Proposed Municipal Advisor Rules Under the Dodd-Frank Act Timothy V. McGree Chapman and Cutler LLP. 3000788. Sources. Section 975 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Act No. 111-203) as amending Section 15B of the Securities and Exchange Act
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Proposed Municipal Advisor RulesUnder the Dodd-Frank Act
Timothy V. McGree
Chapman and Cutler LLP
Section 975 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Act No. 111-203) as amending Section 15B of the Securities and Exchange Act
Release No. 34-63576 (the “Release”) of the SEC Proposing New Rules 15Ba1-1 through 15Ba1-7 and new Forms MA, MA-1, MA-W and MA-NR relating to Municipal Advisors. Note: This release deals with proposed rules.
“It shall be unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered in accordance with this subsection.” [Emphasis added]
(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 clauses (i) through (iii) of subparagraph (A)
(C) 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.
Note the exclusion does not extend to accountants. Limits on exclusions are discussed below.
“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 payment of all, or part of the obligations on the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities).”
These persons include “conduit” obligors, such as universities hospitals, some economic development borrowers, and also governmental units participating in a joint action agency, such as municipalities in an electric or water joint action entity.
Quoted from the Release. Footnotes omitted.
“Section 15B(e)(5) provides that the term “municipal financial product” means “municipal derivatives, guaranteed investment contracts, and investment strategies.” Exchange Act Section 15B(e(3) provides that “the term ‘investment strategies’ includes 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”. . . .The Commission notes that the definition of “investment strategies” provides that it “includes” plans or programs for the investment of the proceeds of municipal securities and, therefore, the Commission interprets the definition to mean that it includes, without limitation, the investment of the proceeds of municipal securities. Further, the Commission interprets this definition to include plans, programs, or pools of assets that invest funds held by or on behalf of a municipal entity, and, therefore, any person that provides advice with respect to such funds must register as a municipal advisor unless it is covered by one of the exclusions discussed below. . . .
Based on these definitions, the Commission believes it was Congress’s intent to include in the definition of “municipal advisor” persons that provide advice with respect to plans, programs or pools of assets that invest funds held by, or on behalf of, a municipal entity, such as a 529 college savings plan, LGIP or public pension plan. Such plans, programs, and pools of assets are generally funded from sources other than proceeds of municipal securities, such as families who wish to save for a child’s college expenses, general monies of state and local governments being temporarily invested prior to their budgeted expenditures, and pension contributions from employees and state and local government employers. As a result, the Commission does not believe that it was Congress’s intent to limit the requirement to register as a municipal advisor only to those persons that provide advice with respect to plans or programs for the investment of
proceeds from municipal securities. Also, because every bank account of a municipal entity is comprised of funds “held by or on behalf of a municipal entity,” money managers providing advice to municipal entities with respect to their bank accounts could be municipal advisors.
So you are giving advice subject to being a municipal advisor if you advise a municipal entity or obligated person (including pension plans or other pools) as to investment of any funds including any corporate funds including advice as to bank accounts.
You are a municipal advisor if you solicit (paid or unpaid) on behalf of a broker, dealer, municipal securities dealer, municipal advisor or investment advisor
(So long as you are not employed by a firm controlling, controlled, or under common control of firm for whom solicitation made)
No de-minimus exception in proposed rules
But — Not with respect to the investment of bond proceeds
Advisability of a derivatives product
As agent in a private placement
But — These are mostly money managers
Not bond structuring
But — Only for swaps
But — Not accountants (limited to audits or comfort letters)
Attorneys limited to advice of “traditional legal nature”
Engineers limited to engineering services (not feasibility studies or cash flow projections)
But — Not appointed board members (Rule likely to change)
There is a separate form for withdrawal
2 years readily accessible
Note: For attorneys, waives any privilege
In the conduct of its municipal securities or municipal advisory activities, each broker, dealer,†municipal securities dealer, and municipal advisor†shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.
Short section. Great duty of care.