[Federal Register Volume 78, Number 218 (Tuesday, November 12, 2013)]
[Rules and Regulations]
[Pages 67468-67798]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-23524]
[[Page 67467]]
Vol. 78
Tuesday,
No. 218
November 12, 2013
Part II
Securities and Exchange Commission
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17 CFR Parts 200, 240 and 249
Registration of Municipal Advisors; Final Rule
Federal Register / Vol. 78 , No. 218 / Tuesday, November 12, 2013 /
Rules and Regulations
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 240 and 249
[Release No. 34-70462; File No. S7-45-10]
RIN 3235-AK86
Registration of Municipal Advisors
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: Section 975 of Title IX of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``Dodd-Frank Act'') amended Section 15B of
the Securities Exchange Act of 1934 (``Exchange Act'') to require
municipal advisors, as defined below, to register with the Securities
and Exchange Commission (``Commission'' or ``SEC''), effective October
1, 2010. To enable municipal advisors to temporarily satisfy this
requirement, the Commission adopted an interim final temporary rule,
Exchange Act Rule 15Ba2-6T, and form, Form MA-T, effective October 1,
2010. To enable municipal advisors to continue to register under the
temporary registration regime until the applicable compliance date for
permanent registration, the Commission is extending Rule 15Ba2-6T, in a
separate release, to December 31, 2014. The Commission is today
adopting new Rules 15Ba1-1 through 15Ba1-8, new Rule 15Bc4-1, and new
Forms MA, MA-I, MA-W, and MA-NR under the Exchange Act. These rules and
forms are designed to give effect to provisions of Title IX of the
Dodd-Frank Act that, among other things, require the Commission to
establish a registration regime for municipal advisors and impose
certain record-keeping requirements on such advisors.
DATES: Effective Date: January 13, 2014, except that amendatory
instruction 11 removing Sec. 249.1300T is effective January 1, 2015.
Compliance Date: The applicable compliance dates are discussed in
the section of the release titled ``V. Implementation and Compliance
Dates''.
FOR FURTHER INFORMATION CONTACT:
Office of Municipal Securities: John Cross, Director, at (202) 551-
5839; Jessica Kane, Senior Special Counsel to the Director, at (202)
551-3235; Rebecca Olsen, Attorney Fellow, at (202) 551-5540; or Mary
Simpkins, Senior Special Counsel, at (202) 551-5683; at Office of
Municipal Securities, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-7010.
Office of Market Supervision: Molly Kim, Senior Special Counsel, at
(202) 551-5644; Ira Brandriss, Special Counsel, at (202) 551-5651;
Brian Baltz, Special Counsel, at (202) 551-5762; Jennifer Dodd, Special
Counsel, at (202) 551-5653; Derek James, Special Counsel, at (202) 551-
5792; Yue Ding, Attorney-Adviser, at (202) 551-5842; or Eugene Hsia,
Attorney-Adviser, at (202) 551-5709; at Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is adopting Rules 15Ba1-1 to
15Ba1-8 (17 CFR 240.15Ba1-1 to 240.15Ba1-8) and 15Bc4-1 (17 CFR
240.15Bc4-1) under the Exchange Act; Forms MA, MA-I, MA-W, and MA-NR
(17 CFR 249.1300, 1310, 1320, and 1330); and Rules 30-3a (17 CFR
200.30-3a) and 19d (17 CFR 200.19d) under the Commission's Rules of
Organization and Program Management. The Commission is amending Rules
30-18 (17 CFR 200.30-18) and 19c (17 CFR 200.19c) under the
Commission's Rules of Organization and Program Management.
Table of Contents
I. Executive Summary
II. Introduction
A. Background
1. Overview of Municipal Securities Market
a. Municipal Advisors
b. Municipal Entities and Municipal Financial Products
2. Historical Regulation of Municipal Securities and Municipal
Advisors
a. Municipal Securities Market
b. Municipal Advisors
B. Dodd-Frank Act and the Need for Oversight
C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T
D. Proposal To Establish a Registration Regime for Municipal
Advisors
III. Discussion
A. Rules for the Registration of Municipal Advisors
1. Rule 15Ba1-1: Definition of ``Municipal Advisor'' and Related
Terms
a. Statutory Definition of ``Municipal Advisor''
b. Interpretation of the Term ``Municipal Advisor''; Definition
of Related Terms
i. Advice Standard in General
ii. Municipal Entity
iii. Obligated Person
iv. Municipal Financial Products
v. Municipal Derivatives
vi. Guaranteed Investment Contracts
vii. Issuance of Municipal Securities
viii. Investment Strategies
ix. Pooled Investment Vehicles
x. Solicitation of a Municipal Entity or Obligated Person
c. Exclusions and Exemptions From the Definition of ``Municipal
Advisor''
i. Public Officials and Employees of Municipal Entities and
Obligated Persons
ii. Responses to Requests for Proposals or Requests for
Qualifications
iii. Municipal Entity or Obligated Person Represented by an
Independent Municipal Advisor
iv. Broker, Dealer, or Municipal Securities Dealer Serving as an
Underwriter
v. Registered Investment Advisers
vi. Registered Commodity Trading Advisors; Swap Dealers
vii. Accountants, Attorneys, Engineers and Other Professionals
viii. Banks
2. Rule 15Ba1-2
a. Application for Municipal Advisor Registration
b. Information Requested in Form MA
c. Information Requested in Form MA-I
3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated
With Registered Municipal Advisors From Registration
4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration;
Form MA-W
a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration
b. Form MA-W
5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I
6. Rule 15Ba1-6: Consent to Service of Process To Be Filed by
Non-Resident Registered Municipal Advisors; Legal Opinion To Be
Provided by Non-Resident Municipal Advisors; and Form MA-NR
a. Rule 15Ba1-6: Consent to Service of Process To Be Filed by
Non-Resident Registered Municipal Advisors; Legal Opinion To Be
Provided by Non-Resident Municipal Advisors
b. Form MA-NR
7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor
8. General Instructions and Glossary
9. Rule 15Bc4-1: Persons Associated With Municipal Advisors
B. Approval or Denial of Registration
C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by
Municipal Advisors
IV. Designation of FINRA To Examine FINRA Member Municipal Advisors
V. Implementation and Compliance Dates
VI. Delegation of Authority
A. Delegation to the Director of the Office of Municipal
Securities
B. Delegation to the Director of the Office of Compliance
Inspections and Examinations
VII. Paperwork Reduction Act
VIII. Economic Analysis
IX. Final Regulatory Flexibility Analysis
X. Statutory Basis and Text of Amendments
I. Executive Summary
Section 975 of the Dodd-Frank Act creates a new class of regulated
persons, ``municipal advisors,'' and requires these advisors to
register with the Commission. This new registration requirement, which
became effective on
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October 1, 2010, makes it unlawful for any municipal advisor to provide
certain advice to or on behalf of, or to solicit, municipal entities or
certain other persons without registering with the Commission.\1\ A
person is deemed under the Exchange Act to have a statutory fiduciary
duty to any municipal entity for whom such person acts as a municipal
advisor.
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\1\ See 15 U.S.C. 78o-4(a)(1)(B).
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The new registration requirements and regulatory standards are
intended to mitigate some of the problems observed with the conduct of
some municipal advisors, including ``pay to play'' practices,
undisclosed conflicts of interest, advice rendered by financial
advisors without adequate training or qualifications, and failure to
place the duty of loyalty to their clients ahead of their own
interests.\2\ According to a Senate Report related to the Dodd-Frank
Act, ``[t]he $3 trillion municipal securities market is subject to less
supervision than corporate securities markets, and market participants
generally have less information upon which to base investment
decisions. During the [financial] crisis, a number of municipalities
suffered losses from complex derivatives products that were marketed by
unregulated financial intermediaries.'' \3\ Accordingly, in response to
the financial crisis that began in 2008, the Dodd-Frank Act amended the
Exchange Act to require ``a range of municipal financial advisors to
register with the [Commission] and comply with regulations issued by
the [MSRB].'' \4\
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\2\ See, e.g., Municipal Securities Rulemaking Board,
Unregulated Municipal Market Participants--A Case for Reform, April
2009, http://www.msrb.org/News-and-Events/Press-Releases/Press-
Releases/~/media/Files/Special-Publications/
MSRBReportonUnregulatedMarketParticipants--April09.ashx (``MSRB
Study'').
\3\ See S. Rep. No. 111-176, at 38 (2010).
\4\ See id.
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In September 2010, the Commission adopted, and subsequently
extended, an interim final temporary rule establishing a temporary
means for municipal advisors to satisfy the registration
requirement.\5\ As of March 31, 2013, there were approximately 1,130
Form MA-T registrants, including approximately 330 registrants that are
also registered investment advisers and/or broker-dealers. In December
2010, the Commission proposed a permanent registration regime to govern
municipal advisor registration (``Proposal'').\6\ The Commission has
considered comments received in connection with both the 2010 interim
final temporary rules, as well as the Proposal, and is today
establishing a permanent registration regime for municipal advisors and
imposing certain record-keeping requirements on such advisors. Further,
the Commission today, in a separate release, is extending the
expiration date of the temporary registration regime to December 31,
2014.\7\ This extension will enable municipal advisors that are
required to register with the Commission on or after the Effective Date
but before the applicable compliance date to continue to register under
the temporary registration regime.
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\5\ See Section II.C. below and Securities Exchange Act Release
No. 62824 (September 1, 2010), 75 FR 54465 (September 8, 2010)
(``Temporary Registration Rule Release'').
\6\ See Section II.D. below and Securities Exchange Act Release
No. 63576 (December 20, 2010), 76 FR 824 (January 6, 2011)
(``Proposal'').
\7\ See Rule 15Ba2-6T and Securities Exchange Act Release No.
70468 (September 23, 2013) (``Form MA-T Extension Release'').
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The statutory definition of a ``municipal advisor'' is broad and
includes persons that may not have been considered to be municipal
financial advisors prior to the enactment of the Dodd-Frank Act.
Historically, municipal advisors have been largely unregulated.\8\ The
Commission believes that the information disclosed pursuant to the
rules and forms established by the permanent registration regime for
municipal advisors will enhance the Commission's oversight of municipal
advisors and their activities in the municipal securities markets. The
publicly-available online information provided pursuant to these rules
and forms should also aid municipal entities and obligated persons in
choosing municipal advisors and help provide greater transparency when
engaging in transactions or investments with municipal advisors.
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\8\ See, e.g., MSRB Study, supra note 2.
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The Exchange Act defines the term ``municipal advisor'' 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.\9\ The definition of municipal advisor includes
financial advisors, guaranteed investment contract brokers, third-party
marketers, placement agents, solicitors, finders, and swap advisors
that provide municipal advisory services, unless they are statutorily
excluded.\10\
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\9\ See 15 U.S.C. 78o-4(e)(4)(A).
\10\ See 15 U.S.C. 78o-4(e)(4)(B).
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The statutory definition of ``municipal advisor'' explicitly
excludes: (1) A broker, dealer, or municipal securities dealer serving
as an underwriter (as defined in Section 2(a)(11) of the Securities Act
of 1933); (2) any investment adviser registered under the Investment
Advisers Act of 1940, or persons associated with such investment
advisers who are providing investment advice; (3) any commodity trading
advisor registered under the Commodity Exchange Act or persons
associated with a commodity trading advisor who are providing advice
related to swaps; (4) attorneys offering legal advice or providing
services of a traditional legal nature; and (5) engineers providing
engineering advice.\11\
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\11\ See 15 U.S.C. 78o-4(e)(4)(C).
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The Exchange Act defines the term ``municipal financial product''
to mean municipal derivatives, guaranteed investment contracts, and
investment strategies.\12\ ``Investment strategies'' is defined to
include plans or programs for the investment of proceeds of municipal
securities that are not municipal derivatives, guaranteed investment
contracts, and the recommendation of and brokerage of municipal escrow
investments.\13\
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\12\ See 15 U.S.C. 78o-4(e)(5).
\13\ See 15 U.S.C. 78o-4(e)(3).
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The Proposal reflected the Commission's preliminary interpretation
of the new statutory requirements, based on its understanding at that
time of Congressional objectives and intent in adopting Section 975 of
the Dodd-Frank Act. The Commission requested comment generally on the
Proposal and also requested comment on over 175 specific issues. The
Commission received over 1,000 comment letters on the Proposal,
representing a wide range of viewpoints, which are discussed throughout
this release. Commenters included municipal advisors, municipal
entities, broker-dealers, banks, accountants, lawyers, engineers,
registered investment advisers, organizations representing industry
participants, investors, the Municipal Securities Rulemaking Board,
members of Congress, and others.
Commenters generally supported the goals of the Proposal, although
many expressed concerns about its breadth and recommended that the
Proposal be amended or clarified in certain respects. Major themes in
the comments included: (1) Concerns about the proposed treatment of
appointed board members and other public officials of municipal
entities as advisors; (2)
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concerns about the proposed application to advice on investments of all
municipal funds (versus investments associated with proceeds of
municipal securities); and (3) potential effects on securities
activities of banks for which there are no statutory exclusions from
the definition of ``municipal advisor.'' The Commission staff discussed
many issues with other U.S. financial regulators, commenters, and
interested market participants in devising a final rule that requires
registration of parties engaging in municipal advisory activities
without unnecessarily imposing additional regulation.
One theme reflected in the statutory exclusions to the definition
of a municipal advisor and in the Commission's consideration of
additional regulatory exemptions involves an approach that focuses and
limits the scope of these exclusions and exemptions based on identified
activities (``activities-based exemptions'') rather than on the basis
of the status of particular categories of market participants
(``status-based exemptions''). This approach aims to ensure that
exemptions apply in targeted circumstances to appropriate identified
activities. By comparison, a concern with status-based exemptions is
that they could provide inappropriate competitive advantages to covered
categories of market participants.\14\
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\14\ See infra Sections VIII.D.5.b. (discussing alternatives to
the exclusions from the definition of municipal advisor) and
VIII.D.6.b. (discussing alternatives to the exemptions from the
definition of municipal advisor).
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In consideration of the views expressed, suggestions for
alternatives, and other information provided by commenters, the
Commission is adopting the rules with significant modifications from
the Proposal to narrow the scope of the registration requirement,
including through certain activity-based exemptions from the definition
of municipal advisor, and to provide additional guidance to market
participants about what constitutes municipal advice and who is
required to register as a municipal advisor. Some of the more
significant changes made in this adopting release are summarized as
follows.
Broad Exemption for Public Officials and Employees of Municipal
Entities and Obligated Persons
The Exchange Act excludes municipal entities and employees of
municipal entities from the definition of municipal advisor.\15\ The
Proposal did not extend the exclusion for ``employees of a municipal
entity'' to include appointed officials. The Commission received
approximately 670 comment letters to the effect that the proposed
exclusion for employees of municipal entities was unduly narrow and
that it failed to provide sufficient coverage for appointed board
members and other public officials associated with municipal entities.
The final rule provides a broad exemption from municipal advisor
registration for all employees, governing body members, and other
officials of municipal entities and obligated persons, to the extent
that they act within the scope of their employment or official
capacity.\16\ The Commission does not expect that the ordinary
performance of the duties of an appointed member of a governing body of
a municipal entity--such as voting, providing a statement or discussion
of views, or asking questions at a public meeting--would cause that
individual to be a municipal advisor with respect to the municipal
entity on whose board he or she serves.
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\15\ See 15 U.S.C. 78o-4(e)(4)(A).
\16\ See infra Section III.A.1.c.i.
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Limitation to Investments Related to Proceeds of Municipal Securities
Instead of All Public Funds
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'' (emphasis added).\17\ In the Proposal,
the Commission proposed to interpret the ``investment strategies''
definition broadly to cover not only the statutorily-identified matters
but also plans, programs, or pools of assets that invest any funds held
by or on behalf of a municipal entity.
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\17\ See 15 U.S.C. 78o-4(e)(3).
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The Commission received approximately 60 comment letters to the
effect that the Proposal interpreted the ``investment strategies''
definition too broadly to cover advice to municipal entities regarding
plans or programs for the investment of all public funds of municipal
entities (rather than investments more narrowly associated with
proceeds of municipal securities and the recommendation of and
brokerage of municipal escrow arrangements). The Commission has
determined to adopt the statutory definition of ``investment
strategies,'' but is also adopting an exemption for certain persons
that will result in a narrower application of ``investment strategies''
than originally proposed, limiting such strategies to matters relating
to the investment of the proceeds of municipal securities or the
recommendation of and brokerage of municipal escrow investments, in
lieu of all public funds of municipal entities.\18\ This more
circumscribed approach to ``investment strategies'' has a narrowing
effect throughout the municipal advisor registration regime (e.g., many
investment advisers and a significant portion of the bank activities
identified by commenters will not be subject to municipal advisor
registration).
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\18\ See infra Section III.A.1.b.viii.
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New Tailored Exemption for Banks
The Exchange Act does not exclude banks from the definition of
municipal advisor. The Commission received approximately 300 comment
letters to the effect that the Proposal did not provide needed
exemptions for so-called ``traditional banking'' activities. Most of
these comments regarding the impact on banks related to the proposed
broad interpretation of the ``investment strategies'' definition. Many
commercial banks and banking associations asserted that the
Commission's interpretation of ``investment strategies'' was overly
broad and would potentially cover traditional banking products and
services, such as deposit accounts, cash management products, and loans
to municipalities. As a result, according to commenters, banks or bank
employees that provide advice regarding such products and services
could be considered municipal advisors, adding ``a new layer of
regulation on bank products for no meaningful public purpose.'' \19\
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\19\ See infra note 876 and accompanying text (discussing
comments regarding an exemption for banks from the municipal advisor
registration rules).
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The narrowing of the application of ``investment strategies'' in
the final rule is designed to address the main concerns raised by these
commenters.\20\ In addition, the final rule provides a new tailored
exemption from the definition of municipal advisor for a bank providing
advice with respect to the following: (1) Any investments that are held
in a deposit account, savings account, certificate of deposit, or other
deposit instrument issued by a bank; (2) any 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; (3) any funds
held in a sweep account; or (4) any investment made by a bank acting in
the capacity of an indenture trustee
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or similar capacity (e.g., a bond indenture trustee, paying agent, or
municipal escrow agent).
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\20\ See infra Section III.A.1.c.viii.
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The final rule preserves the municipal advisor registration
requirement for banks that engage in municipal advisory activities,
such as banks that act as financial advisors to municipal entities in
structuring issues of municipal securities. Also, the final rule
preserves the municipal advisor registration requirement for banks that
provide advice with respect to municipal derivatives.
Advice Standard in General
For purposes of the municipal advisor definition, the Dodd-Frank
Act did not specifically define or otherwise provide a general standard
to determine what constitutes ``advice'' to a municipal entity or
obligated person. The Commission received comments requesting
clarification of ``advice'' and suggesting general parameters for
defining advice that distinguish between providing general information
to a municipal entity and recommending a specific action to a municipal
entity. While the Commission believes that the determination of whether
a person provides advice to or on behalf of a municipal entity or
obligated person depends on all the relevant facts and circumstances,
the Commission also believes that additional guidance on the advice
standard for purposes of the municipal advisor definition will provide
greater clarity regarding the applicability of the municipal advisor
registration requirement. Accordingly, the adopted rules provide that
advice excludes, among other things, the provision of general
information that does not involve a recommendation regarding municipal
financial products or the issuance of municipal securities (including
with respect to the structure, timing, terms and other similar matters
concerning such financial products or issues).\21\
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\21\ See infra Section III.A.1.b.i.
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Exemption for Certain Swap Dealers
The Exchange Act does not exclude swap dealers from the definition
of municipal advisor. The Commission received comments suggesting that
regulation of swap dealers under the municipal advisor registration
regime should be coordinated with other regulatory programs. The
Commission recognizes that swap dealers are also subject to the
provisions of Title VII of the Dodd-Frank Act,\22\ which provide the
Commodity Futures Trading Commission (``CFTC'') with authority to
register and implement business conduct standards for swap dealers with
respect to their interactions with municipal entities and obligated
persons that are ``special entities,'' as discussed further below in
Section III.A.1.c.vi. The final rules exempt any registered swap dealer
to the extent that such dealer recommends a municipal derivative or a
trading strategy that involves a municipal derivative, so long as such
dealer or associated person is not ``acting as an advisor'' to the
municipal entity or obligated person, applying the standards applicable
to the parties to such transactions under the existing regulatory
regime of the CFTC.\23\
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\22\ See Dodd-Frank Act sections 731 et seq., 764 et seq.
\23\ See infra Section III.A.1.c.vi. The Commission also
received similar comments regarding security-based swap dealers. As
discussed herein, although the Commission is not providing an
exemption in the rules as adopted for security-based swap dealers,
security-based swap dealers may be eligible for exemption pursuant
to another exemption, such as when there is a separate registered
municipal advisor, and the Commission may in the future consider
whether to provide a comparable exemption by rule. See id.
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Exemption When There Is an Independent Registered Municipal Advisor
Several commenters suggested that a person providing advice with
respect to municipal financial products or the issuance of municipal
securities should not be regulated as a municipal advisor if the
municipal entity or obligated person is otherwise represented by a
municipal advisor. The Commission believes that if a municipal entity
or obligated person is represented by a registered municipal advisor,
parties to the municipal securities transaction and others who are not
registered municipal advisors should be able to provide advice to such
municipal entity or obligated person, so long as the responsibilities
of each of the parties are clear.
Accordingly, the final rules exempt persons providing advice with
respect to municipal financial products or the issuance of municipal
securities from the definition of municipal advisor so long as: (1) An
independent registered municipal advisor is providing advice with
respect to the same aspects of the municipal financial product or
issuance of municipal securities, is registered pursuant to Section 15B
of the Exchange Act and the rules and regulations thereunder, and is
not, and within at least the past two years was not, associated with
the person seeking to rely on this exemption; (2) such person receives
from the municipal entity or obligated person a representation in
writing that it is represented by, and will rely on the advice of, an
independent registered municipal advisor; and (3) such person provides
written disclosure to the municipal entity or obligated person that
such person is not a municipal advisor and, with respect to a municipal
entity, is not subject to the statutory fiduciary duty applicable to
municipal advisors under the Exchange Act, and such person provides a
copy of such disclosure to the municipal entity's or the obligated
person's independent registered municipal advisor.\24\
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\24\ See infra Section III.A.1.c.iii.
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Exclusion of Individuals From Registration
In the Proposal, the Commission proposed to require registration of
all individuals associated with municipal advisory firms who engage in
municipal advisory activities, as contrasted with limiting registration
to the municipal advisory firms themselves. For reasons further
discussed in Sections III.A.2.a. and III.A.3. of this adopting release,
the Commission is limiting the registration requirement to municipal
advisory firms and sole proprietors.
II. Introduction
A. Background
On July 21, 2010, President Obama signed into law the Dodd-Frank
Act.\25\ The Dodd-Frank Act was enacted, among other things, to promote
the financial stability of the United States by improving
accountability and transparency in the financial system.\26\ With
Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section
15B of the Exchange Act \27\ to, among other things, make it unlawful
for municipal advisors \28\ to provide certain advice to, or solicit,
municipal entities \29\ or certain other persons without registering
with the Commission.\30\
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\25\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\26\ See Public Law 111-203 Preamble.
\27\ 15 U.S.C. 78o-4.
\28\ See infra Section III.A.1. (discussing the term ``municipal
advisor'').
\29\ See infra Section III.A.1.b.ii. (discussing the term
``municipal entity'').
\30\ See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C.
78o-4(a)(1)(B).
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1. Overview of Municipal Securities Market
a. Municipal Advisors
As discussed in the Proposal,\31\ until the passage of the Dodd-
Frank Act, the activities of municipal advisors were largely
unregulated, and municipal advisors were generally not required to
register with the Commission or any other federal, state, or self-
regulatory entity with respect to their municipal advisory activities.
As discussed below in this section and in the Proposal,\32\ some
entities that are now subject to registration as municipal advisors
pursuant to Section 15B of the Exchange Act and rules or regulations
promulgated thereunder currently are subject to regulation by various
federal and state regulators in other capacities. These entities
include brokers, dealers, municipal securities dealers, investment
advisers, and banks. Such regulations, however, generally do not apply
specifically to these entities' municipal advisory activities.
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\31\ See Proposal, 76 FR 825.
\32\ See id.
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Municipal advisors, commonly referred to as ``financial advisors,''
\33\ engage in municipal advisory activities in a variety of contexts.
With respect to the issuance of municipal securities, municipal
advisors (which may include entities registered as brokers, dealers,
municipal securities dealers, or investment advisers acting as
municipal advisors), among other things, may assist municipal entities
in developing a financing plan, assist municipal entities in evaluating
different financing options and structures, assist in the selection of
other parties to the financing (such as bond counsel and underwriters),
coordinate the rating process, ensure adequate disclosure, and/or
evaluate and negotiate the financing terms.\34\ According to the
Municipal Securities Rulemaking Board (``MSRB''), approximately $315
billion (70%) \35\ of the municipal debt issued in 2008 was issued with
the participation of municipal advisors.\36\ The MSRB also stated that
participation by municipal advisory firms in the issuance of municipal
securities is rising, noting a 63% participation rate in 2006, a 66%
participation rate in 2007, and a 70% participation rate in 2008.\37\ A
study that looked at historical involvement by ``financial advisors''
identified participation rates of approximately 50% in the period from
1984 to 2002.\38\
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\33\ See infra note 36 (referring to municipal advisors as
``financial advisors'').
