The municipal advisor registration requirements under Section 975 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank Act”) become effective October 1, 2010.
Generally, absent an exclusion, individuals and entities that provide advice to or on behalf of
municipal entities or certain obligors, such as state and local governments, public pension funds,
local government investment pools (or “LGIPs”) and 529 plans, that constitutes municipal advisory
services (i.e., advice with respect to municipal financial products, the issuance of municipal securities
or the solicitation of a municipal entity as further discussed below) can be swept up into the
municipal advisor registration requirements, depending upon their activities. On September 1, 2010,
the SEC promulgated Interim Final Temporary Rule 15Ba2-6T (“IFTR 15Ba2-6T”), and Form MA-T,1
to create a means for municipal advisors to temporarily register with the SEC. The Dodd-Frank Act
registration requirements, as well as the SEC’s interpretation of them in the Adopting Release, are
less than clear, however, and can be read to expand the scope of the municipal advisor registration
requirements beyond what one would logically expect. For example, as discussed in more detail
below, although Section 975 of the Dodd-Frank Act on its face excludes from the definition of
a “municipal advisor” investment advisers registered under the Advisers Act, given the SEC’s
interpretation of this exclusion in the Adopting Release, a registered investment adviser that provides
advice to a municipal entity, such as a public pension fund, LGIP or 529 plan, regarding swaps or
the structure of the pool or plan, or engages in certain solicitation activity, may be required to also
register as a municipal advisor.
General Discussion of Municipal Advisor Registration Requirements
Legislative Intent/Policy Behind Municipal Advisor Registration
Section 975 of the Dodd-Frank Act is Congress’ attempt to regulate, and to prevent in the future,
activities that are believed to have resulted in the municipal bankruptcies and other “scandals” that
have impacted the municipal securities markets in recent years. To achieve that goal, Section 975
creates a registration regime for previously unregulated financial advisors, investment brokers and
other municipal market intermediaries in an effort to prohibit fraudulent and manipulative practices by
these previously unregulated persons when they work with municipal issuers.2 As enacted, however,
Section 975 appears likely to have a more expansive application.
General Registration Requirement
Among other changes,3 Section 975 of the Dodd-Frank Act amended Section 15B(a) of the ‘34
Act to make it unlawful for a “municipal advisor” to engage in the following activities without being
registered with the SEC:
- Providing 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
- Undertaking a solicitation of a “municipal entity” or “obligated person.”
As noted previously, the provisions of Dodd-Frank Act that relate to regulation of municipal securities,
including the municipal advisor registration requirements, are effective October 1, 2010.
Recent MSRB Announcement Regarding Municipal Advisor Registration
Municipal advisors eventually will need to comply with applicable MSRB rules, and will be subject
to examination by the SEC. The MSRB announced September 15, 2010, that it will commence its
municipal advisor rulemaking and registration activities after October 1, 2010. After acknowledging
that municipal advisors are required to register with the SEC by October 1, 2010, the MSRB
indicated that it will begin its own registration process following the adoption of associated MSRB administrative rules, and that, upon the seating of its new board of directors, the MSRB will begin working on a broad range of administrative and substantive rules to reflect its broadened investor and municipal entity protection mission under Section 15B of the ‘34 Act, as amended by the Dodd Frank Act. Importantly, the MSRB announced that no MSRB rules will apply to municipal advisors prior to such rulemaking by the Board, with the exception of broker-dealers and bank dealers providing financial advisory services to issuers of municipal securities. Dealer financial advisors are already subject to all MSRB rules.
Registration and Timing under SEC Temporary Interim Final Rule 15Ba2-6T
IFTR 15Ba2-6T creates a means for municipal advisors to temporarily register with the SEC4 by October 1, 2010. According to the SEC in the Adopting Release, “[a]bsent such means to register, municipal advisors would likely have to cease providing all municipal advisory services, which may have a significant adverse impact on their businesses and on municipal entities and obligated persons engaged in issuing municipal securities or other activities for which they obtain the advice of a municipal advisor.”5
To register with the SEC, a municipal advisor must establish an account, and a username and password for the SEC’s secure registration website and, must select and answer a security question. Once accepted by the website, the municipal advisor will be notified via e-mail that the account has been established.6 At that point, the municipal advisor will be able to gain access to, and complete and file its Form MA-T through that website.7 Any subsequent amendments, or a withdrawal of its Form MA-T, also must be done through that website.8
Form MA-T generally requires municipal advisors to disclose (a) the purpose for filing Form MA-T (e.g., registration, amendment, or withdrawal), (b) certain basic identifying and contact information regarding the municipal advisor (e.g., name, address, telephone and fax number, e-mail address, etc.), (c) certain regulatory identification information (e.g., CRD number and EIN number), (d) the general types of municipal advisory services the municipal advisor engages in, and (e) certain disciplinary information regarding the municipal advisor and its associated persons (similar to what is required by Form BD). The SEC staff has indicated that information filed by municipal advisors on Form MA-T will be made publicly available on the SEC’s website by October 1, 2010.9
Once a municipal advisor receives confirmation from the SEC that its Form MA-T has been accepted as filed, a municipal advisor’s temporary registration on Form MA-T will be effective until the earlier of: (1) the date that the municipal advisor’s registration is approved or disapproved by the SEC pursuant to a final rule adopted by the SEC establishing another manner of registration of municipal advisors and prescribing a form for such purpose; (2) the date on which the municipal advisor’s temporary registration is rescinded by the SEC; or (3) the expiration of IFTR 15Ba2-6T December 31, 2011.
