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The Final Municipal Advisor Rule: What Public Issuers Need to Know

March 2014

Effective July 1, 2014, municipal advisors will be required to register with the Securities and Exchange Commission (the “SEC”) under the SEC’s final rule concerning municipal advisor registration requirements (the “Final Rule”). The Final Rule implements the provisions of the Dodd-Frank Act that amended Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”) to require municipal advisors to register with the SEC. The Final Rule makes it unlawful for a municipal advisor to provide advice to or on behalf of, or to solicit, municipal entities1 or obligated persons2, without registering with the SEC. It also requires municipal advisors to report certain information that will be made publicly available online, to promote transparency and assist municipal entities and obligated persons in selecting a municipal advisor.

The new requirements, together with other reforms, are designed to address some of the concerns associated with the previously unregulated industry, including “pay to play” practices, undisclosed conflicts of interest, inadequate training of advisors and the failure of advisors to place the municipal entity’s interests ahead of their own. Under the Exchange Act, a person who acts as a municipal advisor for a municipal entity is deemed to have a statutory fiduciary duty to the municipal entity. Proposed Rule G-42 of the Municipal Securities Rulemaking Board provides that a municipal advisor’s fiduciary duty includes a duty of care and a duty of loyalty. In other words, a municipal advisor cannot engage in conduct that is inconsistent with the interests of the municipal entity or obligated person.

Generally, a municipal advisor is defined as a person who provides advice to or solicits municipal entities, or obligated persons, with respect to municipal financial products or the issuance of municipal securities. Municipal entities, and their officials and employees acting within the scope of their official capacity or employment, are explicitly exempt from the definition.

The definition is broad and includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors and swap advisors that provide municipal advisory services, unless a specific statutory exclusion applies. Certain persons are excluded from the definition, including underwriters engaging in activities within the scope of an underwriting, registered investment advisors, and registered commodity trading advisors, as well as attorneys providing legal advice or rendering services of a traditional legal nature, and engineers providing engineering advice.

If an exclusion does not apply, determining whether a person’s activities would result in such person being deemed a municipal advisor is a fact-specific inquiry in which all relevant facts and circumstances should be considered. The key inquiry is focused on the activities being performed, that is, whether the person is either providing advice or soliciting business with respect to a municipal financial product or the issuance of municipal securities.

In this context, “advice” can include recommendations with respect to structure, timing, terms and other similar matters concerning municipal financial products or issues. The more tailored the financial information is to the specific needs or objectives of a municipal entity or obligated person, the more likely it constitutes advice under the rules. On the other hand, general information that does not include a recommendation is not likely to constitute advice. Other factors may also be considered, including written disclosures or disclaimers and the course of dealing between the parties. 

In certain limited circumstances, however, a person may provide advice without being deemed a municipal advisor. The “RFP exemption” allows municipal entities and obligated persons to seek advice from potential underwriters through a request for proposals (“RFP”) or a request for qualifications (“RFQ”) process, without the responding underwriters being deemed to be municipal advisors. The underwriters’ responses generally will not constitute “advice” under the Final Rule as long as the RFP or RFQ is conducted by the municipal entity or obligated person (or a registered municipal advisor acting on its behalf), identifies a specific objective, is open for a reasonable period of time, and involves a competitive process – and the responding underwriters do not receive direct or indirect compensation for the advice provided as part of the response.

The Final Rule also exempts underwriters and other professionals from the municipal advisor definition if they provide advice to a municipal entity or obligated person that is being represented by, and will rely upon the advice of, an independent registered municipal advisor. For the exemption to apply, the municipal entity or obligated person must provide a written representation stating that it is relying on an independent registered municipal advisor, and the underwriter or other professional must provide written disclosure stating that, by receiving such written representation, the underwriter or other professional is not a municipal advisor. A copy of the written disclosure must also be provided to the independent registered municipal advisor.

Even if a person does not provide advice, he or she may still be deemed to be a municipal advisor if the person engages in solicitation of a municipal entity or obligated person to obtain or retain an engagement in connection with municipal financial products, the issuance of municipal securities, or investment advisory services. Solicitation occurs when a person seeks the business of municipal entities or obligated persons for the benefit of a third-party broker, dealer, municipal securities dealer, municipal advisor or investment advisor. However, solicitation undertaken by such a person, whether as a broker, dealer or advisor, on behalf of itself (or one of its affiliates) does not constitute solicitation. Other factors may also be considered, including whether the person received direct or indirect compensation for the business of the municipal entity or obligated person.

It is important in any municipal financial transaction to have a clear understanding of the relationships and duties owed between the parties and whether a person has acted or is acting as a municipal advisor. If a municipal entity or obligated person believes that a person is providing advice or is soliciting its business as defined in the Final Rule, the municipal entity or obligated person should consider memorializing the municipal advisor’s relationship and the nature of the fiduciary duty in writing.  Upon the effective date of the Final Rule, underwriters and other professionals that are not registered as municipal advisors will be unable to make recommendations or offer advice with respect to municipal issues unless an exemption from the Final Rule applies.  Because municipal advisors cannot breach their fiduciary duty and serve as underwriters on a transaction for which they also served as a municipal advisor, municipal entities and obligated persons may be asked to provide written acknowledgement that the underwriter has not engaged in municipal advisory activities or that the municipal entity or obligated person has retained and relied upon the advice of an independent registered municipal advisor. Before providing such written acknowledgement, the municipal entity or obligated person should make an independent analysis of whether the underwriter has engaged in municipal advisory activities in connection with the transaction and whether any exemption applies.

For more information, please contact:  

John J. Scally Jr. | Member of the Firm | (973) 530-2040 | jscally@wolffsamson.com

Bernard S. Davis | Member of the Firm | (973) 530-2016 | bdavis@wolffsamson.com

Tricia M. Gasparine | Member of the Firm | (973) 530-2081 | tgasparine@wolffsamson.com

Dorit F. Kressel | Member of the Firm | (973) 530-2065 | dkressel@wolffsamson.com

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1 Municipal entities include states, political subdivisions of a state, or municipal corporate instrumentalities of a state or of a political subdivision of a state.   
2 Obligated persons include (with certain exceptions) any person who is committed to support the payment of all or a part of the obligations on the municipal securities, including, most typically, a borrower under a conduit bond issue by a municipal entity.