The U.S. Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) have recently undertaken new municipal advisor rulemaking activities. The SEC responded to frequently asked questions regarding municipal advisor registration and record-keeping requirements. The SEC has decided to delay the implementation of its registration and record-keeping rules. Last week, the MSRB announced that it was seeking comment on a draft of a new rule addressing municipal advisor standards of conduct. Details of both entities’ regulatory activities are outlined below.

SEC Municipal Advisor Guidelines

The SEC rules governing municipal advisor registration and record-keeping requirements (SEC Rules)—summarized in our prior publication—were set to become effective on January 13, 2014. On that day, the SEC announced that the effective date would be delayed until July 1, 2014. This marks the first date when municipal advisors will be required to register permanently with the SEC.

On January 10, 2014, the SEC issued responses to 18 frequently asked questions (FAQs) related to eight municipal advisor registration and record-keeping topics. Highlights from the FAQs are provided below.

General Information Disclosure and Disclaimers

General information is excluded from "advice" regarding registration of a municipal advisor. The SEC will consider disclosure and disclaimers in its “facts and circumstances test” to determine whether a person provides advice under SEC Rules. These disclosures and disclaimers include the following when clearly and conspicuously stated:

  • The person is not providing a recommendation.

  • The person is not a municipal advisor and is not subject to a fiduciary duty under the Securities Exchange Act of 1934.

  • The person is acting in his or her own best interest.

  • The municipal entity should consult with its internal advisors and experts regarding the information or material.

The SEC will consider additional disclosures and disclaimers from potential underwriters providing promotional materials, including:

  • The broker-dealer seeks to serve as an underwriter, not as a financial advisor, under MSRB Rule G-23.

  • The broker-dealer describes the arm’s length nature of its role in the same manner required by MSRB Rule G-17.

  • The information is provided solely for purposes of discussion.

Requests for Proposals

A municipal entity is not required to be engaged in a formal procurement process for the request for proposals (RFP) exemption from the definition of municipal advisor under SEC Rules to apply. Additionally, a mini-RFP qualifies for the RFP exemption if the mini-RFP:

  • Is conducted by a municipal entity or obligated person, or a municipal advisor acting on the behalf of such an entity or person

  • Identifies one or more particular questions

  • Is open for a reasonable period of time that is not indefinite

  • Is sent to the entire pre-screened or pre-qualified pool of market participants or at least three members of such pool

Independent Registered Municipal Advisors

A municipal advisor acting in a general capacity may be considered an independent registered municipal advisor (IRMA) under SEC Rules, specifically the “IRMA exemption,” if other exemption requirements are met. Further, the written representation required by a municipal entity may be provided to multiple parties at once, including on the municipal entity’s website.

Engagement as an Underwriter

The SEC noted the following two ways in which an underwriter might be considered engaged in such capacity and, consequently, eligible for the underwriter exclusion from the definition of “municipal advisor”:

  • There is a writing, such as an engagement letter, executed, approved, or acknowledged by a duly authorized officer of the municipal entity and defining the role of the broker-dealer as underwriter, relating to underwriting services in conjunction with a particular municipal securities transaction, and that provides MSRB Rule G-17 disclosures; or

  • There are sufficient actions to establish that a broker-dealer is engaged as an underwriter for a particular municipal securities transaction coupled with required MSRB Rule G-17 disclosures.

Post-Issuance Compliance/Advice

A market participant may remind a municipal securities issuer of continuing disclosure filing deadlines and may assist with Electronic Municipal Market Access system filings without being considered a municipal advisor so long as the person does not provide subjective assumptions, opinions, or views. Further, an underwriter that discovers an issuer’s non-compliance with its continuing disclosure obligations may recommend remedial actions.

Remarketing Agent Services

A broker-dealer advising a municipal entity in its capacity as remarketing agent would be considered a municipal advisor under the SEC Rules. The broker-dealer could not rely on the underwriter exclusion because, under SEC Rules, that exclusion is no longer available after a transaction closes and the underwriting period ends.

Proposed MSRB Rule G-42

In other municipal advisor news, the MSRB issued a Request for Comment relating to draft MSRB Rule G-42 on January 9, 2014. Draft Rule G-42 regulates standards of conduct and duties of municipal advisors in a non-solicitor role regarding municipal entity and obligated person clients.

