clarifies the definitions of “municipal advisor” and “advice,” and provides a number of carve-outs to the registration requirement.

Streamlining of Registration Process

In the Proposed Rule, the SEC planned to require all individual persons acting as municipal advisors to register with the SEC. In the Final Rule, municipal advisory firms can submit a single registration to include all persons acting as municipal advisors for those firms. The firms will provide the SEC with certain information regarding each advisor they employ and will be required to update such information as new advisors join the firms. If an individual municipal advisor acts as a sole proprietor or otherwise independently of a firm (even if such person also provides advice through a registered firm), such person will be required to register with the SEC in his or her own capacity.

Definitions of "Municipal Advisor" and "Advice"

The Final Rule governs the registration of “municipal advisor[s],” defined as a person (who is not a municipal entity or an employee of a municipal entity) who provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues; or a person who undertakes a solicitation of a municipal entity or an obligated person. The definition exempts certain individuals as further described below.

Many of the comments to the Proposed Rule expressed concern about the lack of clarity by the SEC as to what constitutes “advice” under the definition of “municipal advisor.” In the Release, the SEC states that what constitutes “advice” is not subject to a bright-line rule but is subject to an analysis of the facts and circumstances of each case. However, the Final Rule provides that “advice” does not include, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities (including with respect to the structure, timing, terms and other similar matters concerning such financial products or issues).

The Final Rule also states that a response to a Request for Proposals does not constitute “advice” within the scope of the Final Rule, provided that the responder is not being compensated for the content of the RFP response.

Exclusions from Registration

In response to concerns raised by commenters to the Proposed Rule, the SEC included in the Final Rule a number of exemptions to the registration requirements. The key exclusions include:

  • Employees, Elected and Appointed Officials. The Dodd-Frank Act provides that employees of a municipal entity are not “municipal advisors.” However, commenters raised concerns that elected and appointed members of the governing bodies or boards of municipal entities and conduit obligors could be considered advisors subject to registration. To address such concerns, the Final Rule explicitly exempts “any person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity or obligated person to the extent that such person is acting within the scope of such person’s official capacity.” Employees of conduit obligors are also excluded.
  • Underwriters, Brokers and Dealers. The Proposed Rule contained a narrow exemption for brokers, dealers and underwriters. The Final Rule broadens such exemption to apply to “a broker, dealer, or municipal securities dealer serving as an underwriter of a particular issuance of municipal securities to the extent that the broker, dealer, or municipal securities dealer engages in activities that are within the scope of an underwriting of such issuance of municipal securities.” This broader exemption is designed to include activities that are within the scope of a securities underwriting that are ancillary to the underwriting itself.
  • Banks. Commenters on the Proposed Rule raised concerns that no exemption was available to banks providing traditional banking services to municipal entities or obligated persons. In response, the Final Rule exempts banks from registration as municipal advisors to the extent such a bank provides advice with respect to:
  • Any extension of credit by a bank 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 a municipal security for its own account (this exempts direct bond purchase transactions by banks), provided that such bank is not advising the municipal entity or obligated person with respect to other issues or municipal products that are not covered by an exemption;
  • Any investments held in a sweep account, deposit account, savings account or other deposit instrument;
  • Any investment made by a bank in its capacity as indenture trustee; and
  • Any investment strategy that is not a plan or program for the investment of bond or other municipal security proceeds.
  • Parties Retaining an Independent Financial Advisor. The Final Rule exempts from registration any person engaging in municipal advisory activities in cases where the municipal entity or obligated person is represented by an independent, registered municipal advisor with respect to the same financial product or transaction. In order to qualify as “independent,” the advisor in question must not have been associated with the applicable municipal entity or obligated person for a two-year period.
  • Swap Dealers. The Final Rule exempts from the registration requirements any commodity trading advisor who is already registered under the Commodity Exchange Act, to the extent such person is providing advice related to swaps.
  • Registered Investment Advisers. The Final Rule exempts “investment advisers” registered under the Investment Advisers Act of 1940, to the extent such investment adviser is providing investment advice in such capacity. “Investment advice” in this case does not include advice with respect to the issuance and/or structure of municipal securities.
  • Attorneys and Accountants. The Final Rule exempts attorneys providing traditional legal services and accountants providing traditional accounting services, to the extent that such attorney or accountant are not acting in a financial advisory capacity. Members of the public finance community have raised concerns about certain types of advice that are often requested of and given by attorneys and accountants but that are not easily categorized as legal services, accounting services or financial advisory services. It is possible that the SEC will issue further guidance to clarify this particular exemption.

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