January 8, 2014
Practice Group(s):
Public Finance
The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
By Scott A. McJannet, Erica R. Franklin, Laura D. McAloon and Cynthia M. Weed
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”), the Securities and Exchange Commission (the “SEC” or Commission”) has
adopted final rules and forms establishing a permanent registration and record-keeping
regime for municipal advisors.
New Registration Requirement Required by Dodd-Frank
President Obama signed the Dodd-Frank Act into law in 2010. The Dodd-Frank Act
amended Section 15B of the Securities Exchange Act of 1934 (as amended, the “Exchange
Act”), rendering it unlawful for municipal advisors to provide certain kinds of advice to, or to
solicit municipal entities without registering with the Commission. The Dodd-Frank Act also
granted the Municipal Securities Rulemaking Board (“MSRB”) regulatory authority over
municipal advisors and imposed a fiduciary duty on municipal advisors.
The Exchange Act requires municipal advisors to register with the Commission as a
prerequisite to (1) soliciting a municipal entity or obligated person or (2) providing advice to
or on behalf of a municipal entity or an obligated person with respect to municipal financial
products or the issuance of municipal securities. The Exchange Act charges the Commission
with prescribing the information and documents municipal advisors must provide with their
application for registration.
To ensure timely compliance with the new requirements, the Commission adopted interim
final temporary rule 15Ba2-6T on September 1, 2010. On January 6, 2011, the Commission
published proposed Rules 15Ba1-1 to 15-Ba1-7 under the Exchange Act, as well as a
number of accompanying forms. On September 20, 2013, having received more than 1,000
distinct comment letters in response to the proposed rules, the Commission adopted Rules
15Ba1-1 to 15Ba1-8 and 15Bc4-1 under the Exchange Act, as well as Forms MA, MA-I, MAW, and MA-NR.
These rules and forms will go into effect on January 13, 2014.
To comply with the new rules, municipal advisors must file applications for registration during
their assigned filing periods. Filing periods are staggered on the basis of temporary
registration numbers, with the first filing period beginning in July 2014. For firms that file new
applications within the assigned filing period, temporary registrations will remain in effect
pending the grant or denial of the new applications, but for firms that fail to file new
applications within the applicable period, temporary registrations will expire 45 days after the
close of the filing period. Prior to the applicable filing period but after the effective date, firms
may continue to register under the temporary regime.
Rule 15Ba1-1: The Definition of “Municipal Advisor” and Related Terms
The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
Municipal Advisor. The Exchange Act defines the term, “municipal advisor” as a person
(other than a municipal entity or employee of a municipal entity) who (1) provides advice to
or on behalf of a municipal entity or an obligated person with respect to municipal financial
products or the issuance of municipal securities or (2) solicits a municipal entity. This
definition includes “financial advisors, guaranteed investment contract brokers, third-party
marketers, placement agents, solicitors, finders, and swap advisors” that engage in
municipal advisor activities. It excludes the following classes of persons and entities:
• Brokers, dealers, or municipal securities dealers serving as underwriters;
• Attorneys providing legal advice or services of a traditional legal nature;
• Engineers providing engineering advice;
• Investment advisers registered under the Investment Advisers Act of 1940 or individuals
associated with such investment advisers who are providing investment advice; and
• Commodity trading advisors registered under the Commodity Exchange Act or individuals
associated with commodity trading advisors providing advice relating to swaps.
Advice. Rule 15Ba1-1 (d)(ii) provides that “advice” excludes the provision of general
information that does not involve a recommendation with respect to municipal financial
products or the issuance of municipal securities, including recommendations with respect to
the timing, structure, terms, and other like matters concerning such financial products or
issues. For example, factual information without subjective opinions, assumptions, or views;
information that is not specific to a particular municipal entity or type of municipal entity;
information that is widely distributed for use by the public, clients, or market participants
other than municipal entities or obligated persons; and general information in the form of
educational materials do not constitute advice. The determination of whether advice has
been given is an objective, not subjective, matter.
