On September 20, 2013, the SEC adopted a Final Rule to establish a permanent registration regime for municipal advisors (the “Municipal Advisors Rule”) as required to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which amended Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”). The Dodd-Frank Act prohibits municipal advisors from soliciting or providing certain advice to municipal entities without first registering with the SEC . The SEC had previously published a proposed rule to establish a permanent municipal advisors registration regime on December 20, 2010, which was discussed in a previous Alert. The Municipal Advisors Rule adopting release is over six hundred pages long and covers a wide range of issues that are beyond the scope of this Update. The following is a brief overview of certain issues that may be of most concern to investment managers.

In general, a municipal advisor is defined in the Municipal Advisors Rule as a person that “provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products 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 undertakes a solicitation of a municipal entity or an obligated person.”

The definition of municipal advisor thus includes a broad range of participants in the municipal securities industry, such as guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors and other parties that that provide municipal advisory services, unless their activities fall within an applicable exclusion.

Under the Municipal Advisors Rule, registered investment advisers, registered broker-dealers and registered commodity trading advisors (“CTAs”) are excluded from the definition of a “municipal advisor” with respect to specific types of activities. The exclusion for registered investment advisers is applicable to the extent that a registered investment adviser “is providing investment advice in such capacity.” However, this exclusion does not apply to advice provided by an investment adviser “concerning whether and how to issue municipal securities, advice concerning the structure, timing, and terms of an issuance of municipal securities and other similar matters, advice concerning municipal derivatives, or a solicitation of a municipal entity or obligated person.” The exclusion provided for broker-dealers applies when a broker-dealer is serving as an underwriter of a particular issuance of municipal securities, but only to the extent such activities are within the scope of an underwriting of such issuance of municipal securities. Similarly, CTAs are excluded with respect to advice that is related to swaps.

Although the SEC acknowledged that it received numerous comments requesting that these exclusions be more broadly or concretely defined, in general it declined to do so. This approach reflects the SEC’s view that the exclusions are highly dependent on the particular facts and circumstances of the type of activity that is being conducted. However, the SEC incorporated a change in the definition of the term “proceeds of municipal securities” in order to narrow the scope of the rule. As a result of this change, investment advisers who provide investment advice to public employee benefit plans or participant-directed investment plans such as 529, 403(b) or 457 plans that do not include proceeds of municipal securities would not be required to register as municipal advisors.

Municipal advisors who are subject to the new registration regime must register by electronically filing a Form MA with the SEC. In addition, the Exchange Act, as amended by the Dodd-Frank Act, provides that municipal advisors are subject to the regulatory authority of the Municipal Securities Rulemaking Board ("MSRB") and imposes a fiduciary duty on municipal advisors. Municipal advisors must also separately register with MSRB and comply with its regulations, which impose a broad range of requirements, including rules relating to recordkeeping, advertising and training.