\34\ See Jayaraman Vijayakumar and Kenneth N. Daniels, 2006, The
Role and Impact of Financial Advisors in the Market for Municipal
Bonds (``Vijayakumar and Daniels''), Journal of Financial Services
Research, 30:43, at 46.
\35\ See MSRB Study, supra note 2, at 1.
\36\ See id. (referring to municipal advisors as ``financial
advisors''). Approximately 43% of the $453 billion of municipal debt
issued in 2008 (by par amount of bonds) (or 62% of the $315 billion
of municipal debt issued with financial advisors) was issued with
the assistance of ``financial advisors'' that were not part of
dealer firms regulated by the MSRB. See id., at 2.
\37\ See id., at 2.
\38\ See Arthur Allen and Donna Dudney, May 2010, Does the
Quality of Financial Advice Affect Prices? The Financial Review 45:
389 (``Allen and Dudney'').
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As discussed in the Proposal,\39\ municipal advisors may also
engage in municipal advisory activities with respect to municipal
financial products.\40\ For example, as derivatives--which are
municipal financial products--developed in the municipal securities
market, some municipal advisory firms began marketing themselves as
experts in derivatives. These municipal advisory firms are generally
referred to as ``swap advisors.'' \41\ Swap advisors may provide advice
solely with respect to a municipal derivative transaction or may
provide advice in other types of municipal advisory capacities.
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\39\ See Proposal, 76 FR 825.
\40\ See infra Section III.A.1.b.iv. (discussing the term
``municipal financial products'').
\41\ See MSRB Study, supra note 35.
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Further, municipal advisors may provide advice to municipal
entities concerning guaranteed investment contracts and investment
strategies.\42\ These advisory firms may assist in the investment of
proceeds from bond offerings as well as manage other public monies.
Such public monies include general and special funds of state and local
governments, public pension plans, and other funds dedicated to public
programs, such as public transportation, police and fire protection,
public health, and public education. In addition, municipal advisors
may help state and local governments find and evaluate other advisors
that manage public funds and provide other types of services.\43\
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\42\ See infra Sections III.A.1.b.vi. and III.A.1.b.viii.
(discussing the terms ``guaranteed investment contracts'' and
``investment strategies,'' respectively).
\43\ See Investment Advisers Act Release No. 3043 (July 1,
2010), 75 FR 41018, 41019 (July 14, 2010) (``Political Contributions
Final Rule'').
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Other persons that may be required to register as municipal
advisors include those who solicit municipal entities on behalf of
brokers, dealers, municipal securities dealers, municipal advisors, and
investment advisers. Such solicitation activities are discussed
herein.\44\
---------------------------------------------------------------------------
\44\ See infra Section III.A.1.b.x.
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b. Municipal Entities and Municipal Financial Products
The municipal securities market consists of approximately 44,000
issuers,\45\ a diverse group that includes states, their political
subdivisions (such as cities, towns, counties, and school districts),
and their instrumentalities, authorities, agencies, and special
districts. These public bodies are governed by state and local laws,
including state constitutions, statutes, city charters, and municipal
codes.\46\ Such constitutions, statutes, charters, and codes impose on
municipal issuers requirements relating to governance, budgeting,
accounting, and other financial matters.\47\ The governing bodies of
municipal issuers are as varied as the types of issuers, ranging from
state governments, cities, towns, counties, and school districts, to
authorities, agencies, and other special districts.\48\
---------------------------------------------------------------------------
\45\ See Commission Report on the Municipal Securities Market, 1
(July 31, 2012), available at http://sec.gov/news/studies/2012/munireport073112.pdf (``2012 Report on the Municipal Securities
Market'').
\46\ See American Bar Association, Disclosure Roles of Counsel
in State and Local Government Securities Offerings 1 (Third Edition,
2009) (``Disclosure Roles of Bond Counsel'').
\47\ See id., at 2.
\48\ See id., at 78.
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Municipal securities are issued by government entities to pay for a
variety of public projects, to obtain cash flow for other governmental
needs, and to provide tax-exempt or taxable financing for non-
governmental private projects by acting as a conduit on behalf of
private organizations.\49\ In 2011, there were over one million
different municipal bonds outstanding, totaling $3.7 trillion in
principal.\50\ Also, there were 13,463 municipal issuances, totaling
$355 billion of principal.\51\ Further, in 2011, the average daily
trading volume for the municipal bond market was $11.3 billion.\52\
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\49\ The Internal Revenue Code delineates the purposes for which
tax-exempt municipal bonds may be issued for the benefit of
organizations other than states and local governments, i.e., conduit
borrowers. See 26 U.S.C. 142-145, 1394.
\50\ See 2012 Report on the Municipal Securities Market, supra
note 45, at 5. In 2011, there were fewer than 50,000 different
corporate bonds, totaling $11.5 trillion in principal (this figure
includes foreign bonds). See id. There were also $22.5 trillion of
corporate equities outstanding. See id.
\51\ See id., at 6.
\52\ See id., at 21. Compare this to the corporate bond market,
which in 2011 had an average daily trading volume of $20.6 billion.
See id.
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Interests offered by college savings plans (``529 Savings Plans'')
that comply with Section 529 of the Internal Revenue Code \53\ are
another type of
[[Page 67473]]
municipal security. 529 Savings Plans involve offerings of interests in
state tuition programs and qualified savings plans that are public
instrumentalities of the particular state, and provide tax advantages
designed to encourage saving for future college costs.\54\ 529 Savings
Plan assets have increased from approximately $9 billion in 2000 to
approximately $190 billion in 2012, and the number of 529 Savings Plan
accounts has increased from approximately 1.3 million in 2000 to
approximately 11 million in 2012.\55\
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\53\ See 26 U.S.C. 529.
\54\ See 2012 Report on the Municipal Securities Market, supra
note 45, at 8.
\55\ See College Savings Plans Network 529 Report (March 2013),
available at http://www.collegesavings.org/includes/pdfs/March%202013%20529%20Report%20Final.pdf and Investment Company
Institute, 529 Plan Program Statistics, Fourth Quarter 2012,
available at http://www.ici.org/research/stats/529s/529s_12_q4.
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A person that sells interests in 529 Savings Plans generally must
be registered as a broker, dealer, or municipal securities dealer and
comply with applicable MSRB rules.\56\ 529 Savings Plans are also
relevant in the context of municipal advisor regulation, because an
issuance of interests in 529 Savings Plans is an issuance of municipal
securities.\57\ Further, 529 Savings Plans may engage in transactions
involving municipal financial products and may also seek advice in
connection with such products or issuances.\58\ Moreover, third parties
seeking to advise 529 Savings Plans may solicit such plans for that
purpose.\59\
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\56\ See, e.g., MSRB Notice 2002-19 (May 14, 2002) (Application
of Fair Practice and Advertising Rules to Municipal Fund
Securities).
\57\ See MSRB, 529 Plan Basics, available at http://emma.msrb.org/EducationCenter/FAQs.aspx?topic=PlanBasics and MSRB,
Interpretation Relating to Sales of Municipal Fund Securities in the
Primary Market (January 18, 2001), available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Definitional/Rule-D-12.aspx?tab=2#_4B905EF1-5F85-4D2E-B27C-6B94EF405F47 (citing Letter
from Catherine McGuire, Chief Counsel, Division of Trading and
Markets, Commission, to Diane G. Klinke, General Counsel, MSRB,
dated February 26, 1999, in response to letter from Diane G. Klinke,
General Counsel, MSRB, to Catherine McGuire, Chief Counsel, Division
of Trading and Markets, Commission, dated June 2, 1998).
\58\ See Political Contributions Final Rule, supra note 43, at
41044-46.
\59\ See id., at 41019.
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Public pension plans may also engage in transactions in municipal
financial products and seek advice in connection with such
transactions. Third parties may solicit these public pension plans on
behalf of firms seeking to provide advice to these plans.\60\ According
to the 2011 Census Bureau survey, there were 3,418 state- and locally-
administered pension systems in 2011.\61\ As of the first quarter of
2013, public pension plans had over $3 trillion of assets and
represented approximately 30 percent of all U.S. pension assets.\62\
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\60\ See id.
\61\ See U.S. Census Bureau, Annual Survey of Public Pensions:
State- and Locally-Administered Defined Benefit Data Summary Report:
2011 (August 2013), available at http://www2.census.gov/govs/retire/2011summaryreport.pdf.
\62\ See Federal Reserve Board, Financial Accounts of the United
States--Flow of Funds, Balance Sheets, and Integrated Macroeconomic
Accounts, Table L.117 (First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
---------------------------------------------------------------------------
In addition to public pension plans and 529 Savings Plans, state
and local government agencies also maintain other pools of assets,
including general funds and other special funds. Governmental entities
generally invest such funds in a combination of individualized
investments, investment agreements, and local government investment
pools (``LGIPs'').\63\
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\63\ According to a 2009 article, 45 states have LGIPs with
assets totaling more than $250 billion. See Jeff Pentages, Local
Government Investment Pools and the Financial Crisis: Lessons
Learned, October 2009, Government Finance Review 25. As of the first
quarter of 2013, state and local governments had approximately $2.1
trillion dollars in total financial assets. See Federal Reserve
Board, Financial Accounts of the United States--Flow of Funds,
Balance Sheets, and Integrated Macroeconomic Accounts, Table L.104
(First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
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Historically, the over-the-counter derivatives markets have been
relatively opaque because of their privately negotiated, bilateral
nature and the limited availability of transaction data such as prices
and volumes.\64\ Accordingly, there is currently no comprehensive data
on how many municipal issuers are active in the $162 trillion interest-
rate swap market,\65\ although reported estimates of the size of the
municipal derivatives market range from $100 billion to $300 billion
annually in notional principal amount.\66\ Further, estimates of the
number of municipal issuers that have engaged in derivative
transactions also vary. Some anecdotal evidence suggests a relatively
wide use of municipal derivatives in recent years. For instance, a 2008
review of Pennsylvania Department of Community and Economic Development
records indicated that 185 school districts, towns, and counties in
Pennsylvania have entered into derivative transactions since 2003, when
the state's law was explicitly changed to allow for such
transactions.\67\ Other estimates, however, have pointed to a less
widespread use of derivatives among municipal issuers. For example, a
2007 study by Standard & Poor's identified 750 municipal issuers that
engaged in interest rate swaps.\68\ In addition, in October 2009,
Moody's undertook a review of the state and local governments for which
Moody's provides ratings and identified 500 entities with outstanding
interest rate swaps.\69\ Moody's also estimated that Pennsylvania
issuers accounted for 22% of all municipal derivative transactions,
suggesting that a broad participation in derivative transactions by
municipal entities in Pennsylvania did not necessarily translate into a
broad participation by municipal entities nationwide.\70\ Since 2008,
the use of derivatives by municipal entities has declined, and many
municipal entities have terminated existing interest rate swaps.\71\
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\64\ The Dodd-Frank Act, however, will require more public
reporting of derivative transactions in the future. For example, the
CFTC has adopted rules to implement a framework for the real-time
public reporting of swap transactions and pricing data for swap
transactions. See 77 FR 1182 (January 9, 2012). Moreover, the Dodd-
Frank Act requires the Commission to adopt, and the Commission has
proposed, rules to provide for the reporting of security-based swaps
information to registered security-based swap data repositories or
to the Commission and the public dissemination of security-based
swap transaction, volume, and pricing information. See Securities
Exchange Act Release No. 63346 (November 19, 2010), 75 FR 75208
(December 2, 2010).
\65\ See 2012 Report on the Municipal Securities Market, supra
note 45, at 91.
\66\ See MSRB Study, supra note 35, at 10.
\67\ See Martin Z. Braun, Deutsche Bank Swap Lures County as
Budgets Crumble, Bloomberg (Nov. 26, 2008), available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUYLG7W1nGpM.
\68\ See Joe Mysak, California Declares War on State Bond Short-
Sellers, Bloomberg (Apr. 27, 2010), available at http://www.bloomberg.com/news/2010-04-28/california-declares-war-on-short-sellers-of-bonds-commentary-by-joe-mysak.html.
\69\ See Joe Mysak, Swaps Nightmares Become Real for Amateur
Financiers, Bloomberg (Dec. 15, 2009), available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVCDZ6c1PYC0.
\70\ See id.
\71\ See, e.g., William Selway, Derivatives Sold to Governments
Get Dodd-Frank Disclosure: One Year Later, Bloomberg (Jul. 18,
2011), available at http://www.bloomberg.com/news/2011-07-18/derivatives-sold-to-governments-get-dodd-frank-disclosure-one-year-later.html; Michael McDonald, Wall Street Collects $4 Billion From
Taxpayers as Swaps Backfire, Bloomberg (Nov. 10, 2010), available at
http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html; Transcript of the
U.S. Securities and Exchange Commission Birmingham Field Hearing on
the State of the Municipal Securities Market, at 239-240 and 243.
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2. Historical Regulation of Municipal Securities and Municipal Advisors
a. Municipal Securities Market
As discussed in the Proposal,\72\ the Securities Act of 1933
(``Securities
[[Page 67474]]
Act'') \73\ and the Exchange Act \74\ were both enacted with exemptions
for municipal securities, except for the antifraud provisions of
Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act,
and Rule 10b-5 promulgated thereunder.\75\ In the early 1970s, the
municipal securities market was still relatively small.\76\ Up until
that time, the standard issue was usually a general obligation bond,
with fairly standard features, and the typical participants were banks,
underwriters, and bond counsel.\77\
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\72\ See Proposal, 76 FR 826.
\73\ 15 U.S.C. 77a et seq.
\74\ 15 U.S.C. 78a et seq.
\75\ See, e.g., Securities Act Section 3(a)(2) (15 U.S.C.
77c(a)(2)); Securities Act Section 12(a)(2) (15 U.S.C. 77l(a)(2));
Exchange Act Section 3(a)(12) (15 U.S.C. 78c(a)(12)); Exchange Act
Section 3(a)(29) (15 U.S.C. 78c(a)(29)).
\76\ There were $235.4 billion of municipal bonds outstanding in
1975 after an issuance of $58 billion in that year. See The Bond
Buyer's Municipal Finance Statistics, 1975 (June 1976). At the end
of 1976, there were $323 billion of corporate bonds outstanding,
which was about one third more than state and local government
securities and about half as much as U.S. Treasury securities. See
Federal Reserve Bank of New York, the Market for Corporate Bonds
(Autumn 1977). As of the first quarter of 2013, there were
approximately $3.7 trillion of municipal bonds outstanding, $13
trillion of corporate and foreign bonds outstanding, and $12
trillion of Treasury securities outstanding. See Federal Reserve
Board, Financial Accounts of the United States--Flow of Funds,
Balance Sheets, and Integrated Macroeconomic Accounts, Tables L.209,
211 and 212, (First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
\77\ See Ann Judith Gellis, Municipal Securities Market: Same
Problems--No Solutions, 21 Del. J. Corp. L. 427, 428 (1996).
---------------------------------------------------------------------------
In 1975, Congress granted new authority to regulate intermediaries
in the market for municipal securities. As part of the Securities Acts
Amendments of 1975 (``1975 Amendments''), Congress created a limited
regulatory scheme for the municipal securities market at the federal
level.\78\ That scheme included mandatory registration with the
Commission for brokers, dealers, and municipal securities dealers
involved in effecting municipal securities transactions,\79\ and gave
the Commission broad rulemaking and enforcement authority over such
persons.\80\ In addition, the 1975 Amendments authorized the creation
of the MSRB and granted it authority to promulgate rules concerning
transactions in municipal securities by brokers, dealers, and municipal
securities dealers. The 1975 Amendments, however, did not create a
regulatory scheme for, or impose any new requirements on, municipal
issuers. Rather, the 1975 Amendments expressly prohibited the
Commission and the MSRB from requiring municipal securities issuers,
either directly or indirectly, to file any application, report, or
document with the Commission or the MSRB prior to any sale by the
issuer.\81\
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\78\ See, e.g., Exchange Act Sections 15(c)(1), 15(c)(2),
15B(c)(1), 15B(c)(2), 17(a), 17(b), and 21(a)(1) (15 U.S.C.
78o(c)(1), 78o(c)(2), 78o-4(c)(1), 78o-4(c)(2), 78q(a), 78q(b), and
78u(a)(1)).
\79\ The Exchange Act defines a ``municipal securities dealer''
as any person (including a separately identifiable department or
division of a bank) engaged in the business of buying and selling
municipal securities for its own account other than in a fiduciary
capacity, through a broker or otherwise. See 15 U.S.C. 78c(a)(30).
\80\ See supra note 78. Enforcement activities regarding
municipal securities dealers must be coordinated by the Commission,
the Financial Industry Regulatory Authority (``FINRA''), and the
appropriate bank regulatory agency. See Exchange Act Sections
15B(c)(6)(A), 15B(c)(6)(B), and 17(c) (15 U.S.C. 78o-4(c)(6)(A),
78o-4(c)(6)(B), 78q(c)).
\81\ Section 15B(d)(1) of the Exchange Act (commonly known as
the ``Tower Amendment'') provides that ``[n]either the Commission
nor the Board is authorized under this title, by rule or regulation,
to require any issuer of municipal securities, directly or
indirectly through a purchaser or prospective purchaser of
securities from the issuer, to file with the Commission or the Board
prior to the sale of such securities by the issuer any application,
report, or document in connection with the issuance, sale, or
distribution of such securities.'' 15 U.S.C. 78o-4(d)(1).
---------------------------------------------------------------------------
As noted above and in the Proposal, pursuant to the 1975
Amendments, unless an exception or exemption applies, all brokers,
dealers, and municipal securities dealers that underwrite or trade
municipal securities are required to register with the Commission.\82\
All brokers, dealers, and municipal securities dealers that engage in
municipal securities transactions also must register with the MSRB and
comply with its rules.\83\ Furthermore, unless it is a bank, each
broker, dealer, and municipal securities dealer that engages in
municipal securities transactions must be a member of FINRA.\84\ FINRA
is required to examine brokers, dealers, and municipal securities
dealers for compliance with the Exchange Act, rules and regulations
thereunder, and MSRB rules.\85\ Bank municipal securities dealers are
examined by their appropriate regulatory agencies.\86\
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\82\ See 15 U.S.C. 78o-4(a)-(b). See also Proposal, 76 FR 827.
\83\ See 15 U.S.C. 78o-4(c)(1). See also MSRB, Registration
Guidelines for Regulated Entities, available at http://www.msrb.org/
Rules-and-Interpretations/~/media/Files/User-Manuals/
GuidelinesforRegistration.ashx.
\84\ See 15 U.S.C. 78o(b)(8) and 78o-4(a).
\85\ See 15 U.S.C. 78o-4(c)(7).
\86\ The term ``appropriate regulatory agency,'' when used with
respect to a municipal securities dealer, is defined in Section
3(a)(34)(A) of the Exchange Act. 15 U.S.C. 78c(a)(34)(A). The
Commission also has the authority to examine all registered
municipal securities dealers. See 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------
Since 1975, the municipal securities market has grown and evolved
significantly to encompass a wide variety of bond structures \87\ and
credit enhancements. The variety of financing options has led municipal
entities to increasingly rely on external advisors to assist them in
deciding among the structural choices for their debt and to help them
negotiate with a variety of specialized intermediaries.\88\ For
example, municipal bond insurance was first introduced in 1971.\89\ The
introduction of variable rate municipal bonds in the early 1980s
increased the use of letter of credit-supported municipal bonds.\90\ In
1988, auction rate securities were introduced into the municipal
market.\91\ In addition, derivative products have been utilized by
municipal securities issuers beginning generally with interest rate
swap transactions in the mid-1980s. The derivatives utilized since then
have become more complex.\92\
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\87\ Although it is helpful to think of municipal securities as
either (1) general obligation bonds backed by the ``full faith and
credit,'' or an unlimited taxing power of the issuing entity, or (2)
revenue bonds, these general categories mask a broad range of
diversity and complexity in the underlying security for municipal
bonds. See Gary Gray and Patrick Cusatis, Municipal Derivative
Securities--Uses and Valuation 21 (1995) (discussion of revenue
bonds). See also Disclosure of Bond Counsel, supra note 46, at 54-55
(discussion of conduit bonds).
\88\ See Vijayakumar and Daniels, supra note 34, at 43-44.
\89\ See Gray and Cusatis, supra note 87, at 30-31.
\90\ See id. As the Commission noted in the Proposal, although
the use of letters of credit and bond insurance has declined since
2008, these forms of credit enhancement remain an option for
municipal entities to consider when issuing municipal securities.
See 76 FR 827, note 48. See also 2012 Report on the Municipal
Securities Market, supra note 45, at 10-11.
\91\ See Gray and Cusatis, supra note 87, at 41.
\92\ See id., at 49. Municipal derivatives must often be
structured in accordance with the provisions of the tax code and
other laws that apply to the issuance of tax-exempt financings. See
David L. Taub, Understanding Municipal Derivatives, August 2005,
Government Finance Review 21. The most common use for derivatives in
the municipal securities market is the use of interest rate swaps
for new, anticipated, or outstanding debt. See id.
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b. Municipal Advisors
As discussed above and in the Proposal,\93\ many market
participants advise municipal entities about the issuance of municipal
securities and municipal financial products. Historically, however,
these participants have been largely unregulated with respect to their
municipal advisory activities. In addition, Commission staff has taken
the position that financial advisors that limit their advisory
activities solely to advising municipal issuers as to the structuring
of their
[[Page 67475]]
financings may not need to register as investment advisers.\94\
---------------------------------------------------------------------------
\93\ See Proposal, 76 FR 827.
\94\ See Division of Investment Management: Staff Legal Bulletin
No. 11, Applicability of the Advisers Act to Financial Advisors of
Municipal Securities Issuers (Sep. 19, 2000), available at http://www.sec.gov/interps/legal/slbim11.htm (``Staff Legal Bulletin No.
11'') (explaining staff's views as to the circumstances under which
financial advisors (a) may be investment advisers, and (b) may give
advice to issuers of municipal securities regarding the investment
of offering proceeds without being deemed to be investment
advisers).
---------------------------------------------------------------------------
Approximately fifteen states, however, as well as a number of
municipalities, have rules relating to the conduct of some municipal
advisors (generally, financial advisors and swap advisors). For
example, these governmental entities have enacted pay-to-play
prohibitions that range from broad proscriptions relating to all state
and local contracts to narrowly defined rules that apply only to
specific situations.\95\ Some state and local entities also require
certain types of municipal advisors to disclose actual or apparent
conflicts of interest.\96\
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\95\ See MSRB Study, supra note 35, at 4.
\96\ See id., at 6.
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B. Dodd-Frank Act and the Need for Oversight
As discussed in more detail below and in the Proposal,\97\ the
Dodd-Frank Act amended the Exchange Act to require municipal advisors
to register with the Commission.\98\ In addition, the Exchange Act, as
amended by the Dodd-Frank Act, grants the MSRB regulatory authority
over municipal advisors \99\ and imposes a fiduciary duty on municipal
advisors when advising municipal entities.\100\
---------------------------------------------------------------------------
\97\ See, generally, Proposal, 76 FR 824.
\98\ See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C.
78o-4(a)(1)(B).
\99\ See 15 U.S.C. 78o-4(b).
\100\ See 15 U.S.C. 78o-4(c). Specifically, Exchange Act Section
15B(c)(1) provides that: ``A municipal advisor and any person
associated with such municipal advisor shall be deemed to have a
fiduciary duty to any municipal entity for whom such municipal
advisor acts as a municipal advisor, and no municipal advisor may
engage in any act, practice, or course of business which is not
consistent with a municipal advisor's fiduciary duty or that is in
contravention of any rule of the Board.'' 15 U.S.C. 78o-4(c)(1). The
Commission notes that a number of commenters discussed the
applicability of fiduciary duty to municipal advisors. This adopting
release generally does not address those comments, as this release
generally concerns the registration of municipal advisors. The
Commission notes, however, that the fiduciary duty of a municipal
advisor, as set forth in Exchange Act Section 15B(c)(1), extends
only to its municipal entity clients. The Exchange Act does not
impose a fiduciary duty with respect to advice to obligated persons.
See infra note 202 and accompanying text (discussing the definition
of the term ``obligated person'').
---------------------------------------------------------------------------
The Commission believes that regulation of municipal advisors is in
the public interest and will improve the protection of municipal
entities, including the protection of municipal entities in their
capacities as investors, and those who invest in municipal securities.