Municipal Entity. The Exchange Act defines the term ‘municipal entity’ as “any State,
political subdivision of a State, or municipal corporate instrumentality of a State, including —
(A) any agency, authority, or instrumentality of the State, political subdivision, or municipal
corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established
by the State, political subdivision, or municipal corporate instrumentality or any agency,
authority, or instrumentality thereof; and (C) any other issuer of municipal securities.” Rule
15Ba1-1(g) reflects the Commission’s belief that a municipal entity organized as a municipal
corporate instrumentality of a political subdivision of a state is a municipal corporate
instrumentality of a state. The Commission also noted in the release accompanying the final
rules (the “Release”) that the definition of “municipal entity” is not limited to issuers of
municipal securities.
Obligated Person. Section 15B(e)(10) of the Exchange Act defines the term, “obligated
person” as “any person, including an issuer of municipal securities, who is either generally or
through an enterprise, fund, or account of such person, committed by contract or other
arrangement to support the payment of all or part of the obligations on the municipal
securities to be sold in an offering of municipal securities.” Rule 15Ba1-1(k) provides that the
term “obligated person” “has the same meaning as in section 15B(e)(10) of the Act . . .
provided, however, the term obligated person shall not include: (1) a person who provides
municipal bond insurance, letters of credit, or other liquidity facilities; (2) a person whose
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
financial information or operating data is not material to a municipal securities offering,
without reference to any municipal bond issuance, letter of credit, liquidity facility, or other
credit enhancement; or (3) the federal government.”
Municipal Financial Products. The Exchange Act defines “municipal financial products” as
“municipal derivatives, guaranteed investment contracts, and investment strategies.” The
Commission proposed incorporating the statutory definition of “municipal financial product”
into the rule and has adopted the proposed definition of “municipal financial product.”
Municipal Derivatives. Section 15B of the Exchange Act does not provide a definition of
“municipal derivatives.” The Commission has adopted a definition of “municipal derivatives”
that is similar to the proposed definition but includes some minor clarifications. Specifically,
Rule 15Ba1-1(f) defines “municipal derivatives” as “any swap (as defined in Section 1a(47) of
the Commodity Exchange Act (7 U.S.C. 1a(47)) and section 3(a)(69) of the Act (15 U.S.C.
78c(a)(69)), including any rules and regulations thereunder) or security-based swap (as
defined in section 3(a)(68) of the Act (15 U.S.C. 78c(a)(68)), including any rules and
regulations thereunder) to which (1) [a] municipal entity is a counterparty; or (2) [a]n
obligated person, acting in such capacity, is a counterparty.”
Guaranteed Investment Contracts. Section 15B(e)(2) of the Exchange Act defines
“guaranteed investment contract” as including “any investment that has specified withdrawal
or reinvestment provisions and a specifically negotiated or bid interest rate, and also includes
any agreement to supply investments on two or more future dates, such as a forward supply
contract.” The Commission has adopted Rule 15Ba-1-1(a), which narrows the statutory
definition of “guaranteed investment contract” by providing that it “has the same meaning as
in section 15B(e)(2) of the Act (15 U.S.C. 78o-4(e)(2)); provided, however, that the contract
relates to investments of proceeds of municipal securities or municipal escrow investments.”
Investment Strategies. Section 15B(e)(3) of the Exchange Act provides that 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.” Rule 15Ba-1(b)
provides that the term “investment strategies” has “the same meaning as in section 15B(e)(3)
of the Act (15 U.S.C. 78o-4(e)(3), and includes plans or programs for the investment of
proceeds of municipal securities that are not municipal derivatives or guaranteed investment
contracts, and the recommendation of and brokerage of municipal escrow investments.” In
its Release, the Commission notes that a pooled investment vehicle is an investment
strategy, and an advisor to such a pool a municipal advisor, when the pooled investment
vehicle contains proceeds of an issuance of municipal securities, whether or not all funds
invested in the vehicle are those of municipal entities.
Solicitation of a Municipal Entity or Obligated Person. Under the Exchange Act, a
municipal advisor includes a person who undertakes a solicitation of a municipal entity or
obligated person. Section 15B(e)(9) of the Exchange Act defines the term, “solicitation of a
municipal entity or obligated person” as “a direct or indirect communication with a municipal
entity or obligated person made by a person, for direct or indirect compensation, on behalf of
a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (as
defined in section 202 of the Investment Advisers Act of 1940) that does not control, is not
controlled by, or is not under common control with the person undertaking such solicitation
for the purpose of obtaining or retaining an engagement by a municipal entity or obligated
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
person of a broker, dealer, municipal securities dealer, or municipal advisor for or in
connection with municipal financial products, the issuance of municipal securities, or of an
investment adviser to provide investment advisory services to or on behalf of a municipal
entity.” The Commission has adopted Rule 15Ba1-1(n), which provides that the term
“[s]olicitation of a municipal entity or obligated person” has the same meaning as in section
15B(e)(9) of the Act (15 U.S.C. 78o-4(e)(9)); provided, however, that a solicitation does not
include: (1) Advertising by a broker, dealer, municipal securities dealer, municipal advisor, or
investment adviser; or (2) Solicitation of an obligated person, if such obligated person is not
acting in the capacity of an obligated person or the solicitation of the obligated person is not
in connection with the issuance of municipal securities or with respect to municipal financial
products.”
