Welcome to the Club: Municipal Advisors Now Subject to SEC Scrutiny

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HandshakeThe registered advisor community just got a little larger. The SEC recently adopted rules establishing a permanent registration regime for municipal advisors as required by the Dodd-Frank Act.  Municipal advisors will be required to register with the SEC beginning July 1, 2014.

The new regulatory scheme is primarily intended to improve oversight of the $3.7 trillion municipal bond market and address the large financial losses many municipalities suffered during the financial crisis, sometimes at the hands of their advisors. As highlighted by SEC Chair Mary Jo White, prior to the Dodd-Frank Act, municipal advisors “generally were not required to comply with any particular standard of conduct, they did not have to meet any particular training requirements, and they did not have to disclose any potential conflicts of interest.”

After Dodd-Frank became law, the SEC established a temporary registration regime. More than 1,100 municipal advisors have since registered with the SEC.  Responding to criticism that the temporary registration rules were too broad, the final version scales back the definition of “municipal advisor” and offers guidance as to when a person is providing “advice” for purposes of the definition.

Under the Final Rule, the following people would not have to register as municipal advisors:

  • Public Officials and Employees: Public officials do not have to register to the extent that they are acting within the scope of their official capacity. The exemption covers people serving as members of a governing body, an advisory board, or a committee, or acting in a similar official capacity, such as city council members or members of a board of trustees for a university.
  • Underwriter: Brokers, dealers, and municipal securities dealers serving as underwriters do not have to register if their advisory activities involve the structure, timing, and terms of a particular issue of municipal securities. However, the exemption does not apply to advice on investments of proceeds of municipal securities or municipal derivatives.
  • Registered Investment Advisers: Registered investment advisers do not have to register if they provide investment advice regarding the investment of the proceeds of municipal securities or municipal escrow investments.

There are also exemptions for attorneys, engineers, banks, accountants, independent registered municipal advisors, swap dealers and registered commodity trading advisors under certain circumstances.

In general, a person providing advice to a municipality will only be required to register if the advice relates to:

  • The investment of proceeds of municipal securities
  • The investment of municipal escrow funds
  • Municipal derivatives

The final rule takes effect on November 29, 2013.  Advisors within the scope of the new rules will have to file Form MA and Form MA-Is for each associated individual through EDGAR.  The phase-in starting July 1, 2014 is meant to allow an orderly transition from the temporary to the permanent rules.