Analysis of ‘Municipal Advisor’ and Related Definitions
Basic Definition (Without Exclusions)
Section 975 of the Dodd-Frank Act defines a “municipal advisor” to mean, in general, (a) a person (b) who is not a municipal entity or employee of a municipal entity (c) that provides advice to or on behalf of a municipal entity or obligated person with respect to (i) municipal financial products or (ii) the issuance of municipal securities, including advice on the structure, timing, terms and other similar matters concerning such financial products or issues, or (d) who undertakes a solicitation of a municipal entity.10
The definition of “municipal advisor” also specifically includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisers. In the Adopting Release, the SEC clarified that these entities are only included if they provide the advice or services described above (i.e., with respect to municipal products or the issuance of municipal securities (including advice on the structure, timing, terms and other similar matters concerning financial products or issues)).
Who is a “Person”?
A “person” includes a natural person, company11, government, or political subdivision, agency, or instrumentality of a government. A person that is a municipal entity or an employee of a municipal entity would not be a municipal advisor.
What is a “Municipal Entity” or “Obligated Person”?
Section 975 of the Dodd-Frank Act defines a “municipal entity” as including any state, political subdivision of a state, or municipal corporate instrumentality of a state, such as:
- Any agency, authority or instrumentality of the state, political subdivision, or municipal corporate instrumentality,
- Any plan, program or pool of assets sponsored or established by the state, political subdivision, or municipal corporate instrumentality, or any agency, authority, or instrumentality thereof, or
- Any other issuer12 of municipal securities.13
According to the MSRB’s September 15, 2010 announcement, this definition of “municipal entities” would encompass, among other municipal entities, public pension funds, 529 plans, local government investment pools or LGIPs, and other state and local governmental entities or funds.
An “obligated person” is defined to include any person, such as the 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.
What Advice Requires Registration?
In the absence of an exclusion (see discussion below) from the definition of “municipal advisor,” there are two types of advice that a person may provide to, or on behalf of, a municipal entity or obligated person that would result in such person being a municipal advisor: (i) advice with respect to municipal financial products; or (ii) advice with respect to the issuance of municipal securities. This includes advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues.
Section 975 of the Dodd-Frank Act defines a “municipal financial product” to include any municipal derivative, guaranteed investment contract, or investment strategy. While not defined in Section 975, a reasonable definition of “municipal derivative” in this context would appear to be an interest rate swap, rate lock, forward purchase agreement, basis swap or other instrument designed to hedge risk that is embedded within, entered into in connection with the issuance of, a municipal security, or regarding which a municipal entity is provided advice.14 Section 975 of the Dodd-Frank Act defines a “guaranteed investment contract” as including (i) any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, and (ii) any agreement to supply investments on two or more future dates, such as a forward supply contract. “Investment strategy” is defined by Section 975 of the Dodd-Frank Act as including “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.”15
Given the above, in the absence of an exclusion from the definition of “municipal advisor,” it appears that municipal advisors would include persons who provide advice to municipal entities or obligated persons regarding (A) swaps or guaranteed investment contracts, (B) the investment of proceeds from the issuance of municipal securities, or (C) the offering of municipal securities, or (D) that recommend brokerage and investment options for proceeds from the issuance of municipal securities held in escrow, or (E) that prepare feasibility studies, tax or revenue projections, or similar products in connection with offerings or potential offerings of municipal securities.
When Does Solicitation Require Registration?
As noted above, a “municipal advisor” also includes a “person” (who is not a municipal entity or employee of a municipal entity) who undertakes a solicitation of a municipal entity. “Solicitation of a municipal entity or obligated person” is defined in Section 975 of the Dodd-Frank Act to mean (i) a direct or indirect communication with a municipal entity or an obligated person made by a person, (ii) for direct or indirect compensation, (iii) on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (iv) for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person (A) of a broker, dealer, municipal securities dealer or municipal advisor for, or in connection with, municipal financial products, the issuance of municipal securities, or (B) of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.
