Alert January 25, 2011

SEC Proposes Permanent Rules and Forms for Municipal Advisor Registration

On January 6, 2011, the SEC published a release (“Proposing Release”) proposing permanent rules and forms for registration of municipal advisors pursuant to Section 15B of the Securities Exchange Act of 1934 (the “1934 Act”).  Comments on the proposal are due by February 22, 2011.

Background.  Section 15B of the 1934 Act was amended by the Dodd-Frank Act to require registration of municipal advisors.  Temporary rules of the SEC implementing the registration requirement have been in effect since October 1, 2010.  Municipal advisors currently register by filing Form MA-T electronically with the SEC.  The proposed rules and forms contemplate that municipal advisors registered on Form MA‑T will be required to re-register on the new forms.

What is a Municipal Advisor?  A municipal advisor is defined by Section 15B as a person (other than a municipal entity or an employee of a municipal entity) that:

  • 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, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or
  • Undertakes a solicitation of a municipal entity.

“Municipal financial product” means municipal derivatives, guaranteed investment contracts and investment strategies.  “Investment strategies” is defined, in turn, to include “plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments.”  “Solicitation of a municipal entity or obligated person” means a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker-dealer, investment adviser, municipal dealer or municipal advisor for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.  The definition provides an exception for a person making such a solicitation on behalf of an affiliate.  Even though the statute does not specifically state that a person who undertakes solicitation of an obligated person is a municipal advisor, the SEC has concluded, in part from the fact that the statute defines “solicitation of a municipal entity or obligated person,” that Congress intended to include solicitation of obligated persons as an activity requiring registration as a municipal advisor.

The law provides that a person may be a municipal advisor if the person advises a municipal entity with respect to the investment of the “proceeds of a municipal securities.”  In the Proposing Release, the SEC stated it would not limit the identification of “proceeds of municipal securities” to funds a municipal entity received from a municipal securities offering, but would instead interpret the term to mean all funds of a municipal entity, from any source.   However, the SEC did distinguish the situation where a municipal entity invests its funds in a pooled investment vehicle (like a hedge fund) alongside investors that are not municipal entities.  Persons providing advice to such pooled investment vehicles would not have to register as municipal advisors solely on that basis.

What Is a Municipal Entity?  A municipal entity is any state, political sub-division of a state, or municipal corporate instrumentality of a state, including, among other things, any plan, program or pool of assets sponsored or established by the state, political sub-division or municipal corporate instrumentality.  This would cover state and local government employee retirement systems as well as college savings plans that comply with Section 529 of the Internal Revenue Code, since they are sponsored by states, state agencies or state educational institutions.

What Is an Obligated Person?  An “obligated person” is defined in section 15B as a person that is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.  SEC Rule 15Ba1-1 would add an exclusion for providers of municipal bond insurance, letters of credit, or other liquidity facilities.  An example of an obligated person would be the recipient of the proceeds of an industrial revenue bond offering that is obligated to make regular payments of, for example, rent, usage fees or principal and interest on a loan, the proceeds of which are used by the municipal entity to make payments on the bonds.  Although the definition of municipal advisor would not be expected to include persons who advise obligated persons with respect to matters outside of their obligations relating to the municipal securities offering, further guidance of the SEC will need to be sought on this point.

Exclusions for Certain Persons.  Section 15B provides limited exclusions from classification as a municipal advisor to the following persons:

  • Registered investment advisers -- applies only to the extent that the investment adviser is engaged in advisory activities for which registration as an investment adviser is required. 
  • Registered broker-dealers and municipal securities dealers -- applies only to the extent that the broker or dealer is serving as an underwriter.
  • Registered commodity trading advisers and their associated persons -- applies to their activities providing advice related to swaps;
  • Attorneys offering legal advice or services of a traditional legal nature; and
  • Engineers providing engineering advice.

Neither Section 15B nor the proposed rules provide an exception for accountants.  However, the Proposing Release states that the SEC does not consider the preparation or audit of financial statements, or the issuance of comfort letters for underwriters, to constitute the provision of advice of the type that would make accountants municipal advisors.  The SEC also declined to provide an exclusion for banks providing “traditional banking services,” as requested by a commenter, but is seeking further comment on this point.  The SEC also seeks comment on whether it should permit registration of only separately identifiable departments or divisions of a bank.

Forms.  The Proposing Release provides the following proposed forms:

  • Form MA, for registration of entities as municipal advisors;
  • Form MA-I, for registration of individual municipal advisors;
  • Form MA-NR, for designation by non-resident municipal advisors of a U.S. agent for service of process; and
  • Form MA-W, for withdrawal of registration.

Form MA is based in part on Form ADV, used to register investment advisers.  One significant difference from both Form ADV and Form BD is that Form MA requires disclosure of the disciplinary history of all associated persons of the municipal advisor.  Associated persons include any affiliate, any partner, officer, director or branch manager, and any other employee who is engaged in the management, direction, supervision, or performance of any municipal advisory activities.