As noted above,\101\ according to a Senate Report related to the Dodd-
Frank Act, ``[t]he $3 trillion municipal securities market is subject
to less supervision than corporate securities markets, and market
participants generally have less information upon which to base
investment decisions. During the [financial] crisis, a number of
municipalities suffered losses from complex derivatives products that
were marketed by unregulated financial intermediaries.'' \102\
Accordingly, in response to the financial crisis that began in 2008,
the Dodd-Frank Act amended the Exchange Act to require ``a range of
municipal financial advisors to register with the [Commission] and
comply with regulations issued by the [MSRB].'' \103\
---------------------------------------------------------------------------
\101\ See supra notes 3-4 and accompanying text.
\102\ See S. Rep. No. 111-176, at 38 (2010).
\103\ See id.
---------------------------------------------------------------------------
A number of actions brought by the Commission against municipal
market participants also highlight the abuses in the municipal
securities market. For example, the Commission brought a number of
actions alleging payments by J.P. Morgan Securities Inc. (now J.P.
Morgan Securities LLC) to local firms whose principals or employees
were friends of public officials of Jefferson County, Alabama in
connection with a $5 billion bond underwriting and interest rate swap
agreement business.\104\ In addition, the Commission has settled
several actions against major financial institutions for their role in
a series of complex, wide-ranging bid-rigging schemes involving
derivatives utilized by municipalities and underlying obligors as
reinvestment products.\105\ Further, in August 2011, the Commission
filed a civil injunctive action against Stifel, Nicolaus & Co., Inc.
and its former Senior Vice President, David Noack, for allegedly
violating federal securities laws in connection with a $200 million
sale of highly leveraged and unsuitably risky derivatives to five
Wisconsin school districts.\106\ According to the complaint, Stifel and
Noack misrepresented the risks of the investments and failed to
disclose material facts to the school districts.
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\104\ The Commission had alleged that J.P. Morgan Securities
engaged in an improper payment scheme in connection with obtaining
municipal securities underwriting and interest swap agreement
business from Jefferson County, Alabama. The Commission had alleged
that J.P. Morgan Securities incorporated certain of the costs of
these payments into higher swap interest rates that it charged the
County, directly increasing the swap transaction costs to the County
and its taxpayers. J.P. Morgan Securities was censured, paid a $25
million civil penalty, made a $50 million payment to the County, and
forfeited more than $647 million in claimed termination fees under
the swaps. See In the Matter of J.P. Morgan Securities Inc.,
Securities Exchange Act Release No. 60928 (Nov. 4, 2009) (order
instituting administrative and cease-and-desist proceedings, making
findings, and imposing remedial sanctions and a cease-and-desist
order). See also SEC v. Larry P. Langford, et al., Litigation
Release No. 20545 (Apr. 30, 2008) and SEC v. Charles E. LeCroy and
Douglas W. MacFaddin, Litigation Release No. 21280 (Nov. 4, 2009)
(charging an Alabama local government official, a bond dealer and
J.P. Morgan Securities employees with conducting undisclosed payment
schemes in connection with awarding Jefferson County municipal bond
and swap agreement business).
\105\ Collectively, the five financial institutions, Banc of
America Securities LLC, UBS Financial Services Inc., J.P. Morgan
Securities LLC, Wachovia Bank, N.A., and GE Funding Capital Market
Services, Inc., paid $205 million to settle the Commission actions,
all of which was distributed to hundreds of harmed municipal
entities or borrowers, located in 47 states, the District of
Columbia, Guam, and Puerto Rico, as well as an additional $540
million to settle parallel proceedings by other federal and state
authorities for their misconduct. See In the Matter of Banc of
America Securities, Securities Exchange Act Release No. 63451 (Dec.
7, 2010); SEC v. UBS Financial Services Inc., Civil Action No. 11-
CV-2885 (D.N.J. May 4, 2011); SEC v. J.P. Morgan Securities LLC.,
Civil Action No. 11-CV-3877 (D.N.J. Jul. 7, 2011); SEC v. Wachovia
Bank, N.A., Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. Dec. 8,
2011); SEC v. GE Funding Capital Market Services, Inc., Civil Action
No. 2:11-cv-07465-WJM-MF (D.N.J. Dec. 23, 2011).
\106\ See SEC v. Stifel, Nicolaus & Co., Inc. and David W.
Noack, Civil Action No. 2:11-cv-00755-AEG (E.D. Wisc. Aug. 10,
2011). The Commission also charged, and settled with, RBC Capital
Markets, LLC for their involvement in these sales. According to the
order instituting administrative and cease-and-desist proceedings,
RBC negligently recommended and sold these investments, despite
significant internal concerns about the suitability of the
investments for municipalities like the school districts. Moreover,
RBC's marketing materials failed to explain adequately the risks
associated with the investments. See In the Matter of RBC Capital
Markets, LLC, Securities Exchange Act Release No. 65404 (Sept. 27,
2011).
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C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T
The registration requirement for municipal advisors established by
the Dodd-Frank Act became effective on October 1, 2010.\107\ To enable
municipal advisors to temporarily satisfy the registration requirement,
and to make relevant information available to the public and municipal
entities, the Commission adopted interim final temporary Rule 15Ba2-6T
\108\ on September 1, 2010.\109\ Pursuant to Rule 15Ba2-6T, a municipal
advisor may temporarily satisfy the statutory registration requirement
by submitting certain information electronically
[[Page 67476]]
through the Commission's public Web site on Form MA-T.\110\
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\107\ See Section 975(i) of the Dodd-Frank Act.
\108\ 17 CFR 240.15Ba2-6T.
\109\ See Temporary Registration Rule Release, supra note 5.
\110\ 17 CFR 249.1300T. A municipal advisor that completes the
temporary registration form and receives confirmation from the
Commission that the form was filed is temporarily registered for
purposes of Section 15B. As of March 31, 2013, there were
approximately 1,130 Form MA-T registrants.
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Form MA-T requires a municipal advisor to indicate the purpose for
which it is submitting the form (i.e., initial application, amendment,
or withdrawal), provide certain basic identifying and contact
information concerning its business, indicate the nature of its
activities, and supply information about its disciplinary history and
the disciplinary history of its associated municipal advisor
professionals.\111\
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\111\ See Temporary Registration Rule Release, supra note 5, for
a full description of the requirements of Form MA-T.
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As originally adopted, the interim final temporary rule provided
that, unless rescinded, a municipal advisor's temporary registration by
means of Form MA-T would expire on the earlier of: (1) The date that
the municipal advisor's registration is approved or disapproved by the
Commission pursuant to a final rule establishing a permanent
registration regime; (2) the date on which the municipal advisor's
temporary registration is rescinded by the Commission; or (3) December
31, 2011.\112\ The temporary registration procedure was developed as a
transitional step toward the implementation of a permanent registration
regime, which, as discussed below, the Commission is adopting today. On
December 21, 2011, the Commission extended the expiration date of the
temporary registration regime to September 30, 2012, in order to
continue to provide a method for municipal advisors to temporarily
satisfy the statutory registration requirement.\113\ On September 21,
2012, the Commission further extended the expiration date of the
temporary registration regime to September 30, 2013.\114\ Today, in a
separate release, the Commission is extending the expiration date of
the temporary registration regime to December 31, 2014.\115\ This
extension will enable municipal advisors that are required to register
with the Commission on or after the Effective Date but before the
applicable compliance date to continue to register under the temporary
registration regime.
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\112\ See Temporary Registration Rule Release, 75 FR 54471.
\113\ See Securities Exchange Act Release No. 66020 (December
21, 2012), 76 FR 80733 (December 27, 2011).
\114\ See Securities Exchange Act Release No. 67901 (September
21, 2012), 77 FR 59061 (September 26, 2012). As extended, all
temporary municipal advisor registrations will expire on the earlier
of: (1) The date that the municipal advisor's registration is
approved or disapproved by the Commission pursuant to a final rule
adopted by the Commission establishing another manner of
registration of municipal advisors and prescribing a form for such
purpose; (2) the date on which the municipal advisor's temporary
registration is rescinded by the Commission; or (3) on September 30,
2013. See 17 CFR 240.15Ba2-6T(e).
\115\ See Rule 15Ba2-6T and Form MA-T Extension Release, supra
note 7.
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D. Proposal To Establish a Registration Regime for Municipal Advisors
In light of the requirements of Section 975 of the Dodd-Frank Act,
and in anticipation of the expiration of Rule 15Ba2-6T, on December 20,
2010, the Commission proposed Rules 15Ba1-1 to 15Ba1-7 under the
Exchange Act and Forms MA, MA-I, MA-W, and MA-NR to establish a
permanent registration regime for all persons meeting the definition of
municipal advisor, including those persons currently registered on Form
MA-T.\116\ The Proposal was published for comment in the Federal
Register on January 6, 2011.\117\
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\116\ See Proposal, 76 FR 824.
\117\ See id.
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In response to the Proposal, the Commission received over 1,000
unique comment letters from broker-dealers, investment advisers,
individuals, banks, municipal entities, attorneys, engineers, and other
market participants.\118\ In general, commenters supported the
Proposal's overarching goal to establish a permanent registration
regime for municipal advisors. As discussed further below, however,
many commenters recommended that the Proposal be modified or clarified
in certain respects.
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\118\ See http://www.sec.gov/comments/s7-45-10/s74510.shtml. The
Commission has also considered the comment letters that were
submitted in response to the publication of the Temporary
Registration Rule Release. See http://sec.gov/comments/s7-19-10/s71910.shtml (comments received on the Temporary Registration Rule
Release).
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The Commission has carefully considered these comments and is
adopting Rules 15Ba1-1 to 15Ba1-8 and 15Bc4-1 under the Exchange Act
and Forms MA, MA-I, MA-W, and MA-NR, with revisions as appropriate. In
discussing these rules and forms, the Commission highlights and
addresses below commenters' main issues, concerns, and suggestions.
The Commission believes that the information required to be
disclosed pursuant to the new rules and forms will enhance the
Commission's oversight of municipal advisors and their activities in
the municipal securities market. Moreover, the Commission believes the
information provided pursuant to these rules and forms will aid
municipal entities and obligated persons in choosing municipal advisors
and engaging in transactions or investments with municipal advisors.
III. Discussion
Section 15B(a)(1) of the Exchange Act, as amended by the Dodd-Frank
Act, makes it unlawful for a municipal advisor \119\ to provide advice
to or on behalf of a municipal entity or obligated person with respect
to municipal financial products or the issuance of municipal
securities, or to undertake a solicitation of a municipal entity or
obligated person, unless the municipal advisor is registered with the
Commission.\120\ Section 15B(a)(2) of the Exchange Act, as amended by
the Dodd-Frank Act, provides that a municipal advisor may be registered
by filing with the Commission an application for registration in such
form and containing such information and documents concerning the
municipal advisor and any person associated with the municipal advisor
as the Commission, by rule, may prescribe as necessary or appropriate
in the public interest or for the protection of investors.\121\
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\119\ See infra Section III.A.1. (discussing the term
``municipal advisor'').
\120\ See 15 U.S.C. 78o-4(a)(1)(B). For a discussion of the
terms ``municipal entity,'' ``obligated person,'' ``municipal
financial products,'' and ``solicitation of a municipal entity or
obligated person,'' see infra Section III.A.1.b.
\121\ See 15 U.S.C. 78o-4(a)(2).
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Consistent with the requirements of the Dodd-Frank Act, as
discussed in detail below, the Commission is adopting new rules and
forms that establish a Commission registration regime for municipal
advisors, which the Commission believes is necessary and appropriate in
the public interest and will improve the protection of municipal
entities and investors in municipal securities.
A. Rules for the Registration of Municipal Advisors
1. Rule 15Ba1-1: Definition of ``Municipal Advisor'' and Related Terms
a. Statutory Definition of ``Municipal Advisor''
Section 15B(e)(4)(A) of the Exchange Act,\122\ as amended by the
Dodd-Frank Act, defines the term ``municipal advisor'' to mean a person
(who is not a municipal entity \123\ or an employee of
[[Page 67477]]
a municipal entity \124\) that (i) provides advice to or on behalf of a
municipal entity or obligated person \125\ with respect to municipal
financial products \126\ or the issuance of municipal securities,\127\
including advice with respect to the structure, timing, terms, and
other similar matters concerning such financial products or issues, or
(ii) undertakes a solicitation of a municipal entity.\128\ As discussed
in the Proposal,\129\ the statutory definition of municipal advisor is
broad and includes persons that traditionally have not been considered
to be municipal financial advisors. Specifically, the definition of a
municipal advisor includes ``financial advisors, guaranteed investment
contract brokers, third-party marketers, placement agents, solicitors,
finders, and swap advisors'' \130\ that engage in municipal advisory
activities.\131\
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\122\ 15 U.S.C. 78o-4(e)(4)(A).
\123\ See infra Section III.A.1.b.ii. (discussing the term
``municipal entity'').
\124\ See infra Section III.A.1.c.i. (discussing the
Commission's interpretation of the exclusion for employees of a
municipal entity from the definition of the term ``municipal
advisor'' and a parallel exemption for employees of obligated
persons).
\125\ See infra Section III.A.1.b.iii. (discussing the term
``obligated person'').
\126\ See infra Section III.A.1.b.iv. (discussing the term
``municipal financial products'').
\127\ See infra Section III.A.1.b.vii. (discussing the term
``issuance of municipal securities'').
\128\ See infra Section III.A.1.b.x. (discussing the term
``solicitation of a municipal entity or obligated person'').
\129\ See Proposal, 76 FR 828.
\130\ See 15 U.S.C. 78o-4(e)(4).
\131\ See infra note 143 and accompanying text (discussing the
definition of ``municipal advisory activities'').
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The statutory definition of municipal advisor includes distinct
groups of professionals that offer different services and compete in
distinct markets. As noted in the Proposal, the three principal types
of municipal advisors are: (1) financial advisors, including, but not
limited to, brokers, dealers, and municipal securities dealers already
registered with the Commission, that provide advice to municipal
entities with respect to their issuance of municipal securities and
their use of municipal financial products; \132\ (2) investment
advisers that advise municipal entities on the investment of public
monies, including the proceeds of municipal securities; \133\ and (3)
third-party marketers and solicitors.
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\132\ See Proposal, 76 FR 829. For clarity, the Commission notes
that financial advisors as referred to herein also include swap
advisors, including some that are registered with the CFTC or the
SEC in other capacities, that provide advice to municipal entities
on their use of municipal financial products.
\133\ See infra Section III.A.1.b.iv. (discussing the term
``proceeds of municipal securities'').
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Relevant exclusions from the definition of a municipal advisor also
limit the scope of the three types of municipal advisors. The statutory
definition of municipal advisor explicitly excludes ``a broker, dealer,
or municipal securities dealer serving as an underwriter . . .,
attorneys offering legal advice or providing services that are of a
traditional legal nature, [and] engineers providing engineering
advice[.]'' \134\ Further, the statutory definition of municipal
advisor excludes ``any investment adviser registered under the
Investment Advisers Act of 1940 [(``Investment Advisers Act'')], or
persons associated with such investment advisers who are providing
investment advice'' and ``any commodity trading advisor registered
under the Commodity Exchange Act or persons associated with a commodity
trading advisor who are providing advice related to swaps[.]'' \135\ As
discussed more fully below in Section III.A.1.c., the Commission also
proposed Rule 15Ba1-1(d)(2), and is adopting with modifications as
Rules 15Ba1-1(d)(2) and 15Ba1-1(d)(3) a definition of ``municipal
advisor'' that interprets those exclusions and provides other activity-
based (but not status-based) exemptions.
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\134\ See 15 U.S.C. 78o-4(e)(4)(C).
\135\ See 15 U.S.C. 78o-4(e)(4)(C).
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The Commission also noted in the Proposal that, in defining the
term municipal advisor in Exchange Act Section 15B(e)(4), Congress did
not distinguish between persons who are compensated for providing
advice and those who are not. Accordingly, as explained in the
Proposal, the Commission believes compensation for providing advice
with respect to municipal financial products or the issuance of
municipal securities should not factor into the determination of
whether a person must register with the Commission as a municipal
advisor.\136\ However, as clarified in this release, whether or not a
person would have to register as a municipal advisor in connection with
solicitation of a municipal entity or obligated person would depend
upon whether such person receives compensation (direct or
indirect).\137\
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\136\ See Proposal, 76 FR 832, note 113 and accompanying text.
\137\ See infra note 409 and accompanying text.
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b. Interpretation of the Term ``Municipal Advisor''; Definition of
Related Terms
As noted above, Exchange Act Section 15B(e)(4) defines the term
``municipal advisor'' to mean, in part, a person (who is not a
municipal entity or an employee of a municipal entity) that (i)
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, or (ii) undertakes a solicitation of a municipal
entity or obligated person.\138\ The Commission discusses below the
terms ``municipal entity,'' ``obligated person,'' ``municipal financial
products,'' and ``solicitation of a municipal entity or obligated
person'' as well as other terms relating to the definition of municipal
advisor.\139\ Rule 15Ba1-1(d), as proposed \140\ and adopted, provides
that the term ``municipal advisor'' has the same meaning as in Exchange
Act Section 15B(e)(4),\141\ and, as discussed in Section III.A.1.c.,
provides certain exclusions and exemptions. For the purposes of
clarity, however, Rule 15Ba1-1(d) as adopted also includes several non-
substantive and organizational changes. For example, it: (1)
incorporates in Rule 15Ba1-1(d)(1) the language of the statutory
definition, rather than cross referencing the statute; (2) sets forth
in Rule 15Ba1-1(d)(2) the statutory exclusions from the definition, as
interpreted by the Commission; and (3) sets forth in Rule 15Ba1-1(d)(3)
certain exemptions.\142\
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\138\ See 15 U.S.C. 78o-4(e)(4). As noted in the Proposal, the
Commission interprets the definition of ``municipal advisor'' to
include the solicitation of a municipal entity or obligated person,
because, as noted in the Proposal, the definition of municipal
advisor under Exchange Act Section 15B(e)(4)(A) means, in part, a
person that ``undertakes a solicitation of a municipal entity,'' and
in defining the phrase ``solicitation of a municipal entity,''
Exchange Act Section 15B includes within that phrase, ``or obligated
person.'' Also, Exchange Act Section 15B(a)(1)(B) includes
solicitations of obligated persons. See Proposal, 76 FR 831, note
102 and accompanying text.
See also Rule 15Ba1-1(d)(1)(i), which makes clear in the
definition of ``municipal advisor'' that the Commission interprets
the term ``municipal advisor'' to include persons that undertake
solicitation of a municipal entity or obligated person.
\139\ The Commission discusses the statutory exclusion for ``an
employee of a municipal entity,'' along with other exclusions and
exemptions from the definition of ``municipal advisor,'' in Section
III.A.1.c. below.
\140\ See proposed Rule 15Ba1-1(d)(1).
\141\ 15 U.S.C. 78o-4(e)(4).
\142\ See Rule 15Ba1-1(d). To the extent the Commission's
exemptions or interpretations of the exclusions differ substantively
from the Proposal, those differences are discussed in detail below.
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In certain of the rules and forms that the Commission is adopting
with respect to the registration of municipal advisors, the Commission
uses the term ``municipal advisory activities'' to refer to the
activities that would generally require a person to register as a
municipal advisor. In this regard, the Commission is adopting,
substantially as proposed, a definition of the term ``municipal
advisory activities'' with minor clarifying modifications. As
[[Page 67478]]
adopted, ``municipal advisory activities'' means ``(1) [p]roviding
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) [s]olicitation of a municipal entity or obligated
person.'' \143\ The Commission notes, for example, that advice to a
municipal entity about whether to issue municipal securities would be
``municipal advisor activity.''
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\143\ In the Proposal, the Commission proposed to give
``municipal advisory activities'' the same meaning as the term
``municipal advisory services'' in Rule 15Ba2-6T (the temporary rule
for the registration of municipal advisors). Thus, in proposed Rule
15Ba1-1(e), the Commission proposed to define ``municipal advisory
activities'' to mean ``advice to or on behalf of a municipal entity
(as defined in Section 15B(e)(8) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-4(e)(8)) or obligated person (as defined in
Section 15B(e)(10) of the Securities Exchange Act of 1934 (15 U.S.C.
78o-4(e)(10)) 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 a solicitation of a municipal
entity or obligated person.'' See Proposal, 76 FR 829, note 77 and
proposed Rule 15Ba1-1(e).
While the Commission received a few comments that certain
activities should not be ``municipal advisory activities,'' these
comments were in the context of whether certain persons should be
subject to registration as ``municipal advisors'' and are addressed
below in the context of the various exemptions and exclusions from
the definition of ``municipal advisor.'' See, e.g., notes 780, 807,
835 and accompanying text (citing the Gilmore & Bell Letter, the
Rose Letter, and the Brinckerhoff Letter, in the context of
exclusions or exemptions for accountants, attorneys, and engineers,
respectively). These comments are addressed in Section
III.A.1.c.vii.
The Commission is adopting the definition of ``municipal
advisory activities'' substantially as proposed, but with minor non-
substantive modifications to provide greater clarity and consistency
with other organizational changes the Commission is making to the
definitions. Specifically, the Commission is defining ``municipal
advisory activities'' to mean ``the following activities specified
in section 15B(e)(4)(A) of the Act (15 U.S.C. 78o-4(e)(4)(A)) and
paragraph (d)(1) of this section that, absent the availability of an
exclusion under paragraph (d)(2) of this section or an exemption
under paragraph (d)(3) of this section, would cause a person to be a
municipal advisor: (1) [P]roviding 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) [s]olicitation of a municipal entity or obligated person.''
See Rule 15Ba1-1(e).
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Additionally, as discussed more fully below, in response to
comments received on the Proposal and to provide additional clarity,
the Commission is adopting rule text to provide guidance on the term
``advice.'' The Commission also notes, as mentioned above and explained
in more detail below, that the definitions of ``municipal advisor'' and
related terms that it is adopting today include several non-
substantive, clarifying changes designed to reorganize and simplify the
rule, including using defined terms, where possible, and providing
greater clarity as to which statutory standards are being incorporated
into the Commission's rules, the Commission's interpretation of such
standards, and any exemptions the Commission is providing with these
rules.
i. Advice Standard in General
In the Proposal and as noted above, the Commission defined the term
``municipal advisory activities,'' which includes certain advice to or
on behalf of a municipal entity or obligated person,\144\ and addressed
the scope of activities that would require a person to register as a
municipal advisor. The Commission discussed the scope of such
activities through its proposed interpretation of the definition of
``municipal advisor,'' which included guidance on the particular
statutory exclusions and exemptions therefrom.\145\
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\144\ See Proposal, 76 FR 829, note 77. See also supra note 143
and accompanying text (discussing the term ``municipal advisory
activities'').
\145\ See, e.g., Proposal 76 FR 832, text accompanying note 113
(discussing whether compensation for providing advice factors into
the determination of whether a person must register as a municipal
advisor), 833, note 118 and accompanying text (discussing the
provision of certain kinds of advice by investment advisers), 833
(discussing whether a commodity trading advisor would be required to
register as a municipal advisor if the advisor provides certain
kinds of advice), and 833-834 (discussing with respect to
accountants, attorneys and engineers whether certain kinds of advice
and activities are ``advice'' within the meaning of the Exchange Act
or would otherwise cause such persons to meet the definition of
``municipal advisor'').
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In the Proposal, the Commission requested comment on its
interpretation of the definition of ``municipal advisor'' and related
terms, and particularly sought comment on whether any of its
interpretations should be in any way modified or clarified.\146\ The
Commission also requested comment on whether its interpretation of
certain exclusions from the definition of ``municipal advisor'' should
be narrowed or expanded to exclude or include various activities.\147\
More specifically, the Commission requested comment on whether it
should exclude the following persons from the definition of municipal
advisor: (1) An entity that provides to clients investment advice, such
as research information and generic trade ideas or commentary that does
not purport to meet the needs or objectives of specific clients, and is
provided to a municipal entity as part of its ongoing ordinary
communications; and (2) a broker-dealer that provides to a municipal
entity a list of securities meeting specified criteria that are readily
available in the marketplace, but without making a recommendation as to
the merits of any investment particularized to the municipal entity's
specific circumstances or investment objectives.\148\
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\146\ See Proposal, 76 FR 835.
\147\ See id., at 836-838 (requesting comment on, among other
things: whether there are other services or activities engaged in by
accountants, engineers, attorneys or other professionals that should
qualify such persons for exclusion from the definition of
``municipal advisor;'' and whether there are other specific types of
persons that should be excluded and the circumstances under which
they should be excluded).
\148\ See Proposal, 76 FR 838.
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In response to these requests for comment, commenters recommended
additional guidance on the meaning and scope of the term ``advice''
both in general and, as addressed in more detail in subsequent sections
on particular exclusions and exemptions, in the context of specific
activities. A number of commenters requested that the Commission
clarify the meaning of providing ``advice to a municipal entity or
obligated person with respect to municipal financial products or the
issuance of municipal securities.'' \149\ One commenter noted that
``the concept of `advice' is central to the application
[[Page 67479]]
of Section 975,'' \150\ while another commenter stated that ``[a]bsent
a clear understanding of the scope of `advice,' there will be
substantial uncertainty as to which communications with municipal
entity clients would be deemed `advice.''' \151\ The Commission also
received comments suggesting general parameters for defining advice.
