South Florida Arbitration & Litigation Lawyer Blog
SEC Approves Registration Rules for Municipal Advisors
The Securities and Exchange Commission recently voted to adopt rules establishing a permanent registration regime for municipal advisors as required by the Dodd-Frank Act. The rule is currently slated to become effective 60 days after publication in the Federal Register.
The Final Rule:
The Commission has adopted a final rule requiring municipal advisors to register with the SEC. In particular, the rule clarifies who is and isn’t a “municipal advisor” and offers guidance on when a person is providing “advice” for purposes of the municipal advisor definition.
The final rule exempts employees and appointed officials of municipal entities from registration, and narrows the application of the term “investment strategies” to apply only to the investment of proceeds from the sale of municipal securities rather than to all public funds.
Exemptions provided under the rule are based on the activities of the advisor rather than the type of market participant. The SEC staff believes this approach avoids giving certain market participants an inappropriate competitive advantage.
Additionally, instead of the proposed approach that would have required individuals associated with registered municipal advisory firms to register separately, the final rule requires these firms to furnish information about these individuals. The final rule also allows the SEC to censure these individuals if necessary.
Defined Terms:
The rule defines the following terms:
Advice. A person is providing “advice” to a municipal entity or an “obligated person” based 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, however, does not include giving out certain general information.
An “obligated person” essentially means an entity such as a non-profit university or non-profit hospital that borrows the proceeds from a municipal securities offering and is obligated by contract or other arrangement to repay all or some portion of the amount borrowed.
Investment Strategies. A person providing advice to a municipal entity or an “obligated person” with respect to “investment strategies” only has to register if such advice relates to:
- The investment of proceeds of municipal securities.
- The investment of municipal escrow funds.
- Municipal derivatives.
Exemptions From the Municipal Advisor Definition:
To avoid confusion, the final rule clarifies exemptions from the municipal advisor definition for certain people engaging in specified activities.
The following people conducting the specified activities would not be required to register as a municipal advisor:
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. This exemption addresses an unintended consequence of the original proposal that generated significant public comment and created the impression that public officials and municipal employees would be covered if they provide “internal” advice.
This exemption covers people serving as members of a governing body, an advisory board, a committee, or acting in a similar official capacity as an official of a municipal entity or an “obligated person.”
For instance, it covers:
• Members of a city council, whether elected or appointed, who act in their official capacity.
• Members of a board of trustees of a public or private non-profit university acting in their official capacity, where the university is an obligated person by virtue of borrowing proceeds of municipal bonds issued by a state governmental educational authority.
Similarly, this exemption covers employees of a municipal entity or an obligated person to the extent that they act within the scope of their employment.
Underwriters. 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.
This exemption begins when the municipal issuer engages the underwriter on a particular transaction and would continue until the end of the underwriting period for that transaction.
The exemption does not apply to advice on investments of proceeds of municipal securities (or related municipal escrow investments in refinancings) or municipal derivatives. That is because this type of advice is outside the scope of underwriting the issuance of municipal securities and involves potential conflicts of interest.
Registered Investment Advisers. Registered investment advisers and associated persons do not have to register if they provide investment advice regarding the investment of the proceeds of municipal securities or municipal escrow investments. This exemption helps ensure the rule does not create duplicative regulation of investment advisers.
This exemption does not apply to advice on the structure, timing, and terms of issues of municipal securities or municipal derivatives. That is because advice in these areas is outside the focus of investment adviser regulation.
Registered Commodity Trading Advisor. Registered commodity trading advisors under CFTC rules and their associated persons do not have to register if the advice they provide relates to swaps. This exemption helps ensure the rule does not create duplicative regulation with existing CFTC regulation of swap advisers.
Attorneys. Attorneys do not have to register if they are providing legal advice or traditional legal services with respect to the issuance of municipal securities or municipal financial products.
This exemption does not apply to advice that is primarily financial in nature or to an attorney representing himself or herself as a “financial advisor” or “financial expert” on municipal advisory activities.
Engineers. Engineers do not have to register if they provide engineering advice such as feasibility studies and cash flow analysis and similar activities related to engineering aspects of a project.
This exemption does not apply to activities in which an engineer provides advice regarding municipal financial products or the issuance of municipal securities.
Banks. Banks do not have to register to the extent they provide advice on certain identified banking products and services (such as deposit accounts, extensions of credit, or bond indenture trustee services).
This tailored exemption does not apply to banks that:
• Engage in other municipal advisory activities such as providing advice on municipal derivatives or the issuance of municipal securities.
• Provide advice on municipal derivatives, in part because municipal derivatives were a source of significant losses by municipalities in the financial crisis.
Accountants. Accountants do not have to register if they are providing accounting services that include audit or other attest services, preparation of financial statements, or issuance of letters for underwriters.
Independent Registered Municipal Advisor. People who provide advice in circumstances in which a municipal entity has an independent registered municipal advisor with respect to the same aspects of a municipal financial product or issuance of municipal securities do not have to register, provided that certain requirements are met and certain disclosures are made.
Swap Dealers. Registered swap dealers under CFTC rules do not have to register as municipal advisors if they provide advice with respect to swaps in circumstances in which a municipal entity is represented by an independent advisor. This exemption helps ensure that the rule does not create duplicative regulation with existing CFTC regulation of swap dealers and recognizes a similar exemption under CFTC rules.
This exemption does not apply to swap dealers that engage in other municipal advisory activities such as providing advice on the issuance of municipal securities or the investment of the proceeds of municipal securities or municipal escrow investments.
Please keep in mind that the above information is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If the reader has any questions concerning the contents of this post, you should contact a qualified professional.
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