The SEC’s Office of Municipal Securities has released a list of frequently asked questions (the “FAQs”) that presents its views regarding various aspects of the SEC’s municipal advisor registration rules (the “Final Rules”) (discussed in the October 8, 2013 Financial Services Alert and in a Client Alert focused on banks and trust companies).
The FAQs, which may be updated periodically, provide answers to eighteen questions divided into 9 categories.
What Constitutes “Advice”
Several questions address the issue of what constitutes “advice” for purposes of the Final Rules. The FAQs reiterate statements made in the rule release (the “Adopting Release”) that accompanied the Final Rules that the term “advice” is not subject to a bright-line definition and that a determination of whether or not a person provides advice must be based on a facts and circumstances analysis. However, the FAQs list a number of examples of factual information that, if provided without subjective assumptions, opinions, or views, would allow a person providing such facts to rely on the “general information exclusion” that excludes “advice” to a municipal entity or obligated person that provides general information and does not involve a recommendation regarding municipal financial products or the issuance of municipal securities. Examples of such general information listed in the FAQs include factual information describing and even comparing the “general characteristics, risks, advantages, and disadvantages” of various forms of debt financing structures. Providing factual and educational information regarding government financing programs and incentives would also not be considered “advice” according to the FAQs.
The FAQs add that information may be tailored “in limited respects” to the municipal entity or obligated person and still fall within the general information exclusion from advice. The FAQs include an example of a person providing general market information pertaining to a municipal entity’s outstanding bonds. However, the FAQs also state that more specifically tailored factual statements could “imply a recommendation that could constitute advice.” Presenting various debt financing structuring options crafted “to address the specific needs, objectives, or circumstances of a municipal entity or obligated person” would, according to the FAQs, “likely…suggest a preferred financing approach” that could constitute a recommendation outside the scope of the general information exclusion.
The FAQs provide that certain “clearly and conspicuously stated” disclosures and disclaimers would weigh against considering the provision of certain information to be a recommendation that constitutes advice. Examples of these disclosures and disclaimers include statements that the person providing the information is not recommending an action, that the person is not acting as an adviser to the municipal entity or obligated person, and that the municipal entity or obligated person should discuss the information provided with its own advisers and experts. The FAQs add, however, that the use of such disclosures and disclaimers is not controlling and is instead just a factor in the analysis of whether or not given information constitutes advice. Therefore, simply adding such disclosures and disclaimers to written materials that clearly contain recommendations and advice would not be sufficient to excuse the person providing the materials from the obligation to register under the Final Rules.
Investment Adviser Exception
The FAQs also clarify the exclusion of registered investment advisers providing investment advice in such capacity from the definition of “municipal advisor.” Noting that “investment advice” is defined to exclude, among other things, advice concerning municipal derivatives, the FAQs clarify the view of the SEC staff that “advice concerning municipal derivatives” was meant to refer to advice regarding municipal derivatives used by municipal entities or obligated persons in connection with issuing municipal securities. That is, the term is not intended to cover investment advisory services regarding municipal derivatives in an investment portfolio. As a result, registered investment advisers are permitted to advise municipal entities and obligated persons regarding municipal derivatives in an investment portfolio without registering as municipal advisors.
Two questions in the FAQs concern situations in which a broker-dealer, acting as an underwriter for an issuance of municipal securities, discovers an error or omission in the course of its work. The first question asks whether a broker-dealer that realizes that there is a material omission in the offering document after the issuance has closed and the underwriting period has terminated may recommend that the municipal entity prepare an offering supplement. The FAQs clarify that, although the Adopting Release states that providing advice after the end of the underwriting period would be outside the scope of the underwriter exclusion, the broker-dealer would be permitted to advise the municipal entity to prepare a supplement to rectify the omission without registering as a municipal advisor. The FAQs explain that such advice is “integral to” the broker-dealer’s underwriting responsibility and promotes compliance with the anti-fraud provisions of the securities laws. Similarly, the second question asks whether a broker-dealer engaged to serve as underwriter for an issuance of municipal securities that discovers that the municipal entity has failed, during the previous five years, to comply with a continuing disclosure agreement pertaining to an outstanding issuance of municipal securities may advise the municipal entity to take corrective actions. Again, the FAQs state that the broker-dealer may rely on the underwriter exclusion to advise the municipal entity to take corrective actions, such as completing the missing filings, without having to register as a municipal advisor. The FAQs explain that the broker-dealer providing such advice would be fulfilling its obligation to ensure that the offering document for the current offering is materially accurate and complete, and would also be promoting compliance with the anti-fraud provisions of the securities laws.