Duties of Care and Loyalty

The draft Rule assigns to a municipal advisor a duty of care concerning both municipal entity and obligated person clients. The duty of care requires the municipal advisor to possess the knowledge and skills necessary to provide its client with informed advice, and it requires the municipal advisor to make a reasonable inquiry into the facts relevant to a client's decision to proceed with a transaction. The draft Rule G-42 duty of care requires the municipal advisor to "thoroughly" review an official statement concerning a client's issuance of municipal securities or a municipal financial product concerning an issuance of municipal securities, unless otherwise directed by the client and documented in accordance with draft Rule G-42. Finally, the duty of care standard requires municipal advisors to have a reasonable basis for:

  • Any advice provided to or on behalf of the client

  • Any certified representations upon which the client, any involved party, or investor will rely with reasonable foreseeability

  • Any information provided to the client or other parties involved with the transaction in the preparation of an official statement for any issue of municipal securities about which the municipal advisor advises

Draft Rule G-42 establishes a duty of loyalty only regarding the advisor's municipal entity clients. The duty of loyalty requires a municipal advisor to transact with honesty, the utmost good faith, and with the client's best interest in mind, without regard for the municipal advisor's financial or other interests. Each of the municipal advisor's material conflicts of interest must be eliminated or fully disclosed to the client.

In addition to the duties described above, draft Rule G-42 outlines conduct by which municipal advisors must abide in an engagement with a municipal entity or obligated person client.

Documentation and Disclosure of Conflicts and other Required Information

Before the start of an engagement, a municipal advisor must provide the client with a document containing a disclosure of all material conflicts of interest, including any:

  • Actual or possible conflicts that might impair the advisor's ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client

  • Affiliates of the advisor that provide services to the client that are directly or indirectly related to the advisor’s activities

  • Payments paid or received by the advisor in acquiring the client's engagement

  • Fee-splitting arrangements with any providers of investments or services to the client; certain legal or disciplinary events affecting the advisor

  • Other possible conflicts

In addition to conflict documentation, draft Rule G-42 requires the advisor to document and update information relating to the advisor's compensation, scope and limits of the advisor's engagement with the client, and information about termination of the engagement.

Principal Transactions

Except for activity that is expressly permitted by underwriters under Rule G-23, draft Rule G-42 prohibits a municipal advisor and any affiliate from engaging in any transaction in a principal capacity to which a municipal entity or obligated person client is a counterparty.

Recommendations and Review of Recommendations of Other Parties

Draft Rule G-42 establishes a “reasonable basis for belief” standard regarding an advisor's recommendation that a transaction or product is suitable for the client. Additionally, the advisor must discuss with the client its evaluation of material risks, benefits and other characteristics of the transaction, its basis for recommendations, and any other feasible alternatives that might be suitable for the client.

If requested by the client or within the scope of the engagement, the municipal advisor must undertake a thorough review of any recommendation made by any third party regarding a municipal securities transaction or financial product, and discuss the information listed above as if the third party recommendation were its own.

Other Specified Conduct

Finally, draft Rule G-42 prohibits specific conduct relating to excessive compensation, inaccurate fee invoices, materially false or misleading representations or submissions in a request for proposal or qualifications, any fee-splitting arrangements with underwriters and any other undisclosed fee-splitting arrangements with providers of investments or services to the client, and unreasonable fees paid to another advisor for the purpose of obtaining or retaining business.

Future MSRB Action

In the request for comment, the MSRB indicated that although draft Rule G-42 applies in non-solicitor situations, the MSRB intends to issue Rules regulating the conduct and duties of municipal advisors in connection with a solicitation of a municipal entity or obligated person.

The comment deadline is March 10, 2014.

Ballard Spahr's Municipal Securities Regulation and Enforcement Group advises its clients on the latest securities issues in their public finance transactions, including in regulatory and enforcement matters of the SEC. We advise issuers in a broad range of public offerings and private placements of municipal securities in both the primary and secondary market.

If you have questions about this or for more information, please contact Teri M. Guarnaccia at 410.528.5526 or guarnacciat@ballardspahr.com, or Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com.


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Municipal Securities Regulation and Enforcement
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