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January 14, 2011
Proposed SEC Rule Regarding Registration of Municipal Advisors

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I. Overview

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires municipal advisors to register with the United States Securities and Exchange Commission (“SEC”). To address the Dodd-Frank Act, the SEC placed a temporary registration process in effect last fall and, on December 20, 2010, proposed a permanent registration process and accompanying rule that would establish a permanent registration and record-keeping regime for municipal advisors. The proposed rule is published in SEC Release No. 34-63576 available at http://www.sec.gov/rules/proposed/2010/34-63576.pdf. On January 6, 2011, the proposed process and rule was published in the Federal Register. Volume 76, No. 4, p. 824 (January 6, 2011). The SEC is requesting comments on all aspects of the proposed rule by February 22, 2011. While the SEC’s registration process is not particularly burdensome as it presently exists, the SEC’s proposed rule includes, among other things, a far-reaching interpretation of activity that constitutes the business of being a municipal advisor.

II. Application of Proposed Rule

The proposed new rule applies to “municipal advisors” who (i) provide advice to or on behalf of a “municipal entity” or an “obligated person” with respect to municipal derivatives, guaranteed investment contracts, and investment strategies 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 (ii) undertake a solicitation of a “municipal entity” or “obligated person.”1 Id. at 828-29.

A. Municipal Entity

“Municipal entity” means any State, political subdivision of a State, or municipal corporate instrumentality of a State, including (A) any agency, authority, or instrumentality of a State, political subdivision, or municipal corporate instrumentality, (B) any plan, program, or pool of assets sponsored or established by a State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof, and (C) any other issuer of municipal securities. Id. at 829. The definition of “municipal entity” includes, but is not limited to, public pension funds, local government investment pools and other State and local government entities or funds, as well as participant directed investment programs and certain saving and retirement plans, such as 529, 403(b), and 457 plans. Id.

B. Obligated Person

“Obligated person” means any person, including an issuer of municipal securities, who 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. Id. The definition of “obligated person” does not include providers of municipal bond insurance, letters of credit or other liquidity facilities. Id. at 830.

III. Definition of Municipal Advisor

The broadly worded statutory definition of “municipal advisor” includes (A) a person (who is not a municipal entity or an employee of a municipal entity) who (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal derivatives, guaranteed investment contracts, and investment strategies 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 (ii) undertakes a solicitation of a municipal entity; and (B) financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in any of items (i) and (ii) of clause (A). Exchange Act §15B(e)(4). The definition does not include a broker, dealer, or municipal securities dealer serving as an underwriter (as defined in section 2(a)(11) of the Securities Act of 1933) (15 U.S.C. 77b(a)(11)), any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice, any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps, attorneys offering legal advice or providing services that are of a traditional legal nature, or engineers providing engineering advice. Id.

In addition to the express terms of the statutory definition of municipal advisor, the proposed SEC rule indicates that the registration requirement may also apply to professionals and entities described herein, if certain circumstances exist. Federal Register Volume 76, No. 4, p. 824 (January 6, 2011). A person engaging in municipal advisory activities may be considered a municipal advisor even if no contract exists or compensation is received. Id. at 832.

The list below is illustrative of the broad scope of the proposed rule’s definition of municipal advisor and is not intended to be exhaustive. Under the proposed rule, “municipal advisory activities” means providing advice to or on behalf of a municipal entity or obligated person with respect to municipal derivatives, guaranteed investment contracts, and investment strategies 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 solicitation of a municipal entity or obligated person. Id. at 882.

Professionals/Entities

Circumstances

Accountants Engaging in municipal advisory activities other than preparation of financial statements, auditing financial statements, or issuing letters for underwriters for or on behalf of a municipal entity or obligated person.
Appointed members of governing bodies of a municipal entity who are not employees or elected officials of a municipal entity
Engaging in municipal advisory activities.
Attorneys Engaging in municipal advisory activities other than those of a traditional legal nature or legal advice to a client that is a municipal entity or obligated person.
Banks Engaging in activities that would subject them to registration as municipal advisors such as acting as trustees with respect to an issuance of municipal securities or otherwise providing advice with respect to municipal financial products.
Broker-dealers acting as placement agents for a private equity fund Soliciting a municipal entity (including pension funds) and obligated persons to invest in the fund.
Brokers, Dealers, or Municipal Securities Dealers Engaging in municipal advisory activities while acting in a capacity other than as an underwriter on behalf of a municipal entity or obligated person.
Commodity Trading Advisors or persons associated with therewith Engaging in municipal advisory activities other than advice related to swaps.
Employees and Board Members of Obligated Persons The employees and board members of obligated persons are not expressly excluded under the definition of “municipal advisor” as are employees and elected officials of municipal entities.
Engineers Engaging in municipal advisory activities other than providing engineering advice. For example, an engineer is engaging in municipal advisory activities when preparing a feasibility study that includes analysis beyond the engineering aspects of the study.
Investment Advisors or persons associated with such investment advisor not registered under the Investment Advisers Act of 1940
Engaging in municipal advisory activities other than providing investment advice that would subject such advisor or person associated with such advisor to the Investment Advisers Act of 1940.
Third Party Solicitors Seeking business on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser from a municipal entity.

