The Dodd-Frank Act: Are You a “Municipal Advisor?”

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law on July 21, 2010. In December 2010, the U.S. Securities Exchange Commission (SEC) released proposed rules under Dodd-Frank regarding a new class of regulated entity: “municipal advisors.” The SEC asserts that municipal advisors participate in the majority of municipal issues and municipal advisors also regularly advise governments on “municipal financial products,” including swaps and investment strategies; however, they were largely unregulated prior to Dodd-Frank.

Dodd-Frank and the proposed rules make it unlawful for municipal advisors to provide certain advice to, or to solicit, “municipal entities” or “obligated persons” (e.g., conduit borrowers on tax exempt bond issues) without prior registration with the SEC. The proposed rules specify proposed registration requirements, discuss at length who must register and describe what activities trigger the registration requirements. Further, Dodd-Frank for the first time imposes an express fiduciary duty on municipal advisors when advising municipal entities or obligated persons and grants the Municipal Securities Rulemaking Board (MSRB) new regulatory authority over municipal advisors. The MSRB has also begun to propose new “conduct rules” for municipal advisors, including restrictions on political contributions.

A host of issues arise when applying these definitions and exclusions to common business scenarios. For example:

· Appointed board members of municipal entities or obligated persons might be “municipal advisors” subject to registration, if they “advise” the entity on matters related to timing and structure of a bond issue or the investment of bond proceeds or other governmental funds. The proposed rules currently exclude elected officials who are board members, but do not exclude appointed board members of municipal entities and obligated persons from the application of the rules.

· Banks and bankers, including bond trustees, will likely often be regarded as municipal advisors, because the proposed rules deal with governments as investors.

· Any third party solicitor seeking business on behalf of a broker, dealer, municipal securities dealer, municipal advisor or investment advisor from a municipal entity or obligated person must register as a municipal advisor. Introductions, recommendations and references can arguably constitute “solicitation.” This applies regardless of frequency or compensation, or lack thereof.

· Engineers, accountants and attorneys are currently excluded under the proposed rules, but only in limited capacities and contexts. These professionals could be treated as municipal advisors if they engage in certain commonly conducted activities outside of the limited scope of the exclusions.

· Failure to register as a municipal advisor carries penalties if the person engages in municipal advisory activities. Registration involves applications, fees, disclosures and the application of standards and qualifications, including continuing education. Perhaps more significantly, registered municipal advisors are subject to “conduct rules,” which are yet to be finalized, including significant limitations on political contributions, the violation of which can result in loss of compensation for business activities.

Comments on the proposed rules, before such rules become final, are due to the SEC by February 22, 2011. Ice Miller can discuss any of these issues with you, coordinate any comments to the SEC, and inform you on registering as a municipal advisor.

Jeff Lewis is a partner at Ice Miller whose primary practice concentrations are in higher education law and in tax-exempt finance and securities law, with a focus on transactions for colleges, universities, museums and other educational, cultural or charitable institutions.

Erik Long is an associate in the Municipal Finance Group. His practice focuses on tax-exempt financings by schools, cities, towns, counties and libraries, including general obligation, lease and refunding financings.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

February 16, 2011