Municipal Advisor Registration Under Dodd-Frank
Wall Street Reform and Consumer Protection Act, Public Law No. 111-203
(Dodd-Frank) was signed into law on July 21, 2010. Among other
changes to securities law, Dodd-Frank imposes registration and other
obligations, including fiduciary duties, upon municipal advisors who
engage in certain activities with respect to "municipal entities."
See Section 975 of Dodd-Frank. These new obligations
include the requirement, which became effective Oct. 1, 2010, to
register with the Securities and Exchange Commission (SEC). In
addition, Dodd-Frank grants the Municipal Securities Rulemaking Board (MSRB) regulatory authority over municipal advisors,
so municipal advisors will be required to comply with the MSRB's registration and other requirements as well
as those of the SEC.
In the wake of Dodd-Frank, the SEC has issued the
- Interim Final
Temporary Rule 15Ba2-6T (Sept. 1, 2010), which establishes a
temporary registration process to allow municipal advisors to
satisfy the statutory registration requirement until such time as
the permanent registration process has been implemented.
- SEC Release No. 34-63576
(Dec. 20, 2010) (Release), including proposed final rules
(Proposed Rules) that specify the proposed permanent registration
requirements and discuss who must register, and also impose
certain record-keeping requirements upon municipal advisors.
The Release also explains the SEC's
interpretation of Dodd-Frank and the Proposed Rules.
Of particular interest to governmental pension
plans, as described in more detail below, is the SEC's
position that appointed (non-ex officio) members
of the governing body of a municipal entity may be subject to the
requirements of Dodd-Frank if they engage in the activities of a
What is the Potential Impact on Governmental Pension Plans?
The key to understanding the impact of the
Proposed Rules is to understand the definitions in Dodd-Frank and their
interpretation in the Proposed Rules and Release.
Who is a Municipal Advisor? The term
"municipal advisor" is broadly defined under Dodd-Frank and
the Proposed Rules to mean "a person (who is not a municipal
entity or an employee of a municipal entity) 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."
Under Dodd-Frank, a municipal advisor will be deemed to have a
fiduciary duty to any municipal entity for whom such person acts as a
What is a Municipal Entity? Under
Dodd-Frank, a "municipal entity" includes any state or state
political subdivision or municipal corporate instrumentality; any
agency, authority or instrumentality thereof; any plan, program or pool
of assets sponsored or established by a state or state political
subdivision or municipal corporate instrumentality (or an agency,
authority or instrumentality thereof); or any other issuer of municipal
securities. In the Release, the SEC notes that this definition
includes public pension funds, local government investment pools and
other state and local governmental entities or funds, along with
participant-directed investment programs or plans such as 529, 403(b),
and 457 plans.
What is a Municipal Financial Product? Under
Dodd-Frank, the term "municipal financial products" means
municipal derivatives, guaranteed investment contracts and investment
strategies. The term "investment strategies" includes
"plans or programs for the investment of the proceeds of municipal
securities that are not municipal derivatives, guaranteed investment
contracts and the recommendation of and brokerage of municipal escrow
investments." In the Release, the SEC interprets
"investment strategies" to include "plans, programs or
pools of assets that invest funds held by or on behalf of a municipal
entity, and, therefore, any person that provides advice with respect to
such funds must register as a municipal advisor" unless that
person is covered by an exclusion under Dodd-Frank. The SEC goes
on to state that it "believes it was Congress's intent to include
in the definition of 'municipal advisor' persons that provide advice
with respect to plans, programs or pools of assets that invest funds
held by, or on behalf of, a municipal entity, such as a 529 college
savings plan, LGIP or public pension
Who is Covered and Who is Excluded?
The following advisors (among others) to a
governmental pension plan would be excluded from the Proposed Rules:
- An investment
adviser registered under the Investment Advisers Act of 1940 and
offering "legal advice or the provision of services that are
of a traditional legal nature to a client;"
"providing engineering advice;" and
"preparing financial statements, auditing financial
statements or issuing letters for underwriters."
However, these individuals would still be considered municipal
advisors to the extent they are engaging in the activities of a
municipal advisor other than those activities expressly excluded.
A governmental plan's employees are also excluded
from the definition as would be any employee of a municipal
entity. However, the impact on governmental pension plan
board members is covered in the Release as follows. The SEC
commented that the exclusion for employees of a municipal entity should
include: (i) elected members of a municipal entity's governing body, to
the extent such persons are acting within the scope of their role as
elected members; and (ii) appointed members of a governing body to the
extent they are ex officio members of the governing body by
virtue of holding an elective office. However, the SEC stated it
"does not believe that appointed members of a governing body of a
municipal entity that are not elected ex officio members should
be excluded from the definition of a 'municipal advisor.'"
The SEC's reasoning was that appointed
members, whether compensated or not, "are not directly accountable
for their performance to the citizens of the municipal
entity." If a governmental pension plan board has
one or more members who are appointed, and who are not employees or ex
officio members, the SEC approach would treat them as municipal
advisors under the Proposed Rules. It is possible that
the SEC may limit the extent to which the municipal advisor
requirements apply to appointed board members by clarifying that
certain board member activities (for example, voting or expressing
views) do not constitute "advice." However, the SEC has
not provided any official clarification on that point to date.
Comments Requested by SEC
The Proposed Rules are not yet final, and the SEC
has requested comments regarding them, including with respect to the
proposed distinction between elected/ex officio members and
appointed members of a municipal entity's governing body.
Comments on the Proposed Rules are due by Feb. 22, 2011.
For more information regarding the Proposed Rules
or the registration requirements, or if we may assist you in providing
comments to the SEC regarding the Proposed Rules, please contact Mary
Beth Braitman, Terry
A.M. Mumford, Sarah
K. Funke or the Ice Miller Employee Benefits
attorney with whom you work.