Jan. 31, 2011


Municipal Advisor Registration Under Dodd-Frank Act

   The 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 following:

  1. 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.
  2. 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 municipal advisor.

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

  1. 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
  2. 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 municipal advisor.

   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 plan."

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 associated persons;
  • attorneys offering "legal advice or the provision of services that are of a traditional legal nature to a client;"
  • engineers "providing engineering advice;" and
  • accountants "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.



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.

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