For example, one commenter suggested that the Commission ``distinguish
between situations in which information is provided to a municipal
entity or obligated person as opposed to a recommendation as to a
specific course of action.'' \152\ Similarly, another commenter
suggested that ``advice'' is generally understood to contain a
recommendation component as distinguished from the mere giving of
factual, objectively-determinable information.\153\
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\149\ See, e.g., letters from Raymond J. Dorado, Executive Vice
President, Deputy General Counsel, Bank of New York Mellon
Corporation, dated February 23, 2011 (``BNY Letter''); Wayne A.
Abernathy, Executive Vice President, Financial Institutions Policy
and Regulatory Affairs, American Bankers Association, Cecelia A.
Calaby, Executive Director and General Counsel, ABA Securities
Association, and Eli K. Peterson, Vice President and Regulatory
Counsel, The Clearing House Association LLC, dated February 22, 2011
(``American Bankers Association Letter I''); Richard M. Whiting,
Executive Director and General Counsel, Financial Services
Roundtable, dated February 22, 2011 (``Financial Services Roundtable
Letter''); John M. McNally, President, National Association of Bond
Lawyers, dated February 25, 2011 (``NABL Letter''); Leslie M.
Norwood, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association, dated February 22, 2011
(``SIFMA Letter I''); Alexandra M. MacLennan, Chair, Disclosure
Group, and D. Bruce Gabriel, Practice Group Leader, Public and
Infrastructure Finance Group, Squire, Sanders & Dempsey (US) LLP,
dated February 22, 2011 (``Squire Sanders & Dempsey Letter'');
Adella M. Heard, Senior Vice President and Assistant General
Counsel, First Tennessee Bank National Association, dated February
18, 2011 (``First Tennessee Bank Letter''); Dale E. Brown, President
and Chief Executive Officer, Financial Services Institute, dated
April 28, 2011 (``Financial Services Institute Letter''); Sandra K-H
Werner, Chief Executive Officer, First National Bank and Trust,
dated February 18, 2011 (``First National Bank and Trust Letter'').
\150\ BNY Letter.
\151\ Financial Services Roundtable Letter.
\152\ NABL Letter (emphasis in original).
\153\ Letter from John J. Wagner, Kutak Rock, dated February 21,
2011 (``Kutak Rock Letter'').
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Regarding the provision of general information, commenters made
general and specific suggestions regarding the types of information
that should not require registration as a municipal advisor. For
example, one commenter suggested that the provision of general
information should not be defined, in any instance, as municipal
advisory activities that would give rise to a fiduciary duty.\154\ More
specifically, other commenters suggested that broker-dealers be
permitted to provide general market, transactional or financial
information,\155\ attorneys be permitted to provide general educational
information to clients and non-clients,\156\ and insurance companies be
permitted to provide certain general information of an educational
nature regarding retirement plans without being required to register as
a municipal advisor.\157\ With respect to municipal derivatives, one
commenter asked for clarification that the following activities do not
constitute advice for purposes of the municipal advisor definition: (i)
The provision of research, general market information, and product
information that is not specific to a particular client and is provided
to the bank's customers as part of its ordinary communications with
clients or the public; and (ii) the provision of information describing
product alternatives that may meet the needs of a client without giving
a recommendation that the client engage in any specific
transaction.\158\
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\154\ See letter from Anthony A. Kuznik, Vice President and
General Counsel, Honeywell Building Solutions, Honeywell
International Inc., dated February 22, 2011 (``Honeywell Letter'').
\155\ See letter from Brad Winges, Head of Fixed Income Sales
and Trading, Piper Jaffray & Co. and Rebecca S. Lawrence, Assistant
General Counsel, Principal, Piper Jaffray & Co., dated March 18,
2011 (``Piper Jaffray Letter'').
\156\ See letter from Sherman & Howard L.L.C., dated February
22, 2011 (``Sherman & Howard Letter'').
\157\ See letter from Jeffrey W. Rubin, Chair of the Committee
on Federal Regulation of Securities, Business Law Section, American
Bar Association, dated March 1, 2011 (``ABA Letter'').
\158\ See BNY Letter.
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Additionally, several commenters recommended that advice be defined
in accordance with its commonly understood meaning--a recommendation to
act.\159\ One of these commenters further recommended that the
Commission clarify that a communication constitutes advice only when
``it is provided with respect to and directly relates to an enumerated
municipal financial product or the issuance of municipal securities,
and it is a recommendation that is particularized to the needs and
circumstances of the recipient such that, under the prevailing facts
and circumstances, a municipal entity or obligated person would
reasonably expect that it could rely and take action, without further
input, based upon such communication.'' \160\ Another commenter
suggested that registration be required only if a communication
constitutes a recommendation that the municipal entity take an action
and the recommendation is particularized to the entity's needs and is
distinct from normal sales efforts.\161\
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\159\ See, e.g., BNY Letter; American Bankers Association Letter
I; and SIFMA Letter I. See also Kutak Rock Letter.
\160\ SIFMA Letter I.
\161\ See American Bankers Association Letter I.
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The Commission agrees with commenters that clarifying guidance on
what constitutes advice solely for the purposes of the municipal
advisor definition will provide greater clarity regarding the
applicability of the municipal advisor registration requirement. The
Commission does not however believe that the term ``advice'' is
susceptible to a bright-line definition. Instead, the Commission
believes that ``advice'' can be construed broadly and that, therefore,
the determination of whether a person provides advice to or on behalf
of a municipal entity or an obligated person regarding municipal
financial products or the issuance of municipal securities depends on
all the relevant facts and circumstances.\162\ Accordingly, to address
comments, the Commission is adopting Rule 15Ba1-1(d)(1)(ii), which
provides that advice excludes, among other things, the provision of
general information that does not involve a recommendation regarding
municipal financial products or the issuance of municipal securities,
including with respect to the structure, timing, terms, and other
similar matters concerning such financial products or issues.\163\
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\162\ In contexts outside of the municipal advisor definition,
whether certain activities constitute advice also is dependent on
the facts and circumstances.
For example, in the context of broker-dealer regulation,
Commission staff has described that, although not a bright-line
test, ``[t]he more individually tailored the communication is to a
particular customer or targeted group of customers, the more likely
it will be viewed as a recommendation.'' Study on Investment
Advisers and Broker-Dealers (January 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf (``Study on
Investment Advisers and Broker-Dealers'') at 124.
In the context of investment adviser regulation, the
determination of whether a particular communication rises to the
level of investment advice depends on the facts and circumstances
and is construed broadly. For example, Commission staff has
interpreted the definition of investment adviser to include persons
who advise clients concerning the relative advantages and
disadvantages of investing in securities in general as compared to
other investments. See, e.g., Applicability of the Investment
Advisers Act to Financial Planners, Pension Consultants, and Other
Persons Who Provide Investment Advisory Services as a Component of
Other Financial Services, Investment Advisers Act Release No. 1092
(October 8, 1987).
The Commission discusses below, with respect to its
interpretation of the term ``municipal advisor'' and the various
exclusions and exemptions therefrom, whether certain activities
would be advice in the context of the municipal advisor registration
regime.
\163\ The Commission is providing this clarifying guidance
regarding ``advice'' only with respect to municipal advisors and
solely for purposes of the municipal advisor definition. The
Commission further notes that, by establishing certain parameters
for advice, Rule 15Ba1-1(d)(1)(ii) clarifies not only the type of
information or communications that may constitute advice, but also
the persons who may be subject to the municipal advisor definition
in Section 15B(e)(4) of the Exchange Act (15 U.S.C. 78o-4(e)(4)).
For example, the Commission believes that an individual performing
by contract clerical or ministerial services for a municipal entity
or obligated person as part of performing these services would
generally not be providing advice, as defined in adopted Rule 15Ba1-
1(d)(1)(ii). Accordingly, such person would not be required to
register as a municipal advisor.
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The Commission agrees with commenters that the provision of certain
general information does not constitute advice for purposes of the
municipal advisor definition. For example, the Commission believes that
advice does not include provision of the following general information:
Information of a factual nature without subjective
assumptions, opinions, or views;
Information that is not particularized to a specific
municipal entity or type of municipal entity;
Information that is widely disseminated for use by the
public,
[[Page 67480]]
clients, or market participants other than municipal entities or
obligated persons; or
General information in the nature of educational
materials.
The Commission believes that educational materials constitute general
information if the content is limited to instructional or explanatory
information, such as materials that describe the general nature of
financial products or strategies, do not include past or projected
performance figures (including annualized rate of return), do not
include a recommendation to purchase or sell any product or utilize any
particular strategy, and to the extent additional disclosure is
available about a product (such as a prospectus), the materials contain
information about how to obtain such additional information.\164\
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\164\ The Commission has similarly interpreted ``educational
materials'' in other contexts. See, e.g., Securities Act Release No.
6426 (September 16, 1982), 47 FR 41950 (September 23, 1982)
(adopting Rule 134a under the Securities Act to permit the
preparation and dissemination of certain educational materials
concerning options and options trading without deeming such
materials to be a prospectus).
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Conversely, the definition of advice under Rule 15Ba1-1(d)(1)(ii),
as adopted, does not exclude information that involves a recommendation
\165\ regarding municipal financial products or the issuance of
municipal securities. Further and more precisely, the Commission
believes that, for purposes of the municipal advisor definition, advice
includes, without limitation, a recommendation that is particularized
to the specific needs, objectives, or circumstances of a municipal
entity or obligated person with respect to municipal financial products
or the issuance of municipal securities, including with respect to the
structure, timing, terms, and other similar matters concerning such
financial products or issues, based on all the facts and circumstances.
As discussed above and consistent with the FINRA approach to what
constitutes a recommendation, for purposes of the municipal advisor
definition, the Commission believes that the determination of whether a
recommendation has been made is an objective rather than a subjective
inquiry.\166\ An important factor in this inquiry is whether,
considering its content, context and manner of presentation, the
information communicated to the municipal entity or obligated person
reasonably would be viewed as a suggestion that the municipal entity or
obligated person take action or refrain from taking action regarding
municipal financial products or the issuance of municipal
securities.\167\
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\165\ Whether a ``recommendation'' has taken place is not
susceptible to a bright line definition, but turns on the facts and
circumstances of the particular situation. See Securities Exchange
Act Release No. 64766 (June 29, 2011), 76 FR 42396, 42415 (July 18,
2011) (``Business Conduct Standards Proposal for Security-Based
Swaps''). ``This is consistent with the FINRA approach to what
constitutes a recommendation. In the context of the FINRA
suitability standard, factors considered in determining whether a
recommendation has taken place include whether the communication
`reasonably could be viewed as a `call to action' ' and `reasonably
would influence an investor to trade a particular security or group
of securities.' The more individually tailored the communication to
a specific customer or a targeted group of customers about a
security or group of securities, the greater the likelihood that the
communication may be viewed as a `recommendation.' '' Business
Conduct Standards Proposal for Security-Based Swaps, 76 FR 42415,
note 133 and accompanying text (citing FINRA Notice to Members 01-23
(March 19, 2001), and Notice of Filing of Proposed Rule Change to
Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability)
in the Consolidated FINRA Rulebook, Securities Exchange Act Release
No. 62718A (August 20, 2010), 75 FR 52562 (August 26, 2010)).
FINRA suitability guidance has long provided that the
determination of whether a ``recommendation'' has been made is an
objective rather subjective inquiry. See FINRA Notice to Members 01-
23 (March 19, 2001). In guidance relating to FINRA rules 2090 and
2011, FINRA reiterated this prior guidance, stating that an
important factor in this inquiry ``is whether--given its content,
context and manner of presentation--a particular communication from
a firm or associated person to a customer reasonably would be viewed
as a suggestion that the customer take action or refrain from taking
action regarding a security or investment strategy.'' See FINRA
Regulatory Notice 11-02 (Know Your Customer and Suitability),
January 2011, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122778.pdf.
The MSRB has provided similar guidance for dealers in connection
with MSRB Rule G-19. See http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-19.aspx?tab=2.
\166\ See supra note 165. See also Michael Frederick Siegel v.
Securities and Exchange Commission, 592 F.3d 147, 156 (D.C. Cir.
2010) (in sustaining the Commission's finding that Siegel, a broker,
recommended an ``investment'' within the meaning of NASD rule 2310,
the court held that the SEC properly considered the ``content,
context and presentation'' of the communications and whether, as an
``objective matter,'' the communication could reasonably have been
viewed as a ``call to action'' and reasonably would influence an
investor to trade a particular security or group of securities).
\167\ See supra note 165.
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While the determination of whether a person provides advice depends
on all the relevant facts and circumstances, the more individually
tailored the information to a specific municipal entity or obligated
person or a targeted group of municipal entities or obligated persons
that share common characteristics, such as school districts or
hospitals, with respect to municipal financial products or the issuance
of municipal securities, the more likely it will be a recommendation
that constitutes advice under the municipal advisor definition, which
would require registration as a municipal advisor, absent the
application of an exemption or exclusion from registration.\168\ For
example, whether information describing municipal financial product
alternatives constitutes advice under the municipal advisor definition
generally depends on how individually tailored the information is to a
particular municipal entity, obligated person, or targeted group of
municipal entities or obligated persons that share common
characteristics, as well as the content, context, and manner of
presentation of the information communicated.
---------------------------------------------------------------------------
\168\ See supra notes 162 and 165.
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ii. Municipal Entity
Exchange Act Section 15B(e)(8) provides that the term ``municipal
entity'' means ``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.'' \169\ In the Proposal, the Commission
proposed to clarify that, with respect to clause (B) of the definition
of ``municipal entity,'' the definition includes, but is not limited
to, public pension funds, LGIPs, and other state and local governmental
entities or funds, as well as participant-directed investment programs
or plans such as 529, 403(b), and 457 plans.\170\
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\169\ 15 U.S.C. 78o-4(e)(8).
\170\ See infra note 191 (defining 403(b) and 457 plans).
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on whether the
proposed interpretation of municipal entity for purposes of the
proposed definition of municipal advisor is appropriate, and whether
additional clarification is necessary.\171\ The Commission received
approximately 20 comment letters regarding the scope of the
Commission's interpretation of the term ``municipal entity.'' Based on
consideration of the comments received, as further discussed below, the
Commission is making one change to its interpretation.
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\171\ See Proposal, 76 FR 835.
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Several commenters suggested that the definition of ``municipal
entity'' should be limited to issuers of municipal securities \172\
because the
[[Page 67481]]
phrase ``any other issuer of municipal securities'' in Section
15B(e)(8)(C) would otherwise be unnecessary.\173\ In connection with
these comments, one commenter stated that the text and legislative
history of the Dodd-Frank Act ``are devoid of any indication that its
provisions addressing municipal securities were intended to grant the
[Commission] general prudential authority over State and local fiscal
matters.'' \174\ This commenter further stated that the ``Dodd-Frank
Act references to municipal securities were intended to address
securities (primarily municipal bonds) issued by `municipal entities'
to the class of nongovernmental investors that the [Commission] is
charged with protecting.'' \175\ Another commenter, however, suggested
that the definition, as proposed, should extend to public pension
funds, LGIPs, other government asset pools, and investor-directed
governmental plans only to the extent that they are political
subdivisions of a state, or corporate instrumentalities of a state,
that issue municipal securities in the public market.\176\ This
commenter also stated that LGIPs, tax-sheltered annuities, and deferred
compensation plans should not be deemed to be municipal entities,
because they do not issue securities in the public municipal securities
market.\177\ Finally, another commenter suggested that the definition
of municipal entity should include obligated persons, because the
definition includes issuers of municipal securities, and obligated
persons can be issuers of municipal securities pursuant to other
provisions of the federal securities laws.\178\
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\172\ See NABL Letter; letters from Hon. Kelly Schmidt,
President, National Association of State Treasurers, dated February
16, 2011 (``National Association of State Treasurers Letter''); Gail
Schubert, Chair, Alaska Retirement Management Board, dated February
18, 2011 (``Alaska Retirement Management Board Letter'').
\173\ See, e.g., NABL Letter; National Association of State
Treasurers Letter; Alaska Retirement Management Board Letter.
\174\ National Association of State Treasurers Letter. See also
NABL Letter (stating that Section 975 was not intended to address
advice to an entity based on a mere possibility that it would become
an issuer of municipal securities in the public market place, and
that it was not intended to address advice concerning a municipal
entity's fiscal affairs generally, except to the extent that such
affairs relate directly to its issuance or administration of
municipal securities).
\175\ National Association of State Treasurers Letter.
\176\ See NABL Letter.
\177\ See id.
\178\ According to this commenter, ``municipal entity'' is
defined under the Dodd-Frank Act to include ``any other issuer of
municipal securities,'' and ``issuer of municipal securities'' is
defined under Exchange Act Rule 15c2-12 to mean ``the governmental
issuer specified in section 3(a)(29) of the Act and the issuer of
any separate security.'' See letter from Chapman and Cutler, dated
February 22, 2011 (``Chapman and Cutler Letter''). Further, this
commenter stated that ``municipal securities'' is defined in the
Exchange Act to include both governmental bonds and tax-exempt
``industrial development bonds.'' This commenter stated that, since
the Commission has interpreted the term ``obligated person'' to have
the same meaning as in Exchange Act Rule 15c2-12, conduit borrowers
under tax exempt bond issues would be ``issuers of separate
securities'' that are also ``issuers of municipal securities.'' As a
result, the commenter suggested that obligated persons under tax-
exempt bond issues are ``municipal entities.''
The Commission does not agree. Although the Commission believes
that the definition of obligated person for purposes of municipal
advisor registration should be consistent with the definition of
obligated person for purposes of Rule 15c2-12, the Commission is not
applying the definition of ``issuer of municipal securities'' in
Rule 15c2-12 for purposes of interpreting the definition of
``municipal entity'' in Exchange Act Section 15B(e)(8). The
Commission does not believe that the definition of ``municipal
entity'' should be interpreted to include obligated persons, because
the Dodd-Frank Act amended Exchange Act Section 15B to separately
define ``municipal entity'' (15 U.S.C. 78o-4(e)(8)) and ``obligated
person'' (15 U.S.C. 78o-4(e)(10)).
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One commenter stated that, although Congress specifically referred
to states, counties, cities, and other political subdivisions, Congress
did not refer to their pension or retirement plans when it enacted
Section 975 of the Dodd-Frank Act. This commenter further argued that
governmental retirement plans are separate legal entities from the
municipal entities and are not ordinarily funded by, or involved in,
the types of transactions contemplated by Section 975 or the proposed
rules.\179\ Another commenter questioned whether a public retirement
system would be a municipal entity, a municipal financial product, or
both.\180\
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\179\ See letter from Daniel J. Wintz, Fraser Stryker, dated
February 21, 2011 (``Fraser Stryker Letter''). For example, this
commenter stated that assets of plans qualified under Internal
Revenue Code Section 401(a) must be held in trust for the benefit of
employees and their beneficiaries, and qualified plan trusts
maintained by governmental employers are prohibited from engaging in
transactions such as self-dealing with the plan sponsor. The
commenter also provided that 403(b) plans are typically funded with
employee and employer contributions, which are used to purchase
annuity contracts or are deposited in custodial accounts, the assets
of which are invested in mutual funds. Finally, the commenter stated
that 457 plans allow employees of political subdivisions to defer
compensation. All amounts deferred under the plan, all property and
rights purchased with the amounts, and all income attributable to
such amounts, property, or rights, must be held in trust for the
exclusive benefit of the participants and their beneficiaries. See
also letter from Clifford E. Kirsch, Michael B. Koffler, and Susan
S. Krawczyk, Sutherland Asbill & Brennan LLP, for the Committee of
Annuity Insurers, dated February 22, 2011 (``Committee of Annuity
Insurers Letter I'').
\180\ See letter from Richard K. Matta, Groom Law Group, on
behalf of the State Board of Administration of Florida, dated
February 28, 2011 (``State Board of Administration of Florida
Letter''). This commenter expressed this concern, because it is
unsure as to how the employee exclusion from the definition of
municipal advisor would apply to public retirement systems.
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Other commenters suggested that the definition of municipal entity
should exclude public pension plans or participant-directed plans.\181\
One commenter stated that these plans have nothing to do with raising
funds for a municipal entity or investing proceeds from an offering of
municipal securities.\182\ This commenter also stated that once the
funds are contributed to a governmental retirement plan, they are no
longer the property or held for the benefit of the municipal entity
that established the plan.\183\ Further, this commenter stated that the
definition of municipal entity should not include individual
participants in a governmental retirement plan.\184\
---------------------------------------------------------------------------
\181\ See, e.g., Alaska Retirement Management Board Letter;
Committee of Annuity Insurers Letter I; Fraser Stryker Letter.
\182\ See Committee of Annuity Insurers Letter I. This commenter
stated that, if the Commission were to modify the definition of
``municipal entity'' so it did not include 457 plans and 403(b)
plans, its concerns regarding the impact of the proposed rules on
separate accounts, broker-dealers and investment advisers for
insurance contracts would be mooted. See infra notes 386 and 405 and
accompanying text.
\183\ See Committee of Annuity Insurers Letter I.
\184\ See id. As such, this commenter asked the Commission to
clarify that the municipal advisor registration regime does not
apply to persons providing investment advice to individual plan
participants or investment education provided to plan participants.
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One commenter stated that the Commission should clarify that
municipal entity only includes entities that are controlled by, or
established for the benefit and enjoyment of, a state or any of its
constituent political subdivisions or municipal corporations.\185\ This
commenter noted that some public pension plans, ``sponsored or
established'' by states or their political subdivisions or municipal
corporations, are not controlled by the sponsoring governmental unit
but are instead controlled by trustees with plenary authority.\186\
This commenter also suggested that private pension funds, mutual funds,
and insurance companies recognized under state law as such entities as
a result of a filing with a state official and issuance of a
certificate of formation should not be included within clause (B) of
the definition of municipal entity as a ``plan, program or pool of
assets sponsored or established by the State. . . .'' \187\
---------------------------------------------------------------------------
\185\ See NABL Letter.
\186\ See id.
\187\ See id. The commenter expressed concern that the
Commission's proposed interpretation that the definition of
municipal entity includes ``participant-directed investment programs
or pools'' could be interpreted to include private plans established
by an entity chartered by a state.
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[[Page 67482]]
The Commission has carefully evaluated comments received on its
proposed definition of ``municipal entity'' and continues to believe
that the definition of ``municipal entity'' should not be limited to
issuers of municipal securities.\188\ The Commission believes that the
phrase ``any other issuer of municipal securities'' does not limit
clauses (A) and (B) of the definition to entities that can issue
municipal securities. Many of the plans, programs and pools of assets
included in clause (B) of Section 15B(e)(8) do not issue municipal
securities. Further, the definition of municipal entity does not
otherwise limit itself to those entities that issue municipal
securities. To limit the entities listed in clause (A) and (B) of
Section 15B(e)(8) to issuers of municipal securities would also limit
the definitions of ``municipal financial products'' (and therefore
``municipal derivatives'') and ``solicitation of a municipal entity''
to encompass only those entities that issue municipal securities. Under
such a limited definition, advice with respect to municipal
derivatives, for example, would not subject advisors to registration
unless the municipal entity entering into a swap \189\ was also an
issuer of municipal securities. This limited definition would also
allow third parties to solicit various public pension funds and LGIPs
on behalf of brokers, dealers, investment advisers, and municipal
advisors without registering as municipal advisors. The Commission
believes that such entities should have the protections provided by
municipal advisor registration.\190\
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\188\ See supra notes 173-176 and accompanying text.
\189\ Unless the context otherwise requires, for purposes of the
discussion in this release, swap refers to swaps and security-based
swaps.
\190\ The Commission notes that Section 15B(b) of the Exchange
Act, as amended by the Dodd-Frank Act, requires, among other things,
that the MSRB adopt rules to effect the purposes of the Exchange Act
with respect to, among other things, ``advice provided to or on
behalf of municipal entities or obligated persons by . . . municipal
advisors with respect to municipal financial products, the issuance
of municipal securities, and solicitations of municipal entities or
obligated persons undertaken by brokers, dealers, municipal
securities dealers, and municipal advisors.'' See Section 15B(b)(2)
of the Exchange Act. At a minimum, the rules of the MSRB, with
respect to municipal advisors, must, among other things: ``(i)
Prescribe means reasonably designed to prevent acts, practices, and
courses of business as are not consistent with a municipal advisor's
fiduciary duty to its clients; (ii) provide continuing education
requirements for municipal advisors; [and] (iii) provide
professional standards.'' See Section 15B(b)(2)(L) of the Exchange
Act.
