January 6, 2015 by FCS GROUP
By Taree Bollinger and Scott Lester, FCS GROUP
Even as the economy improves and growth within our communities has sponsored the ability to spend again, echoes of the past recession linger with several Dodd-Frank Wall Street Reform and Consumer Protection Act initiated changes taking effect. This time it is about a recently created government-contractor role termed, “Municipal Advisor” and applies to various financial consultants who previously have provided services to the public sector in an unregulated environment.
Effective October 1, 2010, the U.S. Securities and Exchange Commission (SEC) created a new class of regulated persons formally titled Municipal Advisor and established a permanent registration regime to enhance the Commission's oversight of municipal advisors and their activities in the municipal securities market. The Municipal Securities Rulemaking Board (MSRB) is working hand in hand with the SEC to develop and implement specific rules governing Municipal Advisors. These rules are intended for the protection of municipal entities.
From 2010 through 2013, the SEC and MSRB took comments from the public to determine who falls within the definition of a Municipal Advisor. In January 2014, the final rule [Section 15B(e)(4) of the Exchange Act] was amended to define the term 'municipal advisor” to mean, in part, a person that (i) 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 financial products or issues; (ii) advice relating to the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments in lieu of public funds; or (iii) undertakes a solicitation of a municipal entity. (Rule p. 11 and p. 37)1 The rule does not distinguish between persons being compensated for providing advice and those who are not.
The Government Finance Officers Association (GFOA) has commented that, “certain firms that are compensated by unrelated broker-dealers, financial advisors, or investment advisors to solicit business from municipal entities or obligated persons including state and local pension plans, local government investment pools, other participant-directed investment programs or plans, and state and local governments are also municipal advisors.”2
It sounds simple enough, but the problem is that the statutory definition of municipal advisor is broad and includes persons that traditionally have not been considered financial advisors. In fact, the Commission's final rule defining who is a municipal advisor, as well as outlining how to register, is 778 pages long.
Some of the criticism regarding the Municipal Advisor final definition is that it commits more pages to defining what a Municipal Advisor is not, and/or who is exempt, than what exactly a Municipal Advisor does. For example, the following is a partial list of professions and/or activities that are not considered to be municipal advisory activities. Individuals performing these activities are excluded from registration, but only as long as they are performing duties normally associated with their respective professions.
- Brokers, dealers or municipal securities dealers serving as underwriters
- Brokers-dealers acting as a placement agents, dealer-managers, and remarketing agents
- Brokers-dealers providing advice to individual plan participants in a public employee benefit plan
- Investment advisors registered under the Investment Advisor Act of 1940
- Registered commodity trading advisors
- Swap dealers
- Accountants providing audit or attest services, preparing financial statements or issuing letters for underwriters
- Attorneys offering legal advice or providing services of a traditional legal nature
- Engineers providing engineering advice
- Banks to the extent that they are providing advice with respect to a number of banking activities as defined in the final SEC rule.
These are not blanket exemptions for specific classes of professionals. If any of these advisors step outside the confines of their profession as defined by the rule and perform any of the duties within the scope of municipal advisory activities definition approved by the SEC, then they must also register as Municipal Advisors.
For example, an accountant does not need to be registered to review prospective financial details that are part of a feasibility study or acquisition study, but the exemption would apply to the attest portion of a given engagement, and would not necessarily address all services within such an engagement. (Rule p. 212) Similarly, costing-out engineering alternatives would not subject an engineer to registration because such activity would be considered engineering advice. (Rule p. 223) However, an engineer engaging in cash flow modeling and preparing feasibility studies concerning municipal financial products or the issuance of municipal securities beyond the engineering aspects of a project would be subject to registration. Likewise an engineer preparing revenue projections and debt service coverage calculations in a feasibility study to support an issuance of municipal securities may also be considered to be providing advice outside the scope of the engineering exclusion and need to register.
The Dodd-Frank Act amended Section 15B(a)(1) of the Exchange Act to make it unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity with respect to municipal financial products or the issuance of municipal securities unless the municipal advisor is registered with the SEC (effective October 2014). Municipal Advisors must also register with the MSRB. To find out if you are working with a registered municipal advisor, you can search SEC Edgar database under Company Filings as well as visit the MSRB web page.
The objective of regulating municipal advisors is to mitigate some of the problems observed with the conduct of past unregulated financial consultants and advisors including, as the Rule states, “'pay to play' practices, undisclosed conflicts of interest, and failure to place duty of loyalty to their clients ahead of their own interests.” (Rule p. 6) As such, the SEC, MSRB, and FINRA are presently establishing testing requirements to certify all registered Municipal Advisors.
Finally, in the category of “Sometimes the government does get it right”: Municipal entities and employees of municipal entities can breathe a sigh of relief because the Exchange Act includes a broad exemption for public officials, including appointed officials and employees of municipal entities and obligated persons to the extent that they act within the scope of their employment or official capacity for the municipal entity – such as voting, proofing a statement or discussion or view, or asking questions at a public meeting. Otherwise – they too must register.
1 The page references throughout this article refer to specific pages in the Securities and Exchange Commission 17CFR Parts 20, 240 and 249 [Release No. 34-70462; File No. S7-45-10] RIN 3235 –AK86 Registration of Municipal Advisors Final Rule.
About the Authors
FCS GROUP Vice President Taree Bollinger has spent countless hours reading the SEC rulings and participating in National Society of Compliance Professionals discussion groups and SEC- and MSRB-sponsored webinars on this topic. Scott Lester is the firm's marketing and business development director.