Exclusions and Exemptions from the Definition of Municipal Advisor
Public Officials and Employees of Municipal Entities and/or Obligated Persons. The
Exchange Act excludes municipal entities and employees from the definition of “municipal
advisor.” The final rules broaden the exemption for municipal employees to include “[a]ny
person serving as a member of a governing body, an advisory board, or a committee of, or
acting in a similar official capacity with respect to, or as an official of, a municipal entity or
obligated person to the extent that such a person is acting within the scope of such person’s
official capacity” as well as “any employee of a municipal entity or obligated person to the
extent that such person is acting within the scope of such person’s employment.”
Broker, Dealer, or Municipal Securities Dealer Serving as an Underwriter. Under
Section 15B(e)(4)(c) of the Exchange Act, the term, “municipal advisor” does not include a
broker, dealer, or municipal securities dealer operating as an underwriter. The Commission
has adopted Rule 15Ba1-1(d)(2)(i), which clarifies that this exemption only exempts brokers,
dealers, or municipal securities dealers operating as underwriters “to the extent that the
broker, dealer, or municipal securities dealer engages in activities that are within the scope
of an underwriting of such issuance of municipal securities.” For purposes of this exclusion,
underwriting does not include advice on investment strategies, advice on municipal
derivatives, and advice otherwise identified by the Commission as outside the ambit of
underwriting.
Registered Investment Advisers. The Exchange Act excludes from the definition of
municipal advisor “any investment adviser registered under the Investment Advisers Act of
1940, or persons associated with such investment advisers who are providing investment
advice.” The Commission has adopted Rule 15Ba1-1-1(d)(2)(ii), which clarifies that the
definition of municipal advisor excludes “[a]ny investment adviser registered under the
Investment Advisers Act of 1940 … or any person associated with such registered
investment adviser to the extent that such registered investment adviser or such person is
providing investment advice in such capacity.” Rule 15Ba1-1(d)(2)(ii) further provides that
for purposes of this rule, investment advice “does not include advice concerning whether and
how to issue municipal securities, advice concerning the structure, timing, and terms of an
issuance of municipal securities and other similar matters, advice concerning municipal
derivatives, or a solicitation of a municipal entity or obligated person.”
Registered Commodity Trading Advisors; Swap Dealers. The Exchange Act excludes
from the definition of municipal advisor commodity trading advisors registered under the
Commodity Exchange Act and individuals associated with a commodity trading advisor who
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
are providing advice relating to swaps. In interpreting this statutory exclusion, the
Commission has adopted a rule similar to the proposed rule but with some minor
clarifications. Rule 15Ba1-1(d)(2)(iii) provides that the term, “municipal advisor” excludes
commodity trading advisors registered under the Commodity Exchange Act and persons
associated with such advisors to the extent that such persons are providing advice relating to
swaps.
Accountants. The exclusions under the Exchange Act do not explicitly extend to
accountants. The proposed rules, however, would have excluded accountants from the
definition of municipal advisor to the extent the accountant is preparing financial statements,
auditing financial statements, or issuing letters for underwriters for, or on behalf of, a
municipal entity or obligated person. In adopting Rule 15Ba1-1(d)(3)(i), the Commission
broadened the exemption for accountants to include audit and other attest services,
providing that the term “municipal advisor” does not include accountants, to the extent that
the accountant is providing audit or other attest services, preparing financial statements, or
issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person.
Engineers. The Exchange Act excludes engineers providing engineering advice from the
definition of municipal advisor. In line with the statutory definition and the proposed rule on
this subject, the Commission has adopted a final rule providing that engineers are excluded
from the definition of municipal advisor to the extent they are providing engineering advice.