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The Commission believes public employee retirement systems and
public employee benefit plans or public pension plans (including
participant-directed plans, 403(b), and 457 plans) \191\ fall within
the statutory definition of municipal entity. The Commission believes
that each of these plans constitutes a ``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.'' \192\
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\191\ In this release, the Commission uses the term ``public
employee benefit plan'' to refer to a ``pension plan'' that is a
``governmental plan'' (as such terms are described below). Such
plans include ``participant-directed plans,'' ``403(b) plans,'' and
``457 plans'' (as such terms are described below), and may be plans,
funds, or programs (also described below). The Commission also uses
the term ``public employee retirement system.'' As described below,
a public employee retirement system is a special purpose government,
and therefore, a public employee pension plan or a public employee
retirement system may itself be a municipal entity. The Commission
uses the term ``private employee benefit plan'' to refer to a
pension plan that is not a governmental plan.
The term ``governmental plan'' includes a plan established or
maintained for its employees by the Government of the United States,
by the government of any state or political subdivision thereof, or
by any agency or instrumentality of any of the foregoing. See
Section 3(32) of ERISA, 29 U.S.C. 1002(32).
The term ``employee benefit plan'' or ``plan'' means an employee
pension benefit plan or a plan which is both an employee welfare
benefit plan and an employee pension benefit plan. See Section 3(3)
of ERISA, 29 U.S.C. 1002(3).
The terms ``employee pension benefit plan'' and ``pension plan''
mean any plan, fund, or program which was heretofore or is hereafter
established or maintained by an employer or by an employee
organization, or by both, to the extent that by its express terms or
as a result of surrounding circumstances such plan, fund, or
program--(i) provides retirement income to employees, or (ii)
results in a deferral of income by employees for periods extending
to the termination of covered employment or beyond, regardless of
the method of calculating the contributions made to the plan, the
method of calculating the benefits under the plan or the method of
distributing benefits from the plan. See Section 3(2) of ERISA, 29
U.S.C. 1002(2).
Pursuant to the Governmental Accounting Standards Board
(``GASB''), ``public employee retirement system'' means a special-
purpose government that administers one or more pension plans.
Public employee retirement systems also may administer other types
of employee benefit plans, including postemployment healthcare plans
and deferred compensation plans. See GASB Statement No. 28:
Accounting and Financial Reporting for Pensions.
A ``participant-directed plan'' is a plan that provides for the
allocation of investment responsibilities to participants or
beneficiaries. See U.S. Department of Labor, Fact Sheet: Final Rule
to Improve Transparency of Fees and Expenses to Workers in 401(k)-
Type Retirement Plans (February 2012), available at http://www.dol.gov/ebsa/pdf/fsparticipantfeerule.pdf.
A ``403(b) plan'' is a tax-sheltered retirement plan, similar to
a 401(k) plan, offered by public schools and certain 501(c)(3) tax-
exempt organizations. See Internal Revenue Service, IRC 403(b) Tax-
Sheltered Annuity Plans, available at http://www.irs.gov/Retirement-Plans/IRC-403(b)-Tax-Sheltered-Annuity-Plans.
A ``457 plan'' is a deferred compensation plan as described in
IRC section 457, which is available for certain state and local
governments and non-governmental entities tax exempt under IRC
section 501. See Internal Revenue Service, IRC 457(b) Deferred
Compensation Plans, available at http://www.irs.gov/retirement/article/0,,id=172437,00.html.
\192\ 15 U.S.C. 78o-4(e)(8) (defining ``municipal entity'').
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Further, the Commission believes that such plans should be afforded
the protection granted to municipal entities by the statute. The
Commission notes that the solicitation of public pension plans \193\ in
connection with investment advisory services has been subject to
multiple Commission enforcement actions. For example, in 2009, the
Commission charged a former New York State official and top political
advisor with allegedly defrauding the New York State Common Retirement
Fund by causing the fund to invest billions of dollars with private
equity funds and hedge fund managers who paid millions of dollars in
the form of sham ``finder'' or ``placement agent'' fees.\194\
---------------------------------------------------------------------------
\193\ See infra Section III.A.1.b.x. (discussing ``solicitation
of a municipal entity or obligated person'').
\194\ See SEC v. Henry Morris, Litigation Release No. 20963
(March 19, 2009).
As another example, the Commission charged the former CEO of the
California Public Employees' Retirement System and his close
personal friend with allegedly scheming to defraud an investment
firm into paying $20 million in fees to the friend's placement agent
firms. See SEC Charges Former CalPERS CEO and Friend With Falsifying
Letters in $20 Million Placement Agent Fee Scheme, available at
http://www.sec.gov/news/press/2012/2012-73.htm.
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The Commission notes, however, that individual natural person
participants in a public employee benefit plan do not fall within the
definition of municipal entity, because such persons would not be a
state, political subdivision of a state, or municipal corporate
instrumentality. Similarly, private employee benefit plans, mutual
funds, and insurance companies that are not sponsored or established by
a state, political subdivision, or municipal corporate instrumentality
or any agency, authority, or instrumentality thereof, do not fall
within the statutory definition of municipal entity.\195\ Such funds
and entities are not ``established or sponsored by'' a state merely
because they file with a state official or are issued a certificate of
formation by a state.
---------------------------------------------------------------------------
\195\ See supra note 187 and accompanying text.
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As noted above, three commenters \196\ stated that funds
contributed to a governmental plan are no longer the property of, or
held for the benefit of or
[[Page 67483]]
controlled by, the municipal entity that established the plan, and that
such plans are not ordinarily funded by or involved in the types of
transactions contemplated by Congress. These commenters argued that, as
a result, these plans should be excluded from the definition of
municipal entity. The Commission does not agree. Such a plan is
``sponsored or established'' by the municipal entity and, therefore,
falls within the statutory definition of municipal entity.
---------------------------------------------------------------------------
\196\ See Fraser Stryker Letter and Committee of Annuity
Insurers Letter I. See also NABL Letter (making a similar argument
that the term ``municipal entity'' should only include entities that
are controlled by or established for the benefit and enjoyment of a
state or any of its political subdivisions or municipal
corporations).
---------------------------------------------------------------------------
One commenter suggested that the phrase ``any State, political
subdivision of a State, or municipal corporate instrumentality of a
State'' in the interpretation of the definition of ``municipal entity''
would be clearer if it were revised to read ``any State, political
subdivision of a State, or municipal corporate instrumentality of a
State or of a political subdivision of a State.'' \197\ The commenter
noted, for example, that a charter school may be organized as an
``instrumentality of a political subdivision of a State.''
---------------------------------------------------------------------------
\197\ NABL Letter.
---------------------------------------------------------------------------
Because states delegate powers to their political subdivisions and
one of the powers that may be delegated to political subdivisions is
the ability of political subdivisions to create corporate
instrumentalities,\198\ the Commission believes that a municipal entity
organized as a municipal corporate instrumentality of a political
subdivision of a state is properly considered a municipal corporate
instrumentality of a state. Accordingly, the Commission is adopting
Rule 15Ba1-1(g) to reflect such interpretation and define municipal
entity to include municipal corporate instrumentalities of political
subdivisions of states.\199\
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\198\ See, e.g., MCL 117.4o: http://www.legislature.mi.gov/
(S(p3jhrzzb5hbiew45wy2fmz45))/
mileg.aspx?page=getobject&objectname=mcl-117-4o (authorizing cities
in the state of Michigan to form nonprofit corporations under that
state's nonprofit corporation act if they are organized for valid
public purposes).
\199\ See Rule 15Ba1-1(g), which defines municipal entity to
mean ``any State, political subdivision of a State, or municipal
corporate instrumentality of a State or of a political subdivision
of a State, including: (1) [A]ny agency, authority, or
instrumentality of the State, political subdivision, or municipal
corporate instrumentality; (2) [a]ny 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 (3) [a]ny other issuer of municipal
securities.''
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iii. Obligated Person
Exchange Act Section 15B(e)(10) provides that the term ``obligated
person'' means ``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.'' \200\
In the Proposal, in response to a commenter's request for
clarification,\201\ the Commission stated its belief that the
definition of obligated person for purposes of the definition of
municipal advisor should be consistent with the definition of obligated
person for purposes of Rule 15c2-12.\202\ The Commission therefore
proposed to exempt from the definition of obligated person providers of
municipal bond insurance, letters of credit, or other liquidity
facilities.\203\ In the Proposal, the Commission stated its belief that
this interpretation would not conflict with the goals of the Dodd-Frank
Act to provide further protections for certain entities that
participate in borrowings in the municipal securities market and would
help ensure uniformity among rules relating to such market, including
uniformity relating to the definition of obligated persons.\204\ The
Commission noted that providers of municipal bond insurance, letters of
credit, or other liquidity facilities are generally non-governmental
providers of credit enhancements.\205\ As providers of credit
enhancements, these entities are not borrowing funds through a
municipal entity. Therefore, the Commission stated in the Proposal its
belief that they do not require the type of protection that should be
provided to those who, in municipal securities transactions, borrow
funds through municipal entities.
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\200\ 15 U.S.C. 78o-4(e)(10). Obligated persons can include
entities acting as conduit borrowers, such as private universities,
non-profit hospitals, and private corporations.
\201\ See Proposal, 76 FR 829, note 88 and accompanying text.
\202\ Rule 15c2-12 defines the term ``obligated person'' to mean
``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 payment
of all, or part of the obligations on the municipal securities to be
sold in the Offering (other than providers of municipal bond
insurance, letters of credit, or other liquidity facilities).'' See
17 CFR 240.15c2-12(f)(10). ``Offering'' as used in this definition
is defined in Rule 15c2-12(a). See 17 CFR 240.15c2-12(a). See also
Securities Exchange Act Release No. 34961 (November 10, 1994), 59 FR
59590 (November 17, 1994).
\203\ See proposed Rule 15Ba1-1(i) and 17 CFR 240.15c2-
12(f)(10).
\204\ See Proposal, 76 FR 830.
\205\ See id.
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The Commission received approximately ten comment letters with
regard to the definition of ``obligated person'' and the application of
the proposed rules to such persons.
Definition of ``Obligated Person''
Generally, most commenters agreed that the definition of
``obligated person'' should be consistent with the definition of that
term in Rule 15c2-12,\206\ or otherwise expressed support for the
proposed definition of obligated person.\207\ Consequently, the
Commission is adopting the definition substantially as proposed, but
with modifications for general consistency with the application of the
term in Rule 15c2-12 \208\ and certain clarifying modifications to
address concerns raised by commenters. Specifically, Rule 15Ba1-1(k)
provides that obligated person ``has the same meaning as in section
15B(e)(10) of the Act (15 U.S.C. 78o-4(e)(10)); 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 financial information or operating data
is not material to a municipal securities offering, without reference
to any municipal bond insurance, letter of credit, liquidity facility,
or other credit enhancement; or (3) the federal government.''
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\206\ See, e.g., Kutak Rock Letter; NABL Letter. See also ABA
Letter; BNY Letter.
\207\ See letter from Michael G. Bartolotta, Chairman, MSRB,
dated February 22, 2011 (``MSRB Letter I'').
\208\ See Rule 15Ba1-1(k). See also supra note 202.
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The Commission believes that there is no reason to differentiate
the definition of obligated person for purposes of municipal advisor
registration from the definition of obligated person for other Exchange
Act purposes. As discussed in the Proposal and herein, the Commission
believes that such definition will provide further protections for
certain entities that participate in borrowings in, and help ensure
uniformity among rules relating to, the municipal securities market.
The continued use of a consistent definition will also provide clearer
guidance to market participants.
Although most commenters supported the proposed definition, some
commenters asked for clarification. One commenter suggested that the
definition should exclude persons who might otherwise be deemed to be
an obligated person solely on the basis of a commitment to support
payment of the underlying assets that secure such issue, other than a
borrower, lessee, or installment purchaser who is contractually
responsible for payments that exceed a specified and substantial
materiality standard, or a guarantor of
[[Page 67484]]
such a payment obligation, who is not otherwise excluded from the
definition of obligated person.\209\ One commenter specifically stated
that guaranty agencies for loans under the Federal Family Education
Loan Program (``FFELP'') should not be deemed obligated persons.\210\
Another commenter stated that companies registered under the Exchange
Act, the federal government and its instrumentalities, foreign
governments and their instrumentalities, religious organizations, and
entities already subject to substantial oversight and regulation, such
as banks, credit unions, regulated investment companies, and insurance
companies, should be exempt from the definition of obligated
person.\211\
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\209\ See NABL Letter. The commenter stated that the
interpretive guidance with respect to Rule 15c2-12 leaves open the
possibility that some persons who are not directly committed to
support payment of a municipal securities issue may nonetheless be
deemed to be obligated persons by reason of their commitment to
support payment of the underlying assets securing the issue, based
upon a factual analysis of their relationship to the issue. See id.
See also letter from Brett E. Lief, President, National Council of
Higher Education Loan Programs, dated February 16, 2011 (``National
Council of Higher Education Loan Programs Letter''). Another
commenter stated that, according to the proposed rules, while some
of its members would fall within the definition of obligated person
in each of its capital market financings, under the materiality
standard of Rule 15c2-12 under the Exchange Act, the commenter only
designates as obligated persons those members participating in the
projects being financed that have a significant percentage of the
financial obligation that supports the debt service on the
commenter's bonds. See letter from Robert W. Trippe, Senior Vice
President and Chief Financial Officer, American Municipal Power,
Inc., dated February 21, 2011 (``American Municipal Power Letter'').
\210\ See National Council of Higher Education Loan Programs
Letter.
\211\ See Kutak Rock Letter.
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The Commission has carefully considered these comments. The
Commission continues to believe that there is no reason to
differentiate the definition of obligated person for purposes of
municipal advisor registration from the definition of obligated person
for purposes of Rule 15c2-12. The Commission, however, is modifying the
rule text of Rule 15Ba1-1(k) to clarify that the definition of
obligated person excludes persons whose financial information or
operating data is not material to a municipal securities offering,
without reference to any municipal bond insurance, letter of credit,
liquidity facility, or other credit enhancement.
The continuing disclosure requirements of Rule 15c2-12 exclude
certain obligated persons whose financial information or operating data
is not material to the issuance of municipal securities.\212\
Therefore, consistent with Rule 15c2-12, the Commission is clarifying
that an entity whose financial information or operating data is not
material to an issuance of municipal securities would not be an
obligated person under Rule 15Ba1-1(k). Any advisor to such entity
would not be required to register as a municipal advisor, because such
person would not be a municipal advisor within the meaning of Rule
15Ba1-1(d).\213\ In addition to promoting consistency, the Commission
believes that the materiality standard for secondary market disclosure
in Rule 15c2-12 also serves as an appropriate standard to identify
those obligated persons that should have the protections afforded by
Section 15B of the Exchange Act. Using a similar approach ensures
uniformity, provides municipal market participants with existing
guidance about how the rules should be applied, and limits the
application of the definition to only those persons whose financial
information or operating data is material to a municipal securities
offering and for whom registration provides significant benefits to the
municipal marketplace.
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\212\ For example, Rule 15c2-12 requires a written agreement or
contract to provide ongoing information (1) with respect to any
obligated person for whom financial information or operating data is
presented in the final official statement or (2) for each obligated
person meeting the objective criteria specified in the undertaking
and used to select the obligated persons for whom financial
information or operating data is presented in the final official
statement, except that in the case of pooled obligations the
undertaking shall specify such objective criteria. See Rule 15c2-
12(b)(5)(i)(A). The issuer and the other participants determine at
the time of preparation of the official statement which obligated
persons are material to the offering. See Securities Exchange Act
Release No. 34961 (November 10, 1994), 59 FR 59590, 59596 (November
17, 1994).
\213\ A person advising a guarantor that is a municipal entity
(such as a state credit enhancer) must separately determine whether
its advice to that municipal entity would trigger the municipal
advisor registration requirement.
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While the definition of obligated person in the Proposal excluded
only providers of municipal bond insurance, letters of credit, or other
liquidity facilities, the Commission understands that credit
enhancement for municipal securities is not necessarily limited to
those three categories and that many municipal securities may be credit
enhanced indirectly. Prior guidance from Commission staff provides that
``[e]ntities that insure or guarantee performance of assets that have
been pledged to secure the repayment of the municipal obligation may
fall within the definition of `obligated person' . . . unless such
insurance or guarantee has been obtained prior to and not in
contemplation of any offering of municipal securities, the insurance or
guarantee relates only to the individual pledged assets, and the
insurance or guarantee exists independent of the existence of a
municipal obligation.'' \214\ Consistent with this prior guidance from
Commission staff, the Commission is adopting a definition of
``obligated person'' for purposes of Rule 15Ba1-1(k), which provides
that the ultimate determination as to whether an insurer or guarantor
is an obligated person under Rule 15c2-12 depends on the relationship
to the financing itself, which is a factual analysis.\215\ Similarly, a
determination of whether a guarantor or insurer falls within the
exclusion from the definition of obligated person for the purposes of
the municipal advisor registration regime also depends on the
particular facts and circumstances.\216\
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\214\ Response to Question 9 in letter from Catherine McGuire,
Chief Counsel, Division of Market Regulation, Commission to John S.
Overdorff, Chair, Securities Law and Disclosure Committee, NABL,
dated September 19, 1995.
\215\ See id.
\216\ See id.
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In addition, the Commission notes that although the federal
government and its instrumentalities, as providers of credit
enhancement, could fall within the definition of obligated person under
Rule 15c2-12, the federal government does not require the type of
protection that should be applicable generally to those who borrow
funds through municipal entities in municipal securities
transactions.\217\ Accordingly, for purposes of the municipal advisor
registration regime, the Commission is interpreting the definition of
obligated person to exclude the federal government. Therefore, advisors
to the federal government and its instrumentalities providing credit
enhancements in connection with issuances of municipal securities are
not required to register as municipal advisors.
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\217\ The federal government, as a credit enhancer, would not be
borrowing any funds through a municipal entity, and would therefore
be in a position similar to that of providers of municipal bond
insurance, letters of credit, or other liquidity facilities that are
excluded from the definition of ``obligated person'' in Rule 15c2-
12. In addition--unlike for the definition of special entity--
Congress did not include the federal government in the definition of
municipal entity. See infra note 275 (noting differences in the two
definitions).
---------------------------------------------------------------------------
Another commenter stated that buyers of municipal securities rely
on the letter of credit and the credit rating of the lender issuing the
bonds rather than the ``ultimate borrower,'' and the security or
collateral provided by a borrower goes to the lender or letter of
credit issuer,
[[Page 67485]]
not bondholders.\218\ The commenter stated that the real borrower-
lender relationship is between the borrower and the bank issuing the
letter of credit.\219\ This commenter noted that these and other
factors distance conduit borrowers \220\ from direct obligations to
bondholders, but they nonetheless would be obligated persons under the
Proposal.
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\218\ See letter from Andrew S. Rose, dated April 10, 2011
(``Rose Letter'').
\219\ See id.
\220\ Many commenters used the term ``conduit borrower'' in
their letters. Although the term ``conduit borrower'' and
``obligated person'' do not have identical meanings, for purposes of
this release, the Commission is treating the comments regarding
``conduit borrowers'' as applying to ``obligated persons.''
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The Commission understands this commenter to be suggesting that
such conduit borrowers should not be considered obligated persons, such
that their advisors would not have to register as municipal advisors.
The Commission, however, has taken the position that, regardless of
whether an obligated person obtains a letter of credit from a bank to
guarantee the payment of municipal securities, an obligated person has
an obligation to investors.\221\ The Commission has long been of the
view that the presence of credit enhancements generally would not be a
substitute for material disclosure concerning the primary obligor on
municipal bonds.\222\ Thus, an advisor to an obligated person that has
obtained a letter of credit from a bank to guarantee the payment of
municipal securities should not be treated differently from an advisor
to an obligated person that has not obtained such credit enhancements,
and would therefore have to register as a municipal advisor.\223\
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\221\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799, note 89 (July 10, 1989). See also Securities
Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33107
(June 10, 2010) (stating: ``As noted in [Securities Exchange Act
Release No. 60332 (July 17, 2009), 74 FR 36831 (July 24, 2009)], the
Commission believes that information regarding conduit borrowers is
material to investors in credit enhanced offerings and therefore
should be included in the official statements'').
\222\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799, 28812 (July 10, 1989).
\223\ The text of Rule 15Ba1-1(k) has also been clarified to
provide that the definition of obligated person excludes persons
whose financial information or operating data is not material to a
municipal securities offering, without reference to any municipal
bond insurance, letter of credit, liquidity facility, or other
credit enhancement.
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Application of Rules to Advisors to Obligated Persons
One commenter suggested generally that the proposed rules should be
more strictly applied to advisors dealing with municipal entities than
to advisors dealing with obligated persons. The commenter asserted that
there is less public interest in regulating advice to private entities,
and such regulation is better handled outside of municipal markets
regulation.\224\ As stated above, obligated persons assume the same
role as municipal entities in an issuance of municipal securities,
because obligated persons are committed by contract or other
arrangement to support the payment of all or part of the obligations on
the municipal securities. Further, defaults by private entity obligated
persons with respect to municipal securities can have negative
consequences for municipal entities.\225\ Section 15B of Exchange Act
(as amended by the Dodd-Frank Act), moreover, provides for the
protection of both municipal entities and obligated persons.\226\
Accordingly, the Commission believes that the municipal advisor
registration regime should generally apply in the same manner to
advisors of obligated persons as to advisors of municipal
entities.\227\
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\224\ See letter from Kendra York, Public Finance Director,
State of Indiana, dated February 22, 2011 (``State of Indiana
Letter''). This commenter stated that it is unrealistic to expect
board members, attorneys, and accountants of obligated persons to be
aware that their activities would be subject to Commission
regulation. The commenter stated that it seems more appropriate to
regulate improvident and risky usage of derivatives by
unsophisticated borrowers by focusing on suitability rules
applicable to the providers of these services, rather than focusing
on their use in the municipal market.
\225\ According to a Standard and Poor's study of municipal bond
defaults in the 1990s, bonds for the three major types of conduit
bond issues (healthcare, multi-family housing, and industrial
development) accounted for more than 70% of defaulted principal.
More recent reports have also indicated that non-governmental
conduit borrowers account for more than 70% of municipal bond
defaults. For example, a 2011 report stated that the largest share
of modern era defaults consists of industrial development revenue
bonds, followed by bonds supporting healthcare and housing. The
report states that these three sectors accounted for 67% of all
defaulting issues during the period of 1980 to 2011. See 2012 Report
on the Municipal Securities Market, supra note 45, at 24.
\226\ See 15 U.S.C. 78o-4(b)(2)(C).
\227\ The Commission notes, however, that the Exchange Act, as
amended by the Dodd-Frank Act, imposes a fiduciary duty on municipal
advisors when advising municipal entities. See 15 U.S.C. 78o-
4(c)(1). The statute does not impose a fiduciary duty with respect
to advice to obligated persons. See also supra note 100.
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As described more fully below, however, the Commission is providing
an exemption from the definition of municipal advisor for persons
providing advice with respect to certain ``investment strategies,''
which will narrow the range of activities that would cause an advisor
to an obligated person to meet the definition of municipal
advisor.\228\ Also as described more fully below, the Commission is
limiting the scope of its definition of the term ``municipal
derivative'' and its interpretation of the term ``solicitation of a
municipal entity or obligated person'' as each applies to obligated
persons, such that an obligated person must be acting in its capacity
as such and the relevant activity is in connection with municipal
securities (or, in the case of a solicitation, municipal financial
products).\229\
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\228\ See infra Section III.A.1.b.viii.
\229\ See infra note 236 and accompanying text.
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When does a person become an obligated person?
One commenter asked when a client would become an obligated
person.\230\ Specifically, the commenter asked whether it would be
rendering advice as a municipal advisor if it was engaged to consider a
client's options regarding conventional versus conduit financing, but
the client subsequently chose not to engage in conduit financing.\231\
In addition, the commenter asked whether only registered municipal
advisors can solicit clients that are eligible to use conduit
financing.\232\ Lastly, the same commenter asked whether a financial
advisor would be required to register as a municipal advisor if a
client is examining its debt alternatives, among which is conduit
financing.\233\
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\230\ See letter from Jonathan Roberts, Principal, Roberts
Consulting, LLC, dated February 18, 2011 (``Roberts Consulting
Letter'').
\231\ See id.
\232\ See id.
\233\ See id.
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Whether a financial advisor that advises clients about conduit
financing or other financing options would be required to register as a
municipal advisor would depend on the facts and circumstances. A person
will not be a municipal advisor to an obligated person until the
obligated person has begun the process of applying to, or negotiating
with, a municipal entity to issue conduit bonds on behalf of the
obligated person. Activity that never results in solicitation of or
actual contact with a municipal entity does not have a sufficient nexus
to municipal financial products or the issuance of municipal securities
to require registration as municipal advisor. Merely advising a client
on debt financing alternatives that include conduit financing is not a
municipal advisory activity, because the client would not be
sufficiently close to being an obligated person with respect to an
issuance of municipal securities.\234\ If a
[[Page 67486]]
client is only considering conduit financing, the client is not an
obligated person. However, if the client applies to, or negotiates
with, the municipal entity to issue conduit bonds, the person advising
the conduit borrower would be required to be registered as a municipal
advisor, regardless of whether or not the financing successfully
closes.