Thus, for example, solicitation for advisory services by a solicitor that is affiliated with an investment adviser would not cause the affiliated solicitor to be a “municipal advisor.” Similarly, if a solicitor is not directly or indirectly compensated for its solicitation services, that solicitor would not be a “municipal advisor.” Independent solicitors, marketers and finders that solicit municipal entities or obligors for municipal advisory services or products of a third party, or investment advisory services by introducing an investment adviser to a municipal entity, could be subject to registration as “municipal advisors.”16
Limited Exclusions from ‘Municipal Advisor’ Definition
Certain persons are specifically excluded from the definition of “municipal advisor” by Section 975 of the Dodd-Frank Act. These persons would not be municipal advisors subject to the municipal advisor registration requirements even if their activities would otherwise require them to register with the SEC. The persons excluded from the definition of “municipal advisor” include, in pertinent part:17
- A broker, dealer, or municipal securities dealer serving as an underwriter as defined in Section 2(a)(11) of the ‘33 Act;18
- Any investment adviser registered under the Advisers Act, or persons associated with such investment advisers who are providing investment advice;19 and
- Any commodity trading advisor registered under the Commodity Exchange Act, or persons associated with a commodity trading advisor who are provided advice relating to swaps.
Regarding registered investment advisers, on its face, Section 975 of the Dodd-Frank Act appears to exclude investment advisers based solely on their registration status; only associated persons of investment advisers would need to be providing investment advice to be excluded from the “municipal advisor” definition. In the Adopting Release, however, the SEC indicated that a registered investment adviser (or an associated person thereof) is excluded from the definition of “municipal advisor” if the investment adviser or associated person provides municipal advisory services, “so long as those services are investment advice for purposes of the Advisers Act.”20 According to the SEC in the Adopting Release, a “registered investment adviser or an associated person of an investment adviser must register with the [SEC] as a municipal advisor if the adviser or associated person of an adviser provides any municipal advisory services other than investment advice within the meaning of the [Advisers Act].” Thus, the SEC appears to have taken a position contrary to a plain reading of Section 975 of the Dodd Frank Act.21
The staff did not elaborate on the meaning of “investment advice” for purposes of the municipal advisor registration requirements. “Investment advice” could be interpreted as advice that, if provided by a person, would cause the person to be an “investment adviser” under the Advisers Act. Under the Advisers Act, such activity generally would include providing advice as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or issuing or promulgating reports concerning securities. Under the Advisers Act, providing advice on non-security products, such as swaps, for example, would not be considered providing advice regarding the value of, or investing in, purchasing or selling “securities.”22 If this is the case, registered investment advisers that are exempt from registration as commodity trading advisers could be considered not to be providing “investment advice” (and, therefore, required to register as municipal advisors) if they implement investment strategies for municipal entities or obligated parties that include investments in swaps.
A better interpretation of “investment advice” for purposes of the definition of “municipal advisor” may be any advice provided by a registered investment adviser pursuant to a written agreement with a client to whom the registered investment adviser owes a fiduciary duty as an investment adviser under the Advisers Act. This interpretation would be consistent with a plain reading of the definition of “municipal advisor” in Section 975 of the Dodd-Frank Act, and would be consistent with the intent behind Section 975 of the Dodd-Frank Act given that registered investment advisers would be acting as fiduciaries and subject to the anti-fraud provisions in Section 206 of the Advisers Act. Given the definition of “security” in the Advisers Act, the position taken by the SEC, and the lack of guidance provided by the SEC, in the Adopting Release, when a registered investment adviser would not be excluded from the definition of “municipal advisor” is somewhat unclear.
Like investment advisers providing advice on swaps that may be exempt from registering as commodity trading advisors, the status of other entities, such as banks, that are exempt from registering as investment advisers and commodity trading advisers, is unclear under the municipal advisor registration requirements.
Those who provide advice to or on behalf of municipal entities or certain obligors, such as state and local governments, public pension funds, local government investment pools and 529 plans, and those who solicit such municipal entities and obligors, must carefully review their business practices in light of Section 975 of the Dodd-Frank Act and IFTR 15Ba2-6T to determine whether they must register with the SEC on Form MA-T. The review of these rather complex and somewhat ambiguous statutory and regulatory provisions, an analysis of business practices through the lens of these provisions, and the determination as to whether an entity must register with the SEC, must be undertaken in short order, given the October 1 registration deadline. Reed Smith has deep experience in representing regulated entities in complying with federal securities laws and SEC regulations. If you have questions or would like additional information on Section 975 of the Dodd-Frank Act, IFTR 15Ba2-6T or Form MA-T, please contact one of the authors of this Alert or the attorney with whom you regularly work.