In its Release, the Commission noted that activities within the scope of this exclusion include
feasibility studies, cash flow analyses and like activities. The Commission further noted that
this exception does not cover an engineer who is providing advice to a municipal entity or
obligated person regarding municipal financial products or the issuance of municipal
securities.
Banks. The statutory definition of municipal advisor does not include banks. In issuing
proposed rules, the Commission sought comment on whether it should adopt certain
exemptions for banks. The final rule, Rule 15Ba1-1(d)(3)(iii) excludes from the definition of
municipal advisor “[a]ny banks, as defined in section 3(a)(6) of the Act (15 U.S.C. 78c(a)(6)),
to the extent the bank provides advice with respect to the following: (A) [a]ny investments
that are held in a deposit account, savings account, certificate of deposit, or other deposit
instrument issued by a bank; (B) [a]ny extension of credit by a bank to a municipal entity or
obligated person, including the issuance of a letter of credit, the making of a direct loan, or
the purchase of a municipal security by the bank for its own account; (C) [a]ny funds held in
a sweep account that meets the requirements of Section 3(a)(4)(B)(v) of the Act (15 U.S.C.
78c(a)(4)(B)(v)); or (D) [a]ny investment made by a bank acting in the capacity of an
indenture trustee or similar capacity.” This rule does not exempt banks engaging in municipal
advisory activities, such as banks that provide advice to municipal entities or obligated
persons regarding the issuance of municipal securities or municipal derivatives, unless the
bank otherwise qualifies for an exemption.
Registration Process
As noted, the Exchange Act requires municipal advisors to register with the Commission as a
prerequisite to (1) soliciting a municipal entity or obligated person or (2) providing advice to
or on behalf of a municipal entity or an obligated person with respect to municipal financial
products or the issuance of municipal securities. The adopted rules set forth registration
procedures and requirements for municipal advisors. Specifically, Rule 15Ba1-2(a) requires
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
persons applying for registration with the Commission to complete and electronically file
Form MA. Rule 15Ba1-(2)(b) requires persons applying for registration with the Commission,
or persons already registered with the Commission to complete and electronically file Form
MA-I for each natural person who is associated with the municipal advisor and engaged in
municipal advisory activities on its behalf.
Rule 15Ba1-3 exempts from registration requirements any natural persons who are
associated with, and provide municipal advisory services solely on behalf of, a municipal
advisor. In other words, employees of municipal advisory firms who do not provide municipal
advisory services independently of their firm (e.g., as sole proprietors), are not required to
register as municipal advisors.
The registration scheme embodied in the final rules differs markedly from the proposed
scheme. In particular, the proposed rules would have required individual employees
engaging in municipal advisory activities on behalf of municipal advisory firms to register
independently with the Commission. The final rules do not require such individual
employees to register independently but require the municipal advisory firms with which they
are associated to provide certain information about them, using Form MA-I.
Form MA. Form MA is largely modeled after Form ADV (Part 1), which is the form used for
the registration of investment advisers with the Commission. Form MA requests the following
categories of information from municipal advisors, among others:
• Identifying information, including (among other information) name, CRD number,
Employer Identification Number or Social Security Number, registration status and history,
address, websites, contact information for chief compliance officer, location of books and
records, and affiliations;
• Form of organization (e.g., corporation, partnership, sole proprietorship, limited liability
company, etc.);
• Information on whether the applicant is succeeding a registered municipal advisor;
• Information regarding number and activities of employees and unrelated firms or persons
soliciting business on the applicant’s behalf;
• Information on employees who do business independently as affiliates;
• Number and types of municipal advisory clients;
• Types of municipal advisory activities the applicant conducts;
• Types of solicitation activities in which the applicant engages, if applicable;
• Modes of compensation for municipal advisory activities;
• Other business activities;
• Financial industry and other activities of associated persons;
• Owners, officers, and other control persons;
• Information regarding criminal, regulatory, and civil judicial actions relating to the
applicant or its associated persons; and
• Information to determine whether applicant qualifies as a small business.
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
Form MA-I. Form MA-I is similar to FINRA’s Form U4. Form MA-I requests the following
categories of information, among others:
• Identifying information, including employee/ independent contractor status and history and
location;
• Residential history;
• Employment history (past 10 years);
• Other business activities in which the individual is currently engaged; and
• Disciplinary information, including disclosures regarding criminal actions, regulatory
actions, civil judicial actions, customer complaints, termination, certain financial matters,
judgments, and liens.