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\234\ Conversely, providing advice to a client who is a
municipal entity regarding debt financing alternatives would
constitute a municipal advisory activity.
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One commenter argued that a person that is an obligated person does
not remain an obligated person indefinitely and is not an obligated
person with respect to unrelated matters.\235\ The Commission agrees
and has limited the scope of the rules as applied to advice concerning
municipal financial products used by, and third-party solicitations of,
obligated persons as described herein.\236\
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\235\ See SIFMA Letter I.
\236\ See infra Section III.A.1.b.v. (discussing the definition
of ``municipal derivatives'' and its scope with respect to obligated
persons) and Section III.A.1.b.x. (discussing the definition of
``solicitation of a municipal entity or obligated person'' and its
scope with respect to obligated persons).
---------------------------------------------------------------------------
The same commenter also argued that a person should not be deemed
an obligated person if it is not the initial obligor, but rather comes
to support the payment of obligations on municipal securities after the
offering, through an assumption or other arrangement, and asked the
Commission to clarify that any relationship between an obligated person
and its advisor will only be considered a municipal advisory
relationship to the extent that it directly involves a transaction in
which the person is an obligated person.\237\ The Commission does not
agree. It is the Commission's view that such a person would be an
obligated person if the municipal securities remain outstanding after
the substitution of the obligated person, and such a person is an
obligated person for purposes of Rule 15c2-12. The obligated person's
responsibilities and need for protection would be similar regardless of
whether it was an initial obligor or a subsequent obligor. The
Commission notes that, as discussed, a person is only a municipal
advisor to an obligated person if it provides advice to, or on behalf
of, the 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 that meets the definition for
``solicitation'' of such obligated person.\238\ The Commission also
notes that Exchange Act Section 15B(e)(10) defines obligated person to
mean, among other things, ``any person . . . 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.'' \239\
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\237\ See SIFMA Letter I. Further, another commenter stated that
if an entity related to a borrower agrees to guarantee, or be
jointly obligated, on a borrowing, it should be treated as the
primary borrower and not as a municipal advisor. See letter from
Kasey Kesselring, President, South Lake County Hospital District,
dated February 16, 2011 (``South Lake County Hospital Letter''). The
Commission notes that such an entity is not acting as an advisor to
its affiliated borrower merely by agreeing to guarantee or be
jointly obligated on a borrowing.
\238\ See 15 U.S.C. 78o-4(e)(4).
\239\ See 15 U.S.C. 78o-4(e)(10).
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Charter Schools
In the Proposal, the Commission noted that a charter school would
generally fall under the definition of municipal entity, but may, in
certain circumstances, fall under the definition of obligated
person.\240\ With respect to municipal financial products or the
issuance of municipal securities, the Commission asked in what
circumstances should charter schools be considered municipal entities
or obligated persons.\241\ Further, the Commission asked how the
treatment of charter schools under different state laws affects their
classification as municipal entities or obligated persons.\242\
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\240\ 15 U.S.C. 78o-4(e)(8). See also infra note 241.
\241\ See Proposal, 76 FR 835.
In the Proposal, the Commission clarified, in response to a
commenter, that charter schools are considered to be public schools
and generally derive their charter from a political subdivision of a
state (for example, local school boards, state universities,
community colleges, or state boards of education) and, therefore,
would fall under the definition of municipal entity. See id., at
829, notes 83-85 and accompanying text.
Charter schools, or persons that operate charter schools, such
as charter school management organizations that are organized as
non-profit corporations, may issue municipal securities through a
municipal entity for capital needs, such as facilities that are not
provided for by state funding. In that instance, the charter school,
or charter school management organization, would be an obligated
person with respect to the issuance of municipal securities and any
related municipal financial products. See id., at 829, note 85.
\242\ See id., at 835.
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One commenter stated that charter schools that have bonds issued on
their behalf by a local financing governmental entity are classic
examples of obligated persons.\243\ This commenter suggested that, if a
charter school receives tax money from a state or school district, the
school should be treated as a municipal entity.\244\ Otherwise, the
school should be treated as an obligated person.\245\ Another commenter
stated that a charter school should be considered a municipal entity if
it is organized as a political subdivision of a state or an
instrumentality of a political subdivision of a state.\246\ This
commenter stated that, in other circumstances when providing for
payment of municipal securities, a charter school should be considered
an obligated person.\247\
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\243\ See Kutak Rock Letter.
\244\ See id.
\245\ See id.
\246\ See NABL Letter.
\247\ See id.
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As stated in the Proposal, the Commission continues to believe that
charter schools are generally municipal entities, because they are
public schools and derive their charter from a political subdivision of
a state. While charter schools generally receive a portion of their
funds from the state, they may also raise funds through conduit
borrowing, and may pledge funds other than state money for the payment
on the conduit borrowing. Thus, a charter school is an obligated person
under Section 15B(e)(10) and Rule 15Ba1-1(k) when it engages in conduit
borrowing using and/or pledging solely monies derived from sources
other than the state or political subdivision of a state.\248\ A
municipal entity that is an obligated person on bonds issued by another
municipal entity is still a municipal entity for purposes of this rule,
and advisors to such municipal entities are subject to a statutory
fiduciary duty.\249\
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\248\ See also supra note 241 and accompanying text (recognizing
that a charter school may be an obligated person).
\249\ See 15 U.S.C. 78o-4(c).
---------------------------------------------------------------------------
iv. Municipal Financial Products
Exchange Act Section 15B(e)(5) defines ``municipal financial
product'' to mean ``municipal derivatives, guaranteed investment
contracts, and investment strategies.'' \250\ The Commission proposed
to incorporate into the rule the statutory definition of municipal
financial product.\251\ The Commission received approximately ten
comment letters regarding the proposed definition. The issues raised by
these commenters are discussed below in the ``Municipal Derivatives,''
``Guaranteed Investment Contracts,'' and ``Investment Strategies''
sections. The Commission is adopting the definition of ``municipal
financial product'' as proposed.\252\
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\250\ 15 U.S.C. 78o-4(e)(5).
\251\ See proposed Rule 15Ba1-1(g) (providing that ``municipal
financial product'' has the same meaning as in Section 15B(e)(5) of
the Exchange Act).
\252\ See Rule 15Ba1-1(i).
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[[Page 67487]]
v. Municipal Derivatives
As discussed in the Proposal, Exchange Act Section 15B does not
define the term ``municipal derivatives.'' Accordingly, the Commission
proposed Rule 15Ba1-1(f) to define the term to mean any swap \253\ or
security-based swap \254\ to which a municipal entity is a counterparty
or to which an obligated person, acting in its capacity as an obligated
person, is a counterparty.\255\ Thus, as stated in the Proposal, the
Commission included in the definition of municipal derivatives the
definitions of ``swap'' and ``security-based swap,'' as those terms are
defined by statute (and any rules and regulations thereunder). In the
Proposal, the Commission asked whether the proposed definition of
municipal derivatives should be modified or clarified in any way.\256\
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\253\ As proposed and adopted, the definition specifies that
``swap'' is as defined in Section 1a(47) of the Commodity Exchange
Act (7 U.S.C. 1a(47)) and Section 3(a)(69) of the Exchange Act (15
U.S.C. 78c(a)(69)), including any rules and regulations thereunder.
\254\ As proposed and adopted, the definition specifies that
``security-based swap'' is as defined in Section 3(a)(68) of the
Exchange Act (15 U.S.C. 78c(a)(68)), including any rules and
regulations thereunder.
\255\ See proposed Rule 15Ba1-1(f).
\256\ See Proposal, 76 FR 836.
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One commenter stated that the proposed definition of municipal
derivatives is too broad, because it encompasses too many types of
advisory entities and transactions and the definition goes beyond
securities.\257\ The commenter expressed concern that a person must
register as a municipal advisor regardless of the type of swap advice
contemplated or the relationship between the municipal entity and the
person seeking to offer the advice.\258\
---------------------------------------------------------------------------
\257\ See David J. Tudor, President and CEO, ACES Power
Marketing LLC, dated March 2, 2011 (``ACES Power Marketing
Letter'').
\258\ See id.
---------------------------------------------------------------------------
Another commenter stated that there is no statutory basis or
legislative history for the proposed expansion of the industry's common
usage of the term ``municipal derivatives,'' which is limited to
derivatives of a municipal security.\259\ The commenter stated that the
proposed definition would mean that any public plan (if not exempted
from the definition of municipal entity) using swaps in the management
of its overall portfolio would be dealing in municipal financial
products, merely by virtue of being a counterparty to the swap.\260\
---------------------------------------------------------------------------
\259\ See letter from Robert V. Newman, Executive Director, Utah
Retirement Systems, dated February 22, 2011 (``Utah Retirement
System Letter'').
\260\ See id.
---------------------------------------------------------------------------
Additionally, one commenter stated that many municipal entities
enter into commodity hedging transactions in connection with their
operations to avoid mid-year operating budget disruptions and rate
hikes. Accordingly, this commenter asked the Commission to confirm that
hedging transactions by municipal entities related to their operations
(rather than municipal securities) do not constitute municipal
derivatives.\261\
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\261\ See NABL Letter.
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One commenter asked the Commission to clarify how a person engaging
in a transaction or assignment with respect to a municipal derivative
would determine that the person it is advising is ``an obligated
person, acting in its capacity as an obligated person.'' \262\ The
commenter stated that the Commission should clarify that a person
(presumably acting as a dealer or counterparty) must have actual
knowledge that the counterparty is an obligated person acting as such
and have actual knowledge that the municipal derivative implicates or
is related to the underlying transactions or funds that make such
person an obligated person.\263\ Further, the commenter stated that a
person should not need to affirmatively inquire as to the
counterparty's or the funds' status.\264\
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\262\ See SIFMA Letter I.
\263\ See id.
\264\ See id.
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Another commenter suggested narrowing the definition of municipal
derivatives to only include debt-related derivatives entered into (a)
by a municipal entity in connection with an issue of municipal
securities or (b) by an obligated person as a pledged security or a
source of payment for municipal securities.\265\ This commenter also
stated that the phrase ``in its capacity as an obligated person'' is
not sufficiently tailored, because it would include any derivative
entered into by the obligated person to hedge a conduit borrowing, not
merely those that ``by contract or other arrangement . . . support the
payment'' of municipal securities.\266\ In addition, this commenter
stated that, given the use of the term ``municipal financial product,''
Congress did not intend to regulate transactions with non-municipal
entities that do not affect municipal entities or investors, simply
because they result from a municipal securities transaction.\267\
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\265\ See NABL Letter. This commenter stated that by narrowing
the definition of municipal derivatives accordingly, ``swaps that
are entered into by a municipal entity to hedge the interest rate on
variable rate securities, or to hedge the value of municipal
securities to be issued in the future, as well as swaps that are
part of a structured municipal securities financing (e.g., a
structured student loan or mortgage revenue bond issue) would be
covered, but derivatives that are unrelated to municipal securities
issues (e.g., swaps to hedge bank loans or fuel costs) or are
entered into by a conduit borrower and [not] pledged as security or
a source of payment for, the municipal securities issue would be
excluded.''
\266\ See id.
\267\ See id.
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In contrast, one commenter agreed with the Commission that
municipal derivatives includes both swaps and security-based swaps to
which a municipal entity or obligated person is a counterparty, but
stated that this definition is too narrow.\268\ This commenter stated
that, because the term ``municipal derivatives'' (rather than the term
``swap'') was used in the definition of municipal financial products,
Congress intended to ``provide flexibility to address problems that may
arise in the future in connection with the use of other existing or
yet-to-be-developed forms of derivatives by municipal entities.'' \269\
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\268\ See MSRB Letter I.
\269\ See id. See also infra note 271 (discussion of the
definition of swap and security-based swap, which includes
flexibility to address yet-to-be developed forms of derivatives).
The Commission also notes that on July 18, 2012, it adopted
rules jointly with the CFTC to, among other things, further define
the terms swap, security-based swap, and security-based swap
agreement. See Securities Exchange Act Release No. 67453 (July 18,
2012), 77 FR 48208 (August 13, 2012) (Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement;'' Mixed Swaps; Security-Based Swap Agreement
Recordkeeping).
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The Commission has carefully considered these comments and is
adopting the definition of municipal derivatives substantially as
proposed. The Commission, however, is clarifying herein the scope of
application of the definition to obligated persons, in response to
issues raised by commenters.\270\ Specifically, the Commission is
adopting Rule 15Ba1-1(f), which now provides that the term ``municipal
derivatives'' means ``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.'' \271\
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\270\ See Rule 15Ba1-1(f).
\271\ See id. The Commission notes that the definitions of swap
and security-based swap are quite broad and that Section 712(d) of
the Dodd-Frank Act gives the Commission and CFTC joint authority to
further define such terms. Under the Commodity Exchange Act, as
amended by the Dodd-Frank Act, the term ``swap'' is defined to mean,
in part, any agreement, contract, or transaction that is, or in the
future becomes, commonly known to the trade as a swap. See 7 U.S.C.
1a(47). In addition, under the Exchange Act, as amended by the Dodd-
Frank Act, the term ``security-based swap'' incorporates the
definition of ``swap'' under the Commodity Exchange Act. See 15
U.S.C. 78c(a)(68).
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[[Page 67488]]
As proposed and adopted, with respect to municipal entities, the
Commission has determined not to qualify the definition of municipal
derivatives as being limited to those entered into in connection with,
or pledged as security or a source of payment for, existing or
contemplated municipal securities. Municipal entities seeking advice
with respect to municipal derivative transactions (including commodity
hedging transactions in connection with their operations, which fall
within the definition of municipal derivatives) are subject to risks,
regardless of whether the municipal derivatives are entered into in
connection with or pledged as security or a source of payment for
existing or contemplated municipal securities, and should have the
protections provided by municipal advisor registration.\272\
---------------------------------------------------------------------------
\272\ See supra note 190 and accompanying text.
---------------------------------------------------------------------------
As proposed and adopted, with respect to obligated persons, the
coverage of the registration requirement is limited to advice relating
to derivatives entered into by an obligated person in its capacity as
an obligated person with respect to municipal securities. Thus, with
respect to obligated persons, municipal derivatives include those
derivatives entered into by obligated persons in connection with, or
pledged as security or a source of payment for, existing municipal
securities or municipal securities to be issued in the future.\273\ By
contrast, advice with respect to other types of derivative transactions
entered into by obligated persons outside of their capacity as
obligated persons will not trigger the municipal advisor registration
requirement. For example, a person advising a nonprofit hospital to
hedge an interest rate swap entered into in connection with a variable
rate conduit borrowing (by such hospital) would be a municipal advisor.
However, a person would not be required to register as a municipal
advisor if it is advising an airline company that is an obligated
person with respect to airport revenue bonds about whether the airline
company should hedge its exposure on aviation fuel costs with a
derivatives transaction that is unrelated to any particular issuance of
municipal securities and that is outside of its capacity as an
obligated person. The Commission believes that this clarification with
respect to obligated persons addresses the concerns of commenters
regarding scope of the advisors' responsibilities to conduit borrowers
and the ability to identify situations where advising obligated persons
triggers a registration requirement.
---------------------------------------------------------------------------
\273\ The Commission believes it is appropriate to refer to
``existing or contemplated'' municipal securities because an
obligated person could enter into a swap or security-based swap
before or after an issuance of municipal securities (e.g., a
forward-starting interest rate swap as part of a synthetic advanced
refunding). See also supra note 265 (discussing the comment in the
NABL Letter that the definition of municipal derivatives should be
narrowed in a way that would still cover, among other things, swaps
entered into to hedge the value of municipal securities to be issued
in the future).
---------------------------------------------------------------------------
The Commission notes that the Exchange Act and the Commodity
Exchange Act, as amended by the Dodd-Frank Act, provide heightened
protection to special entities, in connection with swaps and security-
based swaps. The Commission interprets the term special entity to
generally include municipal entities, because the definition of
municipal entity is substantially similar to the definition of special
entity in the Exchange Act and the Commodity Exchange Act.\274\ The
heightened protection afforded by the Acts to special entities applies
to all swaps and security-based swaps, irrespective of whether the
swaps and security-based swaps are entered into in connection with or
pledged as security or a source of payment for existing or contemplated
securities.\275\ Accordingly, the Commission's determination not to
qualify its interpretation of the term ``municipal derivatives'' with
respect to municipal entities is designed to provide a level of
protection to such entities with respect to swaps and security-based
swaps that is consistent with the protection afforded to special
entities and the Commission's interpretation of that term with respect
to obligated persons is intended to reflect the scope of the role of
obligated persons with respect to municipal securities.
---------------------------------------------------------------------------
\274\ The Commission notes that there are some differences
between the statutory definitions of municipal entity and special
entity. In particular, the statutory definitions of special entity
do not explicitly include authorities, instrumentalities or
corporate instrumentalities of a state. The definition of municipal
entity includes plans, programs, or pools of assets established by a
state, political subdivision, or municipal corporate instrumentality
(or any agency, authority, or instrumentality thereof), and
therefore includes 529 Savings Plans and LGIPs, while the statutory
definitions of special entity do not explicitly include such
entities. Also, the statutory definitions of special entity include
governmental plans as defined by ERISA. The Commission notes that
the CFTC, in adopting rules to implement business conduct standards
for swap dealers, included in the definition of ``special entity''
(for purposes of Commodity Exchange Act Section 4s): ``A State,
State agency, city, county, municipality, other political
subdivision of a State, or any instrumentality, department, or a
corporation of or established by a State or political subdivision of
a State.'' See Standards for Swap Dealers and Major Swap
Participants with Counterparties (January 11, 2012), 77 FR 9734
(February 17, 2012) (adopting rules proposed by the CFTC prescribing
external business conduct standards for swap dealers and major swap
participants) (``Business Conduct Standards for Swaps'').
The CFTC's final rules state that all State and municipal
special entities are municipal entities. See Business Conduct
Standards for Swaps, 77 FR 9739.
\275\ As discussed herein, with Title IX of the Dodd-Frank Act,
Congress provided certain protections for municipal entities and
obligated persons with respect to their interaction with certain
advisors, including persons providing advice with respect to, among
other things, municipal derivatives.
Moreover, with Section 764 of Title VII of the Dodd-Frank Act,
by adding new Section 15F to the Exchange Act, Congress provided
certain protections for special entities with respect to their
interaction with security-based swap dealers and major security-
based swap participants. See Pub. L. 111-203, 124 Stat. 1376, 1789-
1792, section 764(a) (adding Exchange Act Section 15F).
Among other things, Section 15F(h)(4) of the Exchange Act
establishes that a security-based swap dealer that ``acts as an
advisor to a special entity shall have a duty to act in the best
interests of the special entity'' and ``shall make reasonable
efforts to obtain such information as is necessary to make a
reasonable determination'' that any security-based swap recommended
by the security-based swap dealer is in the best interests of the
special entity . . . .'' Section 15F(h)(5) requires that security-
based swap entities that offer to, or enter into a security-based
swap with, a special entity comply with any duty established by the
Commission that requires a security-based swap entity to have a
``reasonable basis'' for believing that the special entity has an
``independent representative'' that meets certain criteria and
undertakes a duty to act in the ``best interests'' of the special
entity. See Pub. L. 111-203, 124 Stat. 1376, 1791 (to be codified at
15 U.S.C. 78o-10(h)(5)). This provision is intended to operate
together with the municipal advisor regulatory scheme, which would
apply to such an ``independent representative'' unless the
representative is an employee of the municipal entity. Similarly,
Section 731 of the Dodd-Frank Act amends the Commodity Exchange Act
by adding Section 4s, which contains language parallel to Section
15F of the Exchange Act that applies to swap dealers and major swap
participants. See Pub. L. 111-203, 124 Stat. 1376, 1789-1792,
section 731 (adding Commodity Exchange Act Section 4s).
The term ``special entity'' is defined to include a ``State,
State agency, city, county, municipality, or other political
subdivision of a State.'' This definition is consistent with, but
not identical to, the statutory definition of ``municipal entity''
in Section 15B(e)(8). (``[T]he term `municipal entity' means 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[.]'').
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[[Page 67489]]
vi. Guaranteed Investment Contracts
Section 15B(e)(2) of the Exchange Act, as amended by the Dodd-Frank
Act, defines ``guaranteed investment contract'' to include ``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.'' \276\ In the Proposal, the Commission
proposed to include the statutory definition of guaranteed investment
contract in Rule 15Ba1-1(a).\277\
---------------------------------------------------------------------------
\276\ 15 U.S.C. 78o-4(e)(2).
\277\ See proposed rule 15Ba1-1(a).
---------------------------------------------------------------------------
The Commission received one comment supporting the proposed
definition.\278\ Another commenter, however, suggested that the
definition does not include all guaranteed investment contracts entered
into by municipal entities.\279\ Instead, this commenter stated that
the statutory definition of guaranteed investment contracts refers only
to those contracts related to issues of bonds and similar municipal
securities.\280\ Another commenter stated that it is ``cognizant of
special issues arising in the investment of bond proceeds in guaranteed
investment contracts, particularly in the tax area, but [is] unclear
how the situation is improved . . . . by additional regulation of
[guaranteed investment contract] providers by the SEC.'' \281\
---------------------------------------------------------------------------
\278\ See MSRB Letter. This commenter did not suggest any
changes to the proposed definition.
\279\ See NABL Letter.
\280\ See id.
\281\ See State of Indiana Letter.
---------------------------------------------------------------------------
The Commission has carefully considered these comments and is
adopting a definition of guaranteed investment contract substantially
as proposed but with changes designed to respond to commenters.\282\
Specifically, the Commission is interpreting the statutory definition
of guaranteed investment contract so 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.'' \283\
---------------------------------------------------------------------------
\282\ See Rule 15Ba1-1(a).
\283\ See id.
---------------------------------------------------------------------------
For the same reasons that the Commission is narrowing the
application of the term investment strategies as discussed further
herein,\284\ the Commission is persuaded by commenters that, at this
time, it is appropriate to apply the definition of guaranteed
investment contract more narrowly. Guaranteed investment contracts are
investment products,\285\ and this more limited interpretation is
consistent with the approach the Commission is adopting with respect to
the application of ``investment strategies,'' which will be limited to
plans or programs for the investment of proceeds of municipal
securities and the recommendation of and brokerage of municipal escrow
investments.\286\ A municipal entity could invest any funds held by or
on behalf of such municipal entity, as opposed to just proceeds of
municipal securities, in a guaranteed investment contract. Under the
rule as adopted, a provider of a guaranteed investment contract is
generally not a municipal advisor as long as such provider does not
engage in municipal advisory activities, such as providing advice to
the municipal entity or obligated person about the purchase of a
guaranteed investment contract that relates to investments of proceeds
of municipal securities or municipal escrow investments.\287\ The
Commission, therefore, believes it is in the public interest and
consistent with the purposes of Section 15B to interpret the definition
of guaranteed investment contract as described herein.
---------------------------------------------------------------------------
\284\ See Section III.A.1.viii.
\285\ The Commission notes that, by comparison, swaps and
security-based swaps are not investment products, but instead are
often used to hedge the risk from other financial transactions.
Also, the Commission notes that the protections established by the
Dodd-Frank Act with respect to swap and security-based swap
transactions discussed above, are not applicable to guaranteed
investment contracts or other investment strategies. See supra note
275 and accompanying text.
\286\ See infra Section III.A.1.b.viii. (discussing the term
``investment strategies'' and the exemption in Rule 15Ba1-
1(d)(3)(vii)).
\287\ The Commission also notes that it has brought several
enforcement actions involving investment of proceeds in guaranteed
investment contracts. See, e.g., In the Matter of Banc of America
Securities, now known as Merrill Lynch, Pierce, Fenner & Smith
Incorporated, successor by merger, AP File No. 3-14153, Securities
Exchange Act Release No. 63451 (December 7, 2010) (Banc of America
Securities LLC agreed to settle Commission charges of securities
fraud for allegedly engaging in improper practices in connection
with the bidding of reinvestment instruments used by municipal
entities) (``Banc of America Settlement''); Securities and Exchange
Commission v. UBS Financial Services Inc., Civil Action No. 11-CV-
2885 (D.N.J. May 4, 2011) (UBS agreed to settle Commission charges
of securities fraud for allegedly fraudulently rigging over 100
municipal bond reinvestment transactions) (``UBS Settlement'');
Securities and Exchange Commission v. J.P. Morgan Securities LLC.,
Civil Action No. 11-CV-3877 (D.N.J. July 7, 2011) (J.P. Morgan
agreed to settle Commission charges of allegedly fraudulently
rigging at least 93 municipal bond reinvestment transactions) (``JP
Morgan Settlement''); Securities and Exchange Commission v. Wachovia
Bank N.A, now known as Wells Fargo bank, N.A., successor by merger.,
Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. December 8, 2011)
(Wachovia Bank N.A. agreed to settle Commission charges of allegedly
fraudulently rigging at least 58 municipal bond reinvestment
transactions) (``Wachovia Settlement''); and Securities and Exchange
Commission v. GE Funding Capital Market Services, Inc., Civil Action
No. 2:11-cv-07465-WJM-MF (D.N.J. December 23, 2011). The
reinvestment transactions in these cases involved the reinvestment
of municipal bond proceeds in reinvestment instruments, including
guaranteed investment contracts, forward purchase contracts, and
repurchase agreements.
