Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp
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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 Rules Under the Dodd-Frank Act Timothy V. McGree Chapman and Cutler LLP

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Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

Proposed Municipal Advisor RulesUnder the Dodd-Frank Act

Timothy V. McGree

Chapman and Cutler LLP

3000788


Sources

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

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.


Reasons for the new provisions

Reasons for the New Provisions

  • Municipal Advisors (MA) have previously been (in general) unregulated

  • Growth in the municipal bond market place since the last major statutory regulatory actions (1975) has been enormous

    • MA’s participated in $315B in municipal debt in 2008

    • In 1975, total outstanding municipal bond debt was $235B. $474B was issued in 2009 alone. Total outstanding municipal bond debt as of March 2010 was over $2.8T

  • Complexity of market has increased—derivatives, VRDO’s, ARB’s


  • Statute

    Statute

    • Requires registration and oversight of MA by SEC.

    • Section 15B(a)(1)

      “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]

      • Duty to register

      • Oversight and Responsibilities


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • You can analyze the statute’s requirements as follows:

      • Who?

      • To Whom?

      • Providing What Advice?

      • What Consequences?


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • As in many statutes and regulations, definitions are important

      • Who?

        Municipal Advisor

        • A person (who is not 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 tomunicipal financial productsor 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;

            [Emphasis Added]


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    Who includes—

    (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)


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • But Not—

      (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.


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • To Whom?

      • Municipal Entities

        • [No surprises here] These are states, subdivisions, agencies, instrumentalities

        • [Broad reach here] Any plan, program, or pool of assets sponsored by any of the above listed in ( A) and

        • Any other issuer of municipal securities


    Obligated persons

    Obligated Persons

    • (From Section 15B(e)(10) of the Exchange Act)

    • (Also consistent with Rule 15c2-12)

      “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.


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • For What?

    • I.e. What constitutes advice “with respect to municipal financial products or the issuance of municipal securities”

      • The easy part. Issuance of municipal securities. What you would expect: structuring, pricing, assisting in drafting offering documents, negotiating terms, etc.

      • The hard (broad) part. Municipal financial products:

        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


    Continued

    (continued)

    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. . . .


    Continued1

    (continued)

    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


    Continued2

    (continued)

    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.


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    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.


    Solicitation

    Solicitation

    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


    Review of exclusions from municipal advisor

    Review of Exclusions from Municipal Advisor

    • Basic theme: Here are exclusions but they are limited to what you do in excluded activity (Don’t cross the line.)

      • Broker, Dealer or Municipal Securities Dealer acting as underwriter in connection with the issuance of municipal securities

        But — Not with respect to the investment of bond proceeds

        or

        Advisability of a derivatives product

        or

        As agent in a private placement

        or

        Uncompensated advice


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Registered Investment Advisers under the Investment Advisers Act of 1940

      But — These are mostly money managers

      and

      Not bond structuring

      or

      Solicitation

  • Commodity Trading Advisors which are registered under the Commodity Exchange Act

    But — Only for swaps


  • Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Attorneys, Engineers and Other Professionals

      But — Not accountants (limited to audits or comfort letters)

      and

      Attorneys limited to advice of “traditional legal nature”

      and

      Engineers limited to engineering services (not feasibility studies or cash flow projections)


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Employees of Municipal Entities, Elected Officials

      But — Not appointed board members (Rule likely to change)

  • Banks or trust companies are not within an excluded category, even if providing “traditional banking services” or trust companies providing “investment advisory services”


  • What consequences

    What Consequences?

    • If you are a municipal advisor — you must register (both firm and individuals)

      • Be subject to oversight (register, testing, fees)

      • Have duties to your clients

    • Failure to register can result in fines, injunctions and, in extreme cases, possible criminal penalties.


    Registration

    Registration

    • Forms MA and MA-1 (in general)

    • File electronically

    • Information

      • Identity

      • Addresses (5 years)

      • Employment history (10 years)

      • Disciplinary history

      • Signature

      • Other businesses

      • For Firms — Chief Compliance Officer

      • For Firms — Form of Organization

      • For Firms — Describe business

      • For Firms — Other information designed to discover conflicts of interest

      • Certain additional requirement for a non-resident firm

        There is a separate form for withdrawal


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Keep books and records — applies only to municipal advisory firms (including sole proprietors) but not natural persons

    • Still covers almost all MA

    • What? True, accurate and current

      • All communications received or sent

      • Including inter-office communications

      • All financial records (checkbooks, etc.)

      • Any policies and procedures

      • Any document created relevant to advice

      • All contracts

      • All personnel

    • Time? 5 years

      2 years readily accessible

      Note: For attorneys, waives any privilege


    Duties

    Duties

    • Dodd-Frank Act provides

      • That a municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor and prohibits municipal advisors from engaging in any act, practice, or course of business which is not consistent with a municipal advisor’s fiduciary duty or that is in contravention of any rule of the Board (amended Exchange Act §15B(c)(1)).

    • and directs Rule-making by MSRB to

      • Provide for appropriate classification of municipal advisors and associated persons, applicable standards of training and competence, and testing;

      • Add coverage of municipal financial products in rules designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade;

      • Add municipal entities and obligated persons to the goals of protection of investors and the public interest pursued by such rules;


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Provide for periodic examination of municipal advisors;

    • Prescribe record-keeping requirements;

    • Provide for fees to be paid by municipal advisors, as well as municipal securities brokers and municipal securities dealers, to the Board, including changes for failure to submit to the Board, or to any information system operated by the Board, within the prescribed timeframes, any items of information or document required to be submitted under any rule issued by the Board;

  • And specifically with respect to Municipal Advisors

    • Prescribe means reasonably designed to prevent acts, practices, and courses of business as are not consistent with a municipal advisor’s fiduciary duty to its clients;

    • Provide continuing education requirements for municipal advisors;

    • Provide professional standards; and

    • Not impose a regulatory burden on small municipal advisors that is not necessary or appropriate in the public interest and for the protection of investors, municipal entities, and obligated persons, provided that there is robust protection of investors against fraud.


  • Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    • Fees

      • For registration and in doing business are in place

    • MSRB Rules A-7, A-12, A-14

    • Applicability of Rules

    • G-5

    • (c) No municipal advisor shall engage in municipal advisory activities in contravention of any effective restrictions imposed upon such municipal advisor by the Commission pursuant to section 15B(c)(2) or (3) of the Act, and no natural person shall be associated with a municipal advisor in contravention of any effective restrictions imposed upon such person by the Commission pursuant to section 15B(c)(4) of the Act.


    Proposed municipal advisor rules under the dodd frank act timothy v mcgree chapman and cutler llp

    G-17

    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.

    27


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