IV. Appointed Officials of Municipal Entities to Register as Municipal Advisors

As noted above, the definition of “municipal advisor” excludes, among others, “employees of a municipal entity.” Id. at 829. The SEC clarifies in its proposal whether the exclusion for “employees of a municipal entity” covers elected or appointed members of the entity’s governing body, such as board members or county commissioners. Id. at 834. The SEC concludes that elected members of the governing body and those elected officials serving as members ex officio are generally included within the exclusion for “employees of a municipal entity.” Id. Appointed members of that body under the proposed rule are, however, included in the definition of a “municipal advisor,” because of the SEC’s view that “appointed members, unlike elected officials and elected ex officio members, are not directly accountable for their performance to the citizens of the municipal entity.” Id. The SEC has expressly requested comment on whether the above elected/appointed distinction is “appropriate” and whether exclusions from the advisor registration/reporting requirements should be made for non-employee persons “associated with a municipal entity.” Id. at 837.

V. Municipal Advisor Registration Requirements

A. Natural Persons

The proposed rule would require natural persons, such as appointed members of a municipal entity’s governing body, to register with the SEC as “municipal advisors” if they advise on the issuance of municipal securities or swap transactions, guaranteed investment contracts, and investment strategies (including advice with respect to the structure, timing, terms, and other similar matters concerning such issues or financial products), or undertake a solicitation of a municipal entity or obligated person. Registration would require the electronic filing of a new Form MA-I with the SEC which upon completion would be made publically available. Id. at 867-68. Form MA-I requires personal information, including the following:

  • Identifying information
  • Residential history for the past five years
  • Employment history for the past 10 years
  • Other business activity, if any, in which the individual is currently engaged
  • Employment terminations following allegations of certain violations
  • Criminal, regulatory, and civil judicial history
  • Consumer complaints
  • Financial disclosures relating primarily to bankruptcy proceedings and unsatisfied judgments or liens

Registered municipal advisors who are natural persons would be required to electronically amend Form MA-I whenever the information previously provided becomes inaccurate. Id. at 868. In addition, they would be required to certify initially and annually that, among other things, they meet the qualification standards of the SEC, Municipal Securities Rulemaking Board (the “MSRB”), and any other self-regulatory organization. Id. at 867. The SEC has expressly requested general comment on whether disclosure requirements are appropriate. Id. at 863.

B. Organized Entities

The proposed rule would also require organized entities, such as a partnership, corporation, trust or other organized entity to register with the SEC as “municipal advisors” if it advises on the issuance of municipal securities or swap transactions, guaranteed investment contracts, and investment strategies (including advice with respect to the structure, timing, terms, and other similar matters concerning such issues or financial products), or undertakes a solicitation of a municipal entity or obligated person. Registration would require the electronic filing of a Form MA with the SEC which upon completion would be made publically available.

VI. Consequence of Becoming a Municipal Advisor

Under the proposed rule, municipal advisors will be subject to various registration and reporting requirements. In addition, municipal advisors will have to comply with MSRB rules and regulations that have not yet been promulgated. The Dodd-Frank Act establishes a fiduciary duty with respect to municipal advisors and all persons associated with such municipal advisors. Exchange Act §15B(c)(1). No municipal advisor may engage in any act, practice, or course of business that is not consistent with a municipal advisor’s fiduciary duty or that is in contravention of any rule of the MSRB. Id. In addition, the municipal advisor will likely have to comply with additional federal and fraud regulations as set forth by the final SEC rule.

VII. Conclusion

The SEC’s proposed rule includes a far-reaching interpretation of activity that constitutes the business of being a municipal advisor. If you have questions concerning this client update, or would like assistance in commenting on the proposed rule, please contact the Sidley Austin LLP lawyer with whom you usually work.


1  The “solicitation of a municipal entity or obligated person” is the term used in the definition of municipal advisor in the proposed rule. Section 15B of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) provides a definition of solicitation of a municipal entity or obligated person as follows: “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, municipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation 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.” Exchange Act §15B(e)(9).


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This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.

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