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vii. Issuance of Municipal Securities
Section 15B(e)(4)(A) of the Exchange Act provides in relevant part
that a municipal advisor includes a person that provides advice to or
on behalf of a municipal entity or obligated person with respect to the
``issuance of municipal securities,'' including advice with respect to
``the structure, timing, terms, and other similar matters'' concerning
such issues. Section 3(a)(29) of the Exchange Act defines the term
``municipal securities.'' \288\ The broad statutory language in Section
15B(e)(4)(A) of the Exchange Act regarding advice on ``the structure,
timing, terms and other similar matters'' concerning such issues
suggests that advice on a broad range of activities potentially may be
included within advice with respect to the issuance of municipal
securities.
---------------------------------------------------------------------------
\288\ Specifically, Section 3(a)(29) of the Exchange Act defines
the term ``municipal securities'' to mean ``securities which are
direct obligations of, or obligations guaranteed as to principal or
interest by, a State or any political subdivision thereof, or any
agency or instrumentality of a State or any political subdivision
thereof, or any municipal corporate instrumentality of one or more
States, or any security which is an industrial development bond (as
defined in section 103(c)(2) of the Internal Revenue Code of 1954)
the interest on which is excludable from gross income under section
103(a)(1) of such Code if, by reason of the application of paragraph
(4) or (6) of section 103(c) of such Code (determined as if
paragraphs 4(A), (5), and (7) were not included in such section
103(c)), paragraph (1) of such section 103(c) does not apply to such
security.'' See 15 U.S.C. 78c(a)(29) (emphasis added). Section
3(a)(10) of the Exchange Act defines the term ``security.'' See 15
U.S.C. 78c(a)(10).
---------------------------------------------------------------------------
The scope of the concept of an ``issuance of municipal securities''
is particularly relevant to the ``advice'' aspect of the municipal
advisor definition, as discussed previously herein,\289\ because a
person's provision of advice to a municipal entity or obligated person
only results in municipal advisor status if the subject of that advice
involves either the ``issuance of municipal securities'' or ``municipal
financial products.'' \290\ Several commenters recommended that the
Commission provide guidance on the extent to which activities would be
[[Page 67490]]
considered ``advice with respect to the issuance of municipal
securities.'' \291\ One commenter suggested that the municipal advisor
registration provision in Section 975 of the Dodd-Frank Act is intended
to cover advice on certain listed activities within broad categories,
including certain ``strategic services,'' ``transaction-related
services, and ``post-issuance related services.'' \292\ One commenter
recommended that such advice should be construed broadly, from a timing
perspective, to include ``any advice provided in connection with a
municipal securities issue . . . at any point during the pre-issuance
planning process as well as throughout the life of the issuance through
final payment of principal and interest on the securities (by reason of
maturity, earlier redemption, or otherwise, or for such longer period
due to delayed payment such as the case of a payment default). . . .''
\293\ Another commenter recommended that such advice should not extend
to advice after the closing of a specific bond issue.\294\
---------------------------------------------------------------------------
\289\ See supra Section III.A.1.b.i. (discussing the advice
standard in general).
\290\ See supra Section III.A.1.b.iv. (discussing the term
``municipal financial products'').
\291\ See, e.g., MSRB Letter I and NAIPFA Letter I.
\292\ See MSRB Letter II. Other commenters discussed whether the
types of covered activities described by the MSRB should be narrower
or broader in the context of the underwriter exclusion. See NAIPFA
Letter II and Baum Letter.
\293\ See MSRB Letter I.
\294\ See NAIPFA Letter I.
---------------------------------------------------------------------------
The Commission generally agrees that activities covered by the
subject of the ``issuance of municipal securities'' should be construed
broadly as a matter of statutory construction and policy to ensure
appropriate protection of municipal entities with respect to advice
received relating in some way to the issuance of municipal securities
and to limit the potential for circumvention of the municipal advisor
registration provision. As discussed previously herein, however, the
determination of whether any particular activity constitutes ``advice''
in the first instance for purposes of the municipal advisor definition
depends on all the facts and circumstances.\295\ The Commission also
agrees that ``advice with respect to the issuance of municipal
securities'' should be construed broadly from a timing perspective to
include advice throughout the life of an issuance of municipal
securities, from the pre-issuance planning stage for a debt transaction
involving the issuance of municipal securities to the repayment stage
for those municipal securities. This interpretation would afford
municipal entities and investors with the protections of the municipal
advisor registration provision during a time frame that may involve
advice on significant matters affecting issues of municipal securities.
In this regard, municipal issuers may make significant decisions
affecting the structure, timing, terms, or other similar matters
concerning an issue of municipal securities early in the planning
stages of a transaction and may make significant decisions affecting
ongoing compliance, repayment, or refinancing throughout the term of an
outstanding bond issue.
---------------------------------------------------------------------------
\295\ See supra Section III.A.1.b.i. (discussing the advice
standard in general).
---------------------------------------------------------------------------
In addition, the scope of the concept of the issuance of municipal
securities also is particularly relevant to the statutory exclusion to
the municipal advisor definition for broker-dealers serving as
underwriters, because the underwriting function involves certain
activities that relate to the issuance of municipal securities. The
exclusion for underwriters from the definition of municipal advisor is
limited to activities that are within the scope of an underwriting of a
particular issuance of municipal securities. For purposes of the
underwriting exclusion to the municipal advisor definition, the
function of serving as underwriter on a particular issuance of
municipal securities is more circumscribed and encompasses services on
a particular transaction during a narrower time frame than the overall
focus of the municipal advisor definition with respect to advice on the
issuance of municipal securities (which involves a broader focus and
longer time frame), as discussed further herein.\296\
---------------------------------------------------------------------------
\296\ See generally infra Section III.A.1.c.iv. (discussing the
underwriter exclusion). The time frame for the underwriter role
generally begins upon the municipal issuer's engagement of the
underwriter for a particular issuance of municipal securities and
ends at the end of the underwriting period for that issuance. See
infra notes 589-591 and accompanying text.
---------------------------------------------------------------------------
viii. Investment Strategies
Exchange Act Section 15B(e)(3) 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.\297\ The Commission proposed
to interpret the term to mean that it includes, without limitation, the
investment of the proceeds of municipal securities and plans, programs,
or pools of assets that invest any other funds held by, or on behalf
of, a municipal entity.\298\ As such, under the proposed interpretation
of the statutory definition, any person that provides advice with
respect to such funds would have to register as a municipal advisor
unless the person was covered by an exclusion or exemption.\299\
---------------------------------------------------------------------------
\297\ 15 U.S.C. 78o-4(e)(3).
\298\ See Proposal, 76 FR 830.
\299\ See id.
---------------------------------------------------------------------------
Plans or Programs for the Investment of the Proceeds of Municipal
Securities
In the Proposal, the Commission asked whether its interpretation of
the term ``investment strategies'' should be modified or clarified in
any way.\300\ Specifically, the Commission asked whether it should
exclude plans, programs, or pools of assets that invest funds that are
not proceeds of the issuance of municipal securities.\301\ The
Commission also asked how it would determine when funds should no
longer be considered ``proceeds of municipal securities'' if it were to
limit investment strategies to ``plans or programs for the investment
of the proceeds of municipal securities (other than municipal
derivatives and guaranteed investment contracts) or the recommendation
of or brokerage of municipal escrow investments.'' \302\
---------------------------------------------------------------------------
\300\ See id., at 835.
\301\ See id.
\302\ See id.
---------------------------------------------------------------------------
Commenters generally opposed the proposed interpretation of
investment strategies. Many commenters stated that the proposed
interpretation was too broad, because it covers any fund held by a
municipal entity, regardless of its source.\303\ Some commenters
asserted that the proposed interpretation is contrary to the language
and intent of the Dodd-Frank Act \304\ and suggested
[[Page 67491]]
that the definition be restricted so that it applies only to the
statutorily-identified categories of investments of proceeds of
municipal securities and recommendation of and brokerage of municipal
escrow investments.\305\ One commenter stated that the ``expanded
definition'' of investment strategies is not required or even implied
by the Dodd-Frank Act and would subject a ``vast swath of activity--
which was not intended to be, and need not be, further regulated--to
additional regulation.'' \306\
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\303\ See, e.g., letter from Representative Kenny Marchant,
dated March 11, 2011 (``Marchant Letter''); SIFMA Letter I; NABL
Letter; American Bankers Association Letter I; letter from Mike
Nicholas, Chief Executive Officer, Bond Dealers of America, dated
February 22, 2011 (``Bond Dealers of America Letter''). See also
letters from Representative Todd Russell Platts, dated April 7, 2011
(``Platts Letter''); Representatives Peter Welch, Thomas Petri and
Bill Shuster, dated April 5, 2011 (``Welch Letter''); John Walsh,
Acting Comptroller of the Currency, Office of the Comptroller of the
Currency, dated May 24, 2011 (``OCC Letter''); Senator Tim Johnson,
dated June 9, 2011 (``Johnson Letter''); Brian H. Graff, Craig P.
Hoffman, Ilene H. Ferenczy, Judy A. Miller, Mark Dunbar, and James
Paul, American Society of Pension Professionals & Actuaries and the
National Tax Sheltered Accounts Association, dated April 15, 2011
(``American Society of Pension Professionals Letter''); Brian D.
McCoubrey, President and Chief Executive Office, The Savings Bank,
dated February 17, 2011 (``Savings Bank Letter''); Celeste Embrey,
Assistant General Counsel, Texas Bankers Association, dated February
21, 2011 (``Texas Bankers Association Letter''). See also infra
Section III.A.1.c.viii. (discussing an exclusion from the definition
of ``municipal advisor'' for banks).
\304\ See, e.g., Marchant Letter; SIFMA Letter I; NABL Letter;
Kutak Rock Letter; letter from Michael B. Koffler, Sutherland Asbill
& Brennan LLP on behalf of Massachusetts Life Insurance Company,
Nationwide Life Insurance Company and The Prudential Insurance
Company of America, dated February 22, 2011 (``Insurance Companies
Letter''). See also Platts Letter; Welch Letter; Johnson Letter;
American Society of Pension Professionals Letter. Other than
referring to statutory language, none of these letters offered other
evidence of such intent.
\305\ See, e.g., SIFMA Letter I; NABL Letter; ABA Letter; Bond
Dealers of America Letter; letter from Karrie McMillan, General
Counsel, Investment Company Institute, dated February 22, 2011
(``ICI Letter''). See also Marchant Letter and Platts Letter.
\306\ SIFMA Letter I. See also NABL Letter.
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On the other hand, one commenter agreed with the Commission that
the use of the word ``includes'' in the statutory definition of
investment strategies suggests that the term is not limited to plans or
programs for the investment of the proceeds of municipal
securities.\307\ This commenter stated its belief, however, that
Congress intended the definition to be limited to investment activities
that relate to the securities and securities-like vehicles of a
municipal entity, rather than all investment activities of municipal
entities.\308\
---------------------------------------------------------------------------
\307\ See MSRB Letter.
\308\ See id.
---------------------------------------------------------------------------
In a similar vein, commenters suggested that the definition should
encompass only plans or programs for investments in financial
instruments, as opposed to investments in, for example, infrastructure,
real estate, social welfare, and other non-financial investments.\309\
Another commenter stated that, with respect to the funds held by or on
behalf of a municipal entity, whether a person is providing advice
regarding the ``investment of'' those funds, not other expenditure or
use of the funds for non-investment purposes, is the determining factor
for deciding that a person is a municipal advisor.\310\
---------------------------------------------------------------------------
\309\ See NABL Letter. See also SIFMA Letter I (stating that
``the [Commission] should clarify that the term [investment
strategies], in any case, does not include local government
investment pools, purchases of real estate or expenditures for,
among others, infrastructure, equipment and personnel, which often
are described as `infrastructure investments' '').
\310\ See SIFMA Letter I.
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One commenter stated that a ``plan or program,'' as used in the
statutory definition of investment strategies, is a series of
investment related actions that would be generally akin to a financial
plan, not merely advice incidental to a particular trade or
investment.\311\ Another commenter urged the Commission to limit
investment strategies to advice articulated as a part of the investment
plan for the proceeds of a municipal securities offering at or before
the time the proceeds are received.\312\
---------------------------------------------------------------------------
\311\ See SIFMA Letter I. See also American Bankers Association
Letter I (stating that the term ``investment strategy'' by
definition ``contemplates a series of steps to reach a particular
investment goal'') and Financial Services Institute Letter.
\312\ See James S. Keller, Chief Regulatory Counsel, The PNC
Financial Services Group, Inc., dated February 22, 2011 (``PNC
Financial Services Letter'').
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Some commenters asserted that public pension plans, participant
directed investment programs or plans such as 529 Savings Plans and
403(b) and 457 plans were not intended to be regulated under the
Exchange Act or the Dodd-Frank Act and should not be covered under the
definition of investment strategies.\313\ According to these
commenters, the Dodd-Frank Act was intended to regulate those who
provide advice regarding the issuance of municipal bonds and the
investment of offering proceeds.\314\ Therefore, these commenters
argue, all governmental retirement plans should be excluded from the
definition of investment strategies. Alternatively, one commenter
suggested that, at the very least, governmental retirement and savings
plans that are funded exclusively through the contribution of the
employees as participants should be excluded.\315\ Another commenter
stated that the phrase ``plans or programs for the investment of
proceeds of municipal securities'' implies that the purpose of the plan
or program is to invest proceeds of municipal securities, whereas the
purpose of public pension plans is to provide retirement benefits.\316\
Another commenter suggested that municipal securities regulation was
originally intended to regulate the issuance of investment instruments
by a municipal entity under which the municipal entity is required to
pay the investor in accordance with the terms of the investment.\317\
The commenter stated that state employee pension plans, 529 Savings
Plans, and assets invested by the state are not investment instruments
issued by the state to investors.\318\ As such, the commenter stated
that they were never intended to be, nor should they now be, regulated
under the Exchange Act or the Dodd-Frank Act.\319\
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\313\ See, e.g., Utah Retirement Systems Letter; letter from
Jeffrey W. States, State Investment Officer, Nebraska Investment
Council, dated February 15, 2011 (``Nebraska Investment Council
Letter''); letter from Lisa Tate, Vice President, Litigation &
Associate General Counsel, dated February 22, 2011 (``ACLI
Letter''); letter from Gary A. Sanders, Vice President--Securities &
State Government Relations, National Association of Insurance and
Financial Advisors, dated June 13, 2011 (``National Association of
Insurance and Financial Advisors Letter''); letter from Ethan E.
Kra, Vice President, Pension Practice Council and William R.
Hallmark, Chair, Public Plans Subcommittee, American Academy of
Actuaries, dated June 15, 2011 (``American Academy of Actuaries
Letter'').
\314\ See American Society of Pension Professionals Letter;
American Academy of Actuaries Letter; Fraser Stryker Letter.
One commenter stated that governmental retirement plans should
not be considered investment strategies unless the employer funds
such plans with proceeds from the issuance of pension obligation
bonds. See Fraser Stryker Letter.
\315\ See American Society of Pension Professionals Letter.
\316\ See American Academy of Actuaries Letter.
\317\ See Nebraska Investment Council Letter.
\318\ See id.
\319\ See id. This commenter pointed out that the terms
``securities'' and ``municipal securities'' were not changed by the
Dodd-Frank Act. As such, this commenter stated that, ``[w]ith
respect to the grant of authority to the [Commission] over the
`issuance of municipal securities,' there has been no change under
the Dodd-Frank Act to justify the expansion of the [Commission's]
authority.'' Further, the commenter noted that the statutory
definition of investment strategies indicates that plans and
programs that are intended to be covered must relate to the proceeds
of municipal securities. The commenter argued that the definition of
municipal entity was not intended to expand the types of assets
regulated by the Commission and stated that ``[t]he underlying
notion that the [Commission] is still regulating `municipal
securities' should not be disregarded without a clear Congressional
mandate, which must necessarily include a change to the definition
of `municipal security.' '' Additionally, this commenter stated
that, since government plans are specifically exempt from ERISA,
``[t]he proposed rule seems to be an end-run around ERISA, now
subjecting the fiduciaries of these state plans to federal oversight
without a Congressional directive to do so.'' But see infra note 320
and accompanying text (discussing the MSRB Letter, which argues that
some 529 Savings Plans are municipal fund securities).
---------------------------------------------------------------------------
On the other hand, one commenter stated that the term ``investment
strategies'' should include any type of investment strategy or advice
relating to the investment of funds of investors or other vested
persons held in any plan, program, or pool of assets sponsored or
established by a state, political subdivision, or municipal corporate
instrumentality, or any agency, authority, or instrumentality thereof,
such as those created in connection with municipal fund securities,
including but not limited to 529 Savings Plans and state and local
government investment pools.\320\ This commenter further stated that
public defined contribution pension plans should also fall within the
definition, because these plans share many of the same potential
impacts on third-party beneficiaries and
[[Page 67492]]
are generally exempt from the protections afforded by ERISA to private
pension funds.\321\
---------------------------------------------------------------------------
\320\ See MSRB Letter.
\321\ See id.
---------------------------------------------------------------------------
The same commenter stated that funds should cease to be subject to
the definition of investment strategies once their investment is no
longer governed by legal documents or covenants governing the use of
such funds.\322\ Similarly, another commenter stated that proceeds
should mean proceeds raised in securities offerings, until they are
used for the purposes described in the use of proceeds section in the
offering document, or otherwise commingled with the general funds of
the municipal entity.\323\ Additionally, one commenter suggested that
``proceeds'' should not extend to ``replacement proceeds'' such as
pledge funds.\324\
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\322\ See id. This commenter stated that professionals advising
on, or executing investments of, public funds that are not subject
to specific restrictions or covenants, other than municipal
derivatives or guaranteed investment contracts, would instead be
subject to existing applicable investment adviser, broker-dealer, or
bank regulations governing such transactions.
\323\ See ABA Letter.
\324\ See NABL Letter.
---------------------------------------------------------------------------
The Commission has carefully considered the issues raised by
commenters on the Proposal. As noted above, Exchange Act Section
15B(e)(3) defines investment strategies to include 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.\325\
In response to comments on the proposed definition of ``investment
strategies,'' the Commission is adopting Rule 15Ba1-1(b), which defines
``investment strategies'' as having ``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.''
\326\
---------------------------------------------------------------------------
\325\ The application of the term ``municipal financial
products'' to ``municipal derivatives'' and ``guaranteed investment
contracts'' is discussed above. See supra Sections II.A.1.b.v. and
vi., respectively. The term ``municipal escrow investments'' is
described in more detail below in this Section III.A.1.b.viii.
\326\ While the definition of ``investment strategies'' in Rule
15Ba1-1(b), as adopted, is consistent with the definition of
``investment strategies'' in Section 15B(e)(3) of the Act, this
definition, as adopted, clarifies the Commission's interpretation
that investment strategies specifically excludes municipal
derivatives and guaranteed investment contracts, as these products
are expressly included in the definition of municipal financial
product, as defined by Section 15B(e)(5) of the Act and Rule 15Ba1-
1(i), as adopted. This interpretation is consistent with the
Commission's interpretation in the Proposal. See Proposal, 76 FR
830-831.
---------------------------------------------------------------------------
While the Commission continues to believe that the term
``includes'' is not limiting,\327\ the Commission is adopting a
definition of ``investment strategies'' that, as compared to the
definition in the Proposal, focuses more narrowly on the statutorily-
identified categories of ``proceeds of municipal securities'' and
``municipal escrow investments.'' In this regard, the Commission is
adopting Rule 15Ba1-1(d)(3)(vii), which will effectively narrow the
focus of the term ``investment strategies'' to investments of proceeds
of municipal securities and the recommendation of and brokerage of
municipal escrow investments. Specifically, Rule 15Ba1-1(d)(3)(vii), as
adopted, exempts from the definition of municipal advisor any person
that provides advice to a municipal entity or obligated person with
respect to municipal financial products to the extent that such person
provides advice with respect to investment strategies that are not
plans or programs for the investment of the proceeds of municipal
securities or the recommendation of and brokerage of municipal escrow
investments.
---------------------------------------------------------------------------
\327\ Section 15B(e)(3) of the Exchange Act uses the word
``including'' as expanding or illustrative, not as exclusive or
limiting.
---------------------------------------------------------------------------
Pursuant to Section 15B(a)(4) of the Exchange Act, the Commission
may exempt any class of municipal advisors from any provision of
Section 15B or the rules and regulations thereunder, if it finds that
such an exemption is consistent with the public interest, the
protection of investors, and the purposes of Section 15B.\328\ The
Commission believes that providing the exemption described above is
consistent with the public interest, the protection of investors, and
the purposes of Section 15B of the Exchange Act. The exemption tailors
protection of municipal entities to those activities related to the
investment of the proceeds of municipal securities and related
municipal escrow investments, which are the specific categories of
activities that Congress identified in the statutory definition of the
term ``investment strategies'' and that the Commission believes have
the most direct nexus to municipal securities and the protection of
investors and municipal issuers in furtherance of the purposes of
Section 15B.
---------------------------------------------------------------------------
\328\ See 15 U.S.C. 78o-4(a)(4).
---------------------------------------------------------------------------
In the Proposal, the Commission asked how it should determine when
funds should no longer be considered proceeds of municipal securities,
if it were to limit investment strategies to proceeds of municipal
securities or the recommendation of or brokerage of municipal escrow
investments.\329\ While the Exchange Act does not define the term
``proceeds of municipal securities,'' the Federal tax laws provide a
longstanding, known definition of ``proceeds'' of tax-exempt bonds
issued by State and local governments, including related definitions of
various types of proceeds (including ``gross proceeds,'' ``sale
proceeds,'' ``investment proceeds,'' and ``transferred proceeds'')
under Section 148 of the Internal Revenue Code of 1986, as
amended,\330\ and Section 1.148-1 through 1.148-11 of the Regulations
\331\ for the purpose of the arbitrage \332\ investment restrictions
applicable to investments of proceeds of tax-exempt municipal
securities. The arbitrage rules apply as long as the tax-exempt
municipal securities are outstanding, and non-compliance with the
arbitrage rules can result in the loss of the tax-exempt status of the
interest on the municipal securities retroactively to the date of
issuance. The Commission believes that the well-developed concept of
proceeds of tax-exempt
[[Page 67493]]
municipal securities under the arbitrage rules is well-known to issuers
and to the professional participants in the municipal marketplace.
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\329\ See Proposal, 76 FR 835.
\330\ 26 U.S.C. 148.
\331\ 26 CFR 148.1-148.11.
\332\ Arbitrage, in the municipal securities context, is the
profit earned by the municipal entity from borrowing funds in the
tax-exempt market and investing them in the taxable market. The
arbitrage rules have two main branches. The yield restriction branch
of the rules generally limit the yield permitted on investments of
proceeds of tax-exempt municipal securities to a yield that is not
materially higher than the yield on the municipal securities;
provided, however, specific exceptions permit unrestricted
investment during certain temporary periods. The second branch of
the arbitrage rules, the rebate branch, requires that any arbitrage
that the municipal entity earns, including during a temporary
period, must be rebated to the federal government, unless one of the
several specific exceptions to the rebate requirement applies to the
issue of municipal securities. Any issue of tax-exempt municipal
securities can be subject to yield restriction, rebate, or both. The
arbitrage rules and the various exceptions are important factors in
the structuring of any tax-exempt issue of municipal securities.
Under the arbitrage rules, gross proceeds include amounts covered by
the following interrelated definitions. Sale proceeds are the gross
cash amount paid by the purchasers for the securities at the initial
sale of the issue. Investment proceeds are the amounts received from
investing the proceeds of the issue. If proceeds of a refunding
issue are used to pay off a prior issue, any remaining proceeds of
the prior issue become, for tax purposes, transferred proceeds of
the refunding issue. Proceeds, then, are sales proceeds plus
investment proceeds plus transferred proceeds. Replacement proceeds
are amounts that may be used to pay debt service. Gross proceeds are
defined as proceeds plus replacement proceeds. See Frederic L.
Ballard, Jr., ABCs of Arbitrage: Tax Rules for Investment of Bond
Proceeds by Municipalities (Section of State and Local Government
Law, American Bar Association, 2007) (``Ballard, ABCs of
Arbitrage'').
