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SEC Defines ‘Municipal Advisor’ Under Dodd-Frank Act; MSRB Registration Also Required

Monday, January 10, 2011

On December 20, 2010, the Securities and Exchange Commission (SEC) issued a 231-page package of proposed rules and forms defining who must register as a “municipal advisor” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. With certain exceptions, the Dodd-Frank Act makes it 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 that municipal advisor is registered in accordance with the Act. The universe of persons potentially affected is much broader than originally thought and encompasses a large swath of those providing investment advice to state and local governments and their instrumentalities.

The Dodd-Frank Act also expanded the jurisdiction of the Municipal Securities Rulemaking Board (MSRB) to require registration of “municipal advisors,” using the same definition. These registrations were due December 31, 2010, unless an exemption applies. For example, SEC- registered broker-dealers engaged in underwriting a municipal offering and SEC-registered investment advisors offering investment advice are exempt from these registration requirements in most instances. If they are providing other services, they may be required to register again with the SEC and MSRB as municipal advisers.

The Dodd-Frank Act defines the term “municipal entity” to include any state, political subdivision of a state, or municipal corporate instrumentality of a state, including agencies and authorities (whether or not they issue municipal bonds). The Dodd-Frank Act defines the term “municipal advisor” as including any person who 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 who undertakes a solicitation of a municipal entity. It does not include SEC-registered broker-dealers acting as municipal underwriters or SEC-registered investment advisors providing investment advice or U.S. Commodity Futures Trading Commission-registered commodity trading advisors, or attorneys offering legal advice or providing services that are of the traditional legal nature, or engineers providing engineering advice, unless such persons are also providing advice that qualifies under the new statutory definition under the Dodd-Frank Act.

The rule was effective October 1, 2010, meaning anyone who met the definition of a municipal advisor needed to be registered with the SEC at that time. In September 2010, the SEC had created a temporary online registration mechanism to allow municipal advisors to register on a temporary basis. These temporary registrations are effective through December 31, 2011.

The SEC’s December 20, 2010 package of proposed rules and forms is designed to give effect to the provisions of the Dodd-Frank Act referenced above. If adopted, the proposed rules would establish a permanent registration regime with the SEC for municipal advisors and would impose certain record-keeping requirements on such advisors.

There was much uncertainty when the initial interim rule was established in September. The proposed rules have made the picture a bit clearer. According to the SEC’s proposal, there are three principal types of municipal advisors:

  • financial advisors including, but not limited to, broker-dealers already registered with the SEC that provide advice to municipal entities with respect to their issuance of municipal securities and their use of municipal financial products
  • investment advisors that advise municipal pension funds and other municipal entities on the investment of funds held by or on behalf of municipal entities (subject to certain exclusions), and
  • third-party marketers and solicitors.

The proposal attempts to identify and separate activities that are traditionally performed by a registered advisor under its status as an advisor, for example, and those that are outside such traditional services and that would require a further registration as a municipal advisor. It is also clear that other entities, such as trust companies and persons not required to register with the SEC as investment advisors of Form ADV, may nevertheless be required to register as “municipal advisors” if they manage money of a state or political subdivision. Accountants who offer traditional accounting services are exempt from registration, as are lawyers who provide primarily legal advice. But should either an accountant or a lawyer be engaged to provide commentary on a feasibility study, for example, it is possible that the provision of these non-traditional services could trigger the registration requirements under the Dodd-Frank Act.

The SEC's proposal does clarify that with respect to a person providing advice to a pooled investment vehicle (i.e., hedge fund or private equity fund) in which a municipal entity has invested funds along with other investors that are not municipal entities the pooled investment vehicle would not be considered “funds held by or on behalf of a municipal entity” and therefore the person providing the advice to that type of pooled investment vehicle would not have to register as a municipal advisor merely because of this relationship (see text accompanying footnote 98 to the SEC Release No. 34-63576A).

The proposed registration Form MA is very similar to a traditional Form ADV, although there are differences.

The municipal advisor registration requirement under the Dodd-Frank Act is a potential “trap for the unwary.” The names of the registrants are publicly available at https://tts.sec.gov/MATR/index.html and one can see that there has been a flurry of registrations even after the October 1 deadline.

Note also that the SEC’s registration requirements are in addition to those required by the MSRB. The MSRB had reminded municipal securities dealers and municipal advisors (as defined in the Dodd-Frank Act) that they must also register with the MSRB and that such registration is in addition to the new SEC “municipal advisor” registration requirements. The MSRB has also made it clear that even if a broker already has an existing registration with the MSRB, an additional registration under the Dodd-Frank Act will be required if that entity is also engaging in activities that would require registration as a Municipal Advisor under the Dodd-Frank Act. Merely maintaining an existing registration as a municipal dealer, for example, is not enough if these filing requirements are triggered. See http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2010/2010-50.aspx.

The MSRB registration can only be completed after the SEC registration is in place (you need the SEC number to complete the MSRB Form G-40 – a short online form). The MSRB registration was due to be filed before January 1, 2011 and there is an initial filing fee of $100 and an annual fee of $500 (all $600 is due at the time of filing and is mailed to the MSRB’s post office box). Advisors who missed the filing deadlines should refrain from providing advice to municipal advisory clients (as defined above) until their registrations become effective.

Pepper Hamilton will provide a more comprehensive review of the municipal advisor registration proposal in the near future and will also be collecting comments from our clients and friends for submission to the SEC. Comments are due on or before February 22, 2011.

Should you have any questions, or need any assistance with respect to these rules, please feel free to contact the authors or any other member of the Investment Management Group of Pepper Hamilton.

Gregory J. Nowak and Matthew R. Silver

Written by

Gregory J. Nowak
Phone: 215.981.4893
212.808.2723

Fax: 215.981.4750
212.286.9806

nowakg@pepperlaw.com

Matthew R. Silver
Phone: 215.981.4117
Fax: 215.981.4750
silverm@pepperlaw.com


More Resources on the Dodd-Frank Act

For additional information, please visit Pepper's Financial Services Reform Resource Center.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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