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January 3‚ 2011
SEC Proposal May Require Municipal Entity Board
Members and Conduit Borrower Board Members and Financial Officers to
Register as Municipal Advisors
By Len Weiser-Varon
On December 20, 2010, the Securities and Exchange Commission
(SEC) released proposed rules (the “Proposed Rules”) that would require
appointed board members of a municipal bond issuer or other municipal
entity that invests governmental funds to register as municipal advisors
with the SEC and the Municipal Securities Rulemaking Board (MSRB) if
they provide “advice” to the municipal entity as to the issuance of
municipal securities, swap transactions, and/or investment strategy
relating to state or municipal funds. Although not expressly addressed by
the SEC’s release, it appears that board members and even employees of
conduit borrowers from municipal issuers also would need to register if
they provide “advice” to such borrowers relating to the issuance of
municipal securities, swap transactions, and/or investment strategy
relating to municipal bond proceeds. The Proposed Rules do not address what
constitutes “advice.”
Proposed Rules 15Ba1-1 through 15Ba1-7 implement provisions
of Section 15B of the Securities Exchange Act of 1934, as amended by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Section 15B”).
The statutory provisions, requiring registration with the SEC and MSRB of
“municipal advisors,” became effective on October 1, 2010. The SEC adopted
interim rule 15Ba2-6T on September 1, 2010, specifying temporary
registration procedures for municipal advisors. Such temporary
registrations expire on December 31, 2011. The Proposed Rules, when and as
adopted, will replace the temporary registration procedures. The rules and
registration form relating to the temporary registration procedures with
the SEC can be found at http://www.sec.gov/info/municipal/form_ma-t.htm.
The rules and registration form relating to the registration procedures
with the MSRB can be found at http://www.msrb.org/Rules-and-Interpretations/MSRB-Registration.aspx.
Under Section 15B, a “municipal advisor” is defined to
include a person (who is not a municipal entity or an employee of a
municipal entity) who 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
municipal financial products or securities issuance. For this purpose, a
“municipal entity” includes any state agency, authority, instrumentality,
or political subdivision or municipal corporate instrumentality; any plan,
program, or pool of assets sponsored or established by any such state or
municipal entity; and any other issuer of municipal securities. An
“obligated person” includes any entity that is contractually committed to
support the payment of all or part of any issue of municipal securities,
excluding, per the Proposed Rules, bond insurers and providers of letter of
credit or liquidity facilities. “Municipal financial products” is defined
to mean municipal derivatives, guaranteed investment contracts, and
investment strategies. “Investment strategies” is defined to include plans
or programs for the investment of the proceeds of municipal securities,
guaranteed investment contracts, and the recommendation of and brokerage of
municipal escrow investments. Under the Proposed Rules, “investment
strategies” also includes “plans, programs or pools of assets that invest
funds held by or on behalf of a municipal entity,” whether or not such
funds are proceeds of municipal securities, and would include pension
funds, general funds, and other state or municipal investment pools.
As noted above, Section 15B excludes “an employee of a
municipal entity” from the definition of “municipal advisor.” In the
release accompanying the Proposed Rules (the “Release”), the SEC noted that
a commenter on the interim rule for registration of municipal advisors had
suggested that the SEC clarify that this “employee” exclusion covers any
person serving as a member of the governing body of a municipal entity,
such as a board member, commissioner, or city councilman. The SEC agreed
that the “employee” exclusion should extend to elected members of a
governing body of a municipal entity, and ex officio members who are
on such governing body by virtue of holding an elective office. The SEC was
not persuaded, however, that unpaid volunteers sitting on boards should be
categorically exempted from the “municipal advisor” definition, and
declined to exclude appointed members of a municipal entity’s
governing body from the definition of “municipal advisor,” stating that
“the Commission is concerned that appointed members, unlike elected
officials and elected ex officio members, are not directly
accountable for their performance to the citizens of the municipal
entity.”
Neither Section 15B nor the Proposed Rules contain any
exclusion from the definition of “municipal advisor” for a board member or
employee of an “obligated person,” even though providing advice to an
“obligated person” with respect to the issuance of municipal securities,
related swap transactions, and/or investment of proceeds of municipal
securities requires registration absent an applicable exclusion. Although
the Release does not address the status of “obligated person” board members
or employees, given the absence of a statutory or regulatory exclusion—and
the SEC’s decision not to provide an exclusion for unelected board members of
municipal entities—no express or implied exclusion to the municipal advisor
registration requirements is apparent for, e.g., a hospital’s chief
financial officer or other employees, or hospital board members, who
provide “advice” to the hospital in connection with its tax-exempt
borrowings through a state authority or in connection with “advice” to the
hospital regarding related swap transactions or the investment of bond
proceeds.
The fact that under the Proposed Rules appointed board
members of a municipal entity, board members of a non-municipal conduit
borrower, and employees of a non-municipal conduit borrower are not
excluded from the definition of “municipal advisor” does not necessarily
mean that they are or will be required to register as municipal advisors.
Although the registration requirements of Section 15B are already in
effect, the Proposed Rules are not, and expressions of concern by municipal
issuers and conduit borrowers, or trade associations acting on their
behalf, may persuade the SEC to change its mind when it finalizes the
Proposed Rules and expressly exclude non-elected board members and
employees. In the Release, the SEC states that “the Commission does not
believe that whether a municipal advisor is compensated for providing
municipal advice should factor into the determination regarding whether the
municipal advisor must register with the Commission,” but solicits comment
on whether there are any persons who engage in uncompensated municipal
advisory activities who should be excluded. The Release also solicits
comments on whether its distinction between appointed board members and
elected board members is appropriate.
Even if comments on the Proposed Rules do not produce a
change in the SEC’s position, the absence of an exclusion or exemption for
non-elected board members or obligated person employees does not
necessarily mean that a non-exempted board member or employee must register
as a municipal advisor. It is possible that the SEC may clarify what
constitutes “advice” in a manner that makes it clear that the mere offering
by a board member of a view at a board meeting or in a report on how a bond
issue should be structured or timed, on whether a swap should be used,
and/or on how municipal funds or bond proceeds should be invested does not
constitute “advice” to the entity served by such board member. Similarly,
the omission of obligated person employees from Section 15B seems a glitch
rather than an intended distinction from the exclusion for municipal
employees, and the SEC could clarify that an obligated person employee is
not providing “advice” to his or her employer when acting within the scope
of his or her employment. Although a stampede of unelected board members
and chief financial officers registering as municipal advisors seems
unlikely, it may nonetheless prove difficult, unless and until the SEC
changes or clarifies its position, for non-elected board members or
employees to participate in discussions or decisions regarding bond issues
and investment policy without some concern that they may be in technical
violation of federal securities laws.
Comments on the Proposed Rules are due 45 days after the date
of publication of the Proposed Rules in the Federal Register, which has not
yet occurred.
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For assistance in this area, please contact Len
Weiser-Varon or another member in the Mintz Levin Public Finance section.
Click here to view Mintz Levin’s Public Finance attorneys.
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