Amendments to Forms MA and MA-I. Rule 15Ba1-5(a) requires a municipal advisor to
amend the information in its Form MA (1) at least annually, within 90 days of the close of the
municipal advisor’s fiscal year (or the calendar year if the municipal advisor is a sole
proprietor), or (2) more frequently, as required by the General Instructions. The General
Instructions enumerate a number of circumstances that require a municipal advisor to amend
its Form MA. Rule 15Ba1-5(b) requires registered municipal advisors to file an amended
Form MA-I at any time the information in that form becomes inaccurate.
Approval or Denial of Application. The Exchange Act provides that within 45 days of the
filing of an application for registration, the Commission must either (1) grant registration or
(2) institute proceedings to determine whether registration should be denied. Such
proceedings shall include notice and an opportunity for the applicant to be heard and must
be completed within 120 days of the filing of the application.
Books and Records Requirements
The Exchange Act requires registered municipal advisors to make, retain, and provide copies
of records and disseminate reports as prescribed by the Commission. The Commission has
adopted the proposed rules on record-keeping with minor modifications, including renumbering. As adopted, Rule 15Ba1-8(a) requires municipal advisory firms to make and
keep current the following records:
• All written communications sent and received relating to municipal advisory activities
(including inter-office memoranda and communications);
• All checkbooks, bank statements, general ledgers, cancelled checks, and cash
reconciliations;
• Policies and procedures currently in effect or in effect within past five years (excluding
those in effect prior to the effective date of the new rule);
• Any documents created by a municipal advisor that were material to making a
recommendation to a municipal entity or obligated person and that state the basis for the
recommendation;
• All written agreements between the municipal advisor and municipal entity, employee of
municipal entity, or obligated person relating to the business of the municipal advisor;
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
• Names of individuals currently associated, or associated within past five years, with the
municipal advisor (excluding those who were associated with the municipal advisor prior
to effective date of new rule);
• Names, titles, and addresses of all persons associated with the municipal advisor;
• All municipal entities or obligated persons with which the municipal advisor is engaging,
or has engaged within the past five years, in municipal advisory activities (excluding
engagements prior to the effective date of the new rule);
• The name and address of each individual whom the municipal advisor pays or agrees to
pay to solicit a municipal entity, an employee of a municipal entity, or an obligated person
on its behalf;
• The name and address of each person who pays or agrees to pay the municipal advisor
to solicit a municipal entity, employee of a municipal entity, or obligated person on its
behalf; and
• Written consents to service of process from each natural person associated with the
municipal advisor who engages in municipal advisory activities solely on its behalf.
Rule 15Ba1-8(b)(1) requires municipal advisory firms to retain all required books and records
for at least two years in an accessible location and at least five years in total. In addition, the
municipal advisory firm must maintain certain corporate governance documents in the firm’s
principal office for at least three years after withdrawing as a registered municipal advisor or
terminating the business.
These new record-keeping requirements are largely drawn from existing requirements for
municipal advisors who are also registered as broker-dealers and investment advisers. Rule
15Ba1-8(e)(1) provides that books made, maintained, and preserved pursuant to the
requirements of Rules 17a-3 and 17a-4 under the Exchange Act, the rules of the MSRB, or
Rule 204-2 of the Investment Advisers Act will be deemed compliant with the similar
requirements of 15Ba1-8. In contrast, municipal advisors who were not previously subject to
such books and records requirements face new and substantial record-keeping burdens with
the advent of the new regime. The new rules may pose particular challenges for firms that
provide integrated services and will now be required to segregate their municipal advisory
activities for books and records requirements.
Conclusion
Understanding the requirements and impact of the new rules is an ongoing task; please
contact us if you would like to discuss your concerns and whether the new requirements
apply.
The new rule is available here.
Authors:
Scott A. McJannet
Scott.McJannet@klgates.com
+1.206.370.8190
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The SEC Adopts Final Registration Regime and
Record-Keeping Obligations for Municipal Advisors
Erica R. Franklin
Erica.Franklin@klgates.com
+1.206.370.7670
Laura D. McAloon
laura.mcaloon@klgates.com
+1.509.241.1532
Cynthia M. Weed
cynthia.weed@klgates.com
+1.206.370.7801
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