---------------------------------------------------------------------------
Some commenters that discussed ``proceeds of municipal securities''
did so by reference to Federal tax regulations and terms defined
therein.\333\ Because the arbitrage rules governing the investment of
bond proceeds are central to an issue of tax-exempt municipal
securities and well-known in the municipal market, the Commission has
determined to define proceeds of municipal securities in a similar
manner and to apply the term to tax-exempt municipal securities and
also to taxable \334\ municipal securities. Therefore, for purposes of
the application of the definition of investment strategies and in
response to comments raised on this issue,\335\ the Commission is
adopting Rule 15Ba1-1(m)(1), which defines ``proceeds of municipal
securities'' as (i) monies derived by a municipal entity from the sale
of municipal securities, (ii) investment income derived from the
investment or reinvestment of such monies, (iii) any monies of a
municipal entity or obligated person held in funds under legal
documents for the municipal securities that are reasonably expected to
be used as security or a source of payment for the payment of the debt
service on the municipal securities, including reserves, sinking funds,
and pledged funds created for such purpose,\336\ and (iv) the
investment income derived from the investment or reinvestment of monies
in such funds.\337\ Further, consistent with the general definition of
proceeds under the arbitrage rules, Rule 15Ba1-1(m)(1) also provides
that when such monies are spent to carry out the authorized purposes of
municipal securities, they cease to be proceeds of municipal
securities.
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\333\ See, e.g., NABL Letter. In addition, as discussed below,
some commenters suggested that a municipal entity should have the
responsibility for tracking and characterizing proceeds because it
is already required to do so under certain tax laws, implying that
the definition of proceeds of municipal securities should be
consistent with such definition under tax laws. See infra notes 361-
362 and accompanying text.
\334\ Municipal issuers sometimes issue small amounts of taxable
bonds in combination with tax-exempt bonds in the same offerings to
finance costs that are ineligible for tax-exempt bond financing. The
most significant recent type of taxable municipal securities was the
temporary stimulus ``Build America Bond'' program, with respect to
which approximately $181 billion were issued in 2009-2010 and the
arbitrage rules on bond proceeds notably applied directly to those
taxable municipal securities due to a Federal subsidy. The taxable
bond sector of the municipal securities market represents a
relatively small portion of the overall municipal securities market.
For example, less than 9% of new issues in the municipal securities
market in 2012 were taxable bonds, according to Thomson-Reuters
data.
\335\ See supra note 333 and accompanying text.
\336\ Such applicable legal documents include, for example, the
indentures, ordinances, or resolutions of the issuer of the
municipal securities, and the resolutions, leases, loan agreements,
or other agreements of an obligated person.
\337\ See Rule 15Ba1-1(m)(1). See also supra notes 330-331 and
accompanying text (discussing Federal tax laws and regulations
related to the definition of proceeds).
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Rule 15Ba1-1(m), however, establishes an exception from the
definition of proceeds of municipal securities. The exception provides
that, solely for purposes of Rule 15Ba1-1(m), monies derived from a
municipal security issued by an education trust established by a State
under Section 529(b) of the Internal Revenue Code are not proceeds of
municipal securities.\338\ Although interests in 529 Savings Plans may
be municipal fund securities, and therefore municipal securities,
monies derived from a municipal security issued by an education trust
established under Section 529(b) come from individuals making
investments for the purpose of prepaying or accumulating savings for
higher education costs, and do not come from municipal entities.
Because these monies are derived from individuals primarily for the
benefit of these individuals and not municipal entities, the Commission
does not believe persons engaged in activities with respect to these
monies are appropriately governed by this registration regime.\339\
---------------------------------------------------------------------------
\338\ See Rule 15Ba1-1(m)(2). See also supra notes 313-319
(discussing comments regarding the inclusion of certain plans under
``investment strategies'').
\339\ Because monies in accounts of 529 Savings Plans are not
included in the definition of proceeds of municipal securities for
purposes of Rule 15Ba1-1(m), persons providing advice with respect
to the investment of monies in 529 Savings Plans will not be
required to register as municipal advisors based on this prong of
the municipal advisor definition to the extent their municipal
advisory activities are limited to such advice. See note 338 and
accompanying text. However, a person that advises a municipal entity
with respect to how to structure a 529 Savings Plan may be required
to register as a municipal advisor. Interests in 529 Savings Plans
are municipal securities, and such a person would be engaging in
municipal advisory activities to the extent he or she provides
advice with respect to the structure, timing, terms, or other
similar matters concerning such an issuance unless an exclusion or
exemption applies.
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Rule 15Ba1-1(m) also states that in determining whether or not
funds to be invested constitute proceeds of municipal securities for
purposes of Rule 15Ba1-1(m), a person may rely on representations in
writing made by a knowledgeable official of the municipal entity or
obligated person whose funds are to be invested regarding the nature of
such funds, provided that the person has a reasonable basis for such
reliance.\340\ This exemption is discussed in more detail below.
---------------------------------------------------------------------------
\340\ See Rule 15Ba1-1(m)(3).
---------------------------------------------------------------------------
The Commission notes that the exemption from the definition of
``municipal advisor'' in Rule 15Ba1-1(d)(3)(vii) does not permit a
person to avoid registering as a municipal advisor by stating that its
advice is isolated or incidental and thus not within the meaning of
``plan or program'' in the definition of investment strategies. The
Commission is not persuaded by commenters who have stated that ``plan
or program'' means a series of investment decisions \341\ and does not
agree that this would be an appropriate interpretation of the statute.
Any advice or recommendation with respect to the investment of proceeds
not otherwise subject to an exclusion or exemption \342\ would be a
municipal advisory activity, even if such advice or recommendation is
not part of a series of investment-related actions or articulated as
part of the investment plan for the proceeds at or before the time the
proceeds are received.\343\ For example, advice or a recommendation
with respect to a single trade or investment not otherwise subject to
an exemption would be a municipal advisory activity, and the person
providing such advice would not be exempt from the definition of
municipal advisor pursuant to Rule 15Ba1-1(d)(3)(vii).
---------------------------------------------------------------------------
\341\ See supra notes 311-312 and accompanying text.
\342\ See, e.g., infra Section III.A.1.c.iv. (discussing an
exemption for broker-dealers serving as underwriters).
\343\ See supra notes 311-312 and accompanying text.
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Commingling of Proceeds of Municipal Securities With Other Funds and
Proceeds Determinations Generally
In the Proposal, the Commission provided that commingled proceeds,
regardless of when they lose their character as proceeds, would still
constitute ``funds held by or on behalf of a municipal entity,'' but
asked whether that interpretation was too broad.\344\ Additionally, the
Commission asked what obligations parties other than a municipal entity
should have in determining whether funds held by or on behalf of the
municipal entity are proceeds of municipal securities.\345\
---------------------------------------------------------------------------
\344\ See Proposal, 76 FR 836.
\345\ See id., at 835.
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The Commission received a number of comments in response to these
questions. One commenter stated ``[t]he Commission's proposed
definition effectively reads out the statutory requirement to trace
assets to the
[[Page 67494]]
proceeds of municipal securities[,]'' and ``[t]hus, an adviser
providing advice to a municipal entity with respect to any plan,
program or pool of assets--even if the plan, program or pool of assets
did not consist of the proceeds of municipal securities (such as, for
example, 529 Savings Plans and public pension plans)--would be required
to register with the Commission if no exclusion is available.'' \346\
Some commenters stated that once the proceeds of a municipal offering
are commingled with other funds, they lose their character as
proceeds.\347\ Commenters also stated that subsequent investments of
proceeds are not proceeds of municipal securities, unless the
subsequent investment is part of the plan or program that was developed
at the time of, and in connection with, the initial investment.\348\
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\346\ See ICI Letter. See also American Bankers Association
Letter I and American Society of Pension Professionals Letter
(stating that the Proposal indicated that the expansive definition
of ``investment strategies'' avoids the need to trace the investment
of proceeds of municipal securities commingled with other public
funds and that this ``regulatory shortcut'' exceeds the authority
granted under the Dodd-Frank Act).
\347\ See, e.g., SIFMA Letter I; NABL Letter; letter from
Catherine McClellan, Legal & Regulatory Affairs, SunTrust Banks,
Inc., dated February 22, 2011 (``SunTrust Letter''); and Financial
Services Roundtable Letter.
\348\ See SIFMA Letter I. See also American Bankers Association
Letter I.
---------------------------------------------------------------------------
One commenter stated that a person should not be considered to be
providing advice with respect to an investment strategy if he
reasonably believes that the relevant funds are not from an account
specifically for the proceeds of municipal securities issuances, unless
the municipal entity or obligated person communicated otherwise.\349\
This commenter also stated that, depending on the Commission's
interpretation of investment strategies, the adviser should only be
considered a municipal advisor if the funds invested are proceeds of
municipal securities, the adviser is aware of this fact, and there is
no evidence of a sham.\350\ Another commenter further suggested that a
municipal entity should have the responsibility for tracking and
characterizing municipal proceeds.\351\ This commenter suggested that
advisors should be entitled to reasonably rely on the municipal
entity's representation since it is already required to track proceeds
under certain state and Federal tax laws.\352\
---------------------------------------------------------------------------
\349\ See SIFMA Letter I. See also BNY Letter (stating that
``the Commission should clarify that a person would not be
considered to provide advice that triggers municipal advisor status
if the person reasonably believes that the funds for the financial
activity on which the person is advising are from an account of the
municipal entity or obligated person other than an account
specifically for the proceeds of municipal securities or escrow
funds that contains [sic] funds from multiple sources other than the
initial proceeds of a municipal security'').
\350\ See SIFMA Letter I.
\351\ See Kutak Rock Letter. See also Financial Services
Roundtable Letter.
\352\ See Kutak Rock Letter (stating that commingled proceeds
are required by federal tax laws (applicable to tax-exempt bonds)
and state laws to be traced for use and investment purposes).
Another commenter suggested that municipal entities, and not their
municipal advisors, should have the responsibility for identifying
any assets in accounts maintained at banks or broker-dealers that
should be deemed proceeds. See Financial Services Roundtable Letter.
---------------------------------------------------------------------------
One commenter stated that, in the context of obligated persons,
only the investment of the proceeds of municipal securities, and not
all monies of the obligated person, could be considered proceeds of
municipal securities, even if the proceeds may be commingled with other
monies for investment purposes.\353\ Further, another commenter urged
the Commission to exclude investments of bond proceeds for the accounts
of obligated persons when the investment is not pledged as security for
a municipal securities issue.\354\ On the other hand, a different
commenter stated that in no event should the definition of investment
strategies apply to engagements with obligated persons, because
obligated persons' funds are not held in plans, programs, or pools of
assets that invest funds held by or on behalf of a municipal
entity.\355\
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\353\ See Kutak Rock Letter.
\354\ See NABL Letter. This commenter argued that, ``[s]ince
only a small portion of an obligated person's investible assets may
represent unspent proceeds of a municipal securities issue, and
since it would not be apparent to investment advisors whether
private entities are obligated persons unless the Commission limits
municipal financial products to those pledged as security for a
municipal securities issue, any more expansive reading of the term
would impose an impossible diligence burden on corporate investment
advisors.'' Id.
\355\ See SIFMA Letter I.
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As discussed above, in response to comments, the Commission is
adopting a definition of ``proceeds of municipal securities'' for
purposes of the term ``investment strategies,'' which is consistent
with Federal tax laws and regulations related to the definition of
proceeds. This definition provides that when monies are spent to carry
out the authorized purposes of the municipal securities, they cease to
be proceeds of municipal securities.\356\ Under this definition and
except as otherwise noted below, the mere fact that proceeds are
commingled with other funds generally does not cause such monies to
lose their character as proceeds. However, once the proceeds are spent
to carry out an authorized purpose of the issuance of municipal
securities, and the applicable legal documents or any other agreement
pertaining to the investment of proceeds of municipal securities are no
longer in effect, such funds will no longer constitute proceeds of
municipal securities.
---------------------------------------------------------------------------
\356\ See Rule 15Ba1-1(m)(1).
---------------------------------------------------------------------------
The Commission does not agree with those commenters who argued that
once the proceeds of a municipal offering are commingled with other
funds, they lose their character as proceeds.\357\ The adopted
definition of ``proceeds of municipal securities'' and the treatment of
commingled proceeds are familiar concepts to market participants
because they are consistent with Federal tax laws and regulations
related to the definition of proceeds. The Commission believes this
treatment of commingled proceeds will help to ensure that municipal
advisors are registered and regulated as such until commingled proceeds
are spent to carry out the authorized purposes of the municipal
securities. Further, as discussed above, to assist a person in
determining whether or not funds to be invested constitute proceeds of
municipal securities, such person may rely on representations in
writing made by a knowledgeable official of the municipal entity or
obligated person whose funds are to be invested regarding the nature of
such funds, provided that the person seeking to rely on such
representations has a reasonable basis for such reliance.\358\ As noted
below, municipal entities and obligated persons generally already track
investments and ultimate expenditures of proceeds of tax-exempt
municipal securities for authorized purposes in order to comply with
certain state and tax Federal laws and governing legal documents
pertaining to the investment of proceeds of municipal securities.\359\
---------------------------------------------------------------------------
\357\ See supra note 347 and accompanying text.
\358\ See Rule 15Ba1-1(m)(3).
\359\ See infra note 361 and accompanying text.
---------------------------------------------------------------------------
With respect to the tracing of proceeds after commingling, Federal
tax arbitrage rules provide that if amounts of proceeds constituting
investment earnings (excluding those of municipal escrow investments)
on certain tax-exempt municipal securities (particularly governmental
bonds and certain governmentally-owned private activity bonds) are
deposited in a commingled fund with substantial tax or other revenues
from governmental operations of the municipal issuer and the amounts
are reasonably expected to
[[Page 67495]]
be spent for governmental purposes within six months from the date of
the commingling, those proceeds are treated as spent at the time of
commingling.\360\ This Federal tax arbitrage rule mainly benefits
general purpose municipal entities (e.g., States, cities, and counties)
with respect to very short-term investment practices involving their
general fund accounts. The Commission likewise considers proceeds as
spent at the time of such commingling in the context of municipal
advisors because, as noted above, arbitrage rules governing the
investment of bond proceeds are central to an issue of tax exempt
municipal securities and are well-known in the municipal market.
Because the approach the Commission is taking today is consistent with
Federal tax arbitrage rules, it should be consistent with the current
practice of municipal entities and obligated persons related to tracing
proceeds of municipal securities. Further, because such proceeds are
reasonably expected to be spent for governmental purposes within six
months from the date of commingling, the Commission believes these
proceeds involve shorter term investments and therefore are subject to
lower risk. As a result, they raise less concern.
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\360\ See Treas. Reg. Sec. 1.148-6(d)(6).
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The Commission believes that any person that does not satisfy the
conditions for an exclusion or exemption from the definition of
municipal advisor should know whether the person it is advising is a
municipal entity or obligated person and whether the relevant funds
constitute proceeds of municipal securities. As commenters stated,
municipal entities and obligated persons generally already track
investments and ultimate expenditures of proceeds of tax-exempt
municipal securities for authorized purposes in order to comply with
certain state and Federal tax laws and governing legal documents
pertaining to the investment of proceeds of municipal securities.\361\
Thus, with respect to the tracing of proceeds of municipal securities
to investments and expenditures for authorized purposes, the Commission
does not believe that the municipal advisor registration regime will
impose any significant additional burden on municipal entities,
obligated persons, or municipal advisors.\362\
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\361\ See Kutak Rock Letter. See also Financial Services
Roundtable Letter.
\362\ See, e.g., Kutak Rock Letter (noting that ``[a]dvisors
should be entitled to reasonably rely on a municipal entity's
tracking and characterization of the proceeds of municipal
securities, as they are already entitled to do so under state and
federal tax laws'').
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Reasonable Reliance on Representations for Proceeds Determinations
As set forth in Rule 15Ba1-1(m)(3), in determining whether or not
relevant funds constitute proceeds of municipal securities for purposes
of Rule 15Ba1-1(m), a person may rely on representations in writing
made by a knowledgeable official of the municipal entity or obligated
person whose funds are to be invested regarding the nature of such
funds, provided the person has a reasonable basis for such
reliance.\363\ Under Rule 15Ba1-1(m)(3), a person need not obtain a
separate written representation each time an investment is made, and
can instead rely on a prior written representation if the person has a
reasonable basis for reliance. The Commission believes that a
determination of whether or not a person has a reasonable basis to rely
on a written representation requires reasonable diligence, based on all
the facts and circumstances, including review of the written
representation and other relevant information reasonably available to
the person. For example, a person should not ignore information \364\
in the person's possession as a result of which such person would know
that the representation is inaccurate. In such a circumstance, the
person seeking to rely on the representation should make further
inquiry to verify the accuracy of the representation in order to show a
reasonable basis for the reliance. However, a person relying on a
written representation generally need not independently verify all the
information underlying the representation. Depending on the particular
facts and circumstances, however, a person seeking to rely on such
representations should take into account other information, including,
but not limited to, information that is reasonably available to such
person either as a result of the person's relationship with the
municipal entity or obligated person or that is provided by other
parties to the relevant transaction.\365\
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\363\ See Rule 15Ba1-1(m)(3).
\364\ For example, such person may have acquired other
information as a result of its interaction with the municipal entity
or obligated person, either in connection with the transaction with
respect to which it received the written representation or
otherwise.
\365\ The Commission notes that it has in other contexts
expressed similar views on whether a person's reliance on
information is reasonable. For example, under Regulation R, a bank
or a broker-dealer satisfies its customer eligibility requirements
if the bank or broker-dealer ``has a reasonable basis to believe
that the customer'' is an institutional customer or high net worth
customer before the time specified in the rule. See 17 CFR 247.701.
When adopting Regulation R, the Commission stated that a bank or
broker-dealer would have a ``reasonable basis to believe'' if it
obtains a signed acknowledgment that the customer met the applicable
standards, unless it had information that would cause it to believe
that the information provided by the customer was or was likely to
be false. See Definitions of Terms and Exemptions Relating to the
``Broker'' Exceptions for Banks, Securities Exchange Act Release No.
56501 (September 28, 2007), 72 FR 56514 (October 3, 2007).
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Municipal Escrow Investments
Section 15B(e)(3) of the Exchange Act provides that the term
investment strategies includes, in part, ``the recommendation of and
brokerage of municipal escrow investments.'' \366\ However, Section
15B(e) of the Exchange Act does not define the term ``municipal escrow
investments.''
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\366\ 15 U.S.C. 78o-4(e)(3).
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Several commenters discussed the term ``municipal escrow
investments'' as used in the context of investment strategies and some
asked for further Commission guidance on the meaning of this term.\367\
For example, one commenter stated that Congress intended the term to be
limited to accounts holding the proceeds of municipal securities
pending deployment.\368\ Another commenter stated that municipal escrow
investments means investments deposited in an escrow account to
``defease'' \369\ municipal securities.\370\ Another commenter stated
that municipal escrow investments are
[[Page 67496]]
investments of funds in a segregated escrow account established by the
municipal entity or obligated person to hold funds that have been
allocated for satisfying a specific and identified obligation of the
municipal entity or obligated person and maintained by an escrow agent
for the municipal entity or obligated person.\371\ One commenter stated
that the Commission should recognize that the term ``municipal escrow
investments'' has a different and narrower meaning than ``proceeds of
municipal securities'' and is limited to investments held in an escrow
account.\372\ This commenter also suggested that the Commission should
clarify that merely providing brokerage of municipal escrow investments
does not make a person a municipal advisor.\373\
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\367\ See, e.g., ABA Letter and SIFMA Letter I.
\368\ See letter from Charles W. Cary, Jr., Chief Investment
Officer, Division of Investment Services, Employees' Retirement
System of Georgia and Teachers Retirement System of Georgia, dated
February 21, 2011 (``Teachers Retirement System Letter'').
\369\ The MSRB provides the following definition for
``defeasance'' or ``defeased''--``Termination of certain of the
rights and interests of the bondholders and of their lien on the
pledged revenues or other security in accordance with the terms of
the bond contract for an issue of securities. This is sometimes
referred to as a `legal defeasance.' Defeasance usually occurs in
connection with the refunding of an outstanding issue after
provision has been made for future payment of all obligations
related to the outstanding bonds, sometimes from funds provided by
the issuance of a new series of bonds. In some cases, particularly
where the bond contract does not provide a procedure for termination
of these rights, interests and lien other than through payment of
all outstanding debt in full, funds deposited for future payment of
the debt may make the pledged revenues available for other purposes
without effecting a legal defeasance. This is sometimes referred to
as an `economic defeasance' or `financial defeasance.' If for some
reason the funds deposited in an economic or financial defeasance
prove insufficient to make future payment of the outstanding debt,
the issuer would continue to be legally obligated to make payment on
such debt from the pledged revenues.'' See definition of
``Defeasance'' or ``Defeased'' in Glossary of Municipal Securities
Terms, MSRB (3d ed. 2013), available at http://msrb.org/glossary.aspx (``MSRB Glossary'').
\370\ See Kutak Rock Letter.
\371\ See SIFMA Letter I.
\372\ See ABA Letter.
\373\ See id. Rather, the commenter asserted that providing
advice with respect to the recommendation of, and brokerage of,
municipal escrow investments makes a person a municipal advisor.
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The Commission has carefully considered the issues raised by
commenters on the Proposal and has determined to provide a definition
for ``municipal escrow investments.'' \374\ For purposes of the
definition of investment strategies, the Commission is defining
``municipal escrow investments'' as proceeds of municipal securities
and any other funds of a municipal entity that are deposited in an
escrow account to pay the principal of, premium, if any, and interest
on one or more issues of municipal securities.\375\ Because it is a
separate component of the statutory definition of investment
strategies, the Commission agrees with the comments that ``municipal
escrow investments'' does not necessarily have the same meaning as
``proceeds.'' \376\ At the same time, however, municipal escrow
investments generally are funded with proceeds raised from the issuance
of municipal securities in refunding or refinancing transactions to be
used to provide for repayment of prior outstanding issues of municipal
securities and these escrows also may include certain other funds, such
as an issuer's cash contribution derived from revenues.\377\ In
addition, municipal escrow investments may be funded in part from
equity-type funds which may be viewed as equity or as a broad category
of proceeds as a result of their escrow pledge to secure the
outstanding municipal securities to be refinanced and their attendant
close nexus to those municipal securities.\378\ The definition of
municipal escrow investments provided herein, consistent with Rule
15Ba1-1(d)(3)(vii), protects funds that are used for payment of the
municipal securities issue, whether or not they are derived from the
sale of municipal securities.
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\374\ See Rule 15Ba1-1(h).
\375\ See Rule 15Ba1-1(h)(1).
\376\ See Rule 15Ba1-1(m) (defining proceeds of municipal
securities).
\377\ See, e.g., Ballard, ABCs of Arbitrage at 169 (``A
refunding escrow is any fund that contains proceeds of a refunding
issue for use in paying principal or interest on a prior issue.
Normally, an issuer will contribute either revenues or unspent prior
issue proceeds to a refunding escrow in addition to proceeds of the
refunding issue.). See also Treas. Reg. Sec. 1.148-1(b), which
defines a ``refunding escrow'' generally to mean ``one or more funds
established as part of a single transaction or a series of related
transactions, containing proceeds of a refunding issue and any other
amounts to provide for payment of principal or interest on one or
more prior issues.'')
\378\ See Treas. Reg. Sec. 1.148-1(b) (definitions of
``proceeds'' and ``replacement proceeds,'' respectively).
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The Commission believes that this definition of municipal escrow
investments is appropriate in order to protect both investors in
municipal securities and municipal entities for reasons discussed
further below. These municipal escrow investments typically involve
investments of significant amounts of proceeds of municipal securities
for long periods of time linked to call restrictions or maturities of
refunded debt. These features make municipal escrow investments
particularly vulnerable to abuse, and in fact significant investment
pricing abuses have occurred in the area of municipal escrow
investments in the past and the potential for future pricing abuses
continues to exist in this area.\379\ In one particularly notable
historic example, pricing abuses involving municipal escrow investments
were the subject of a major joint enforcement initiative involving the
Commission, the Internal Revenue Service, and the U.S. Attorney for the
Southern District of New York that affected a large number of major
broker-dealers with respect to artificially high prices on U.S.
Treasury securities charged by such dealers in sales of such securities
to municipal entities to fund municipal escrow investments.\380\
---------------------------------------------------------------------------
\379\ See generally Robert A. Fippinger, The Securities Law of
Public Finance (3rd Ed. 2012) at Sec. 14:12 entitled ``Markup
Fraud: Yield Burning.''
\380\ See SEC Press Release No. 2000-45 (April 6, 2000), in
which the SEC announced a global settlement with 17 broker-dealers
with respect to pricing abuses in municipal escrow investments. The
artificial pricing practices are known as ``yield-burning'' and this
settlement is known as the ``global yield-burning settlement.''
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The Commission notes that a person merely providing brokerage of
municipal escrow investments would not be a municipal advisor if such
person does not provide advice with respect to such investments.\381\
The purchase and sale of escrow investments upon the direction of an
obligated person or its financial advisor without rendering advice is
merely a provision of brokerage services and does not render such
person a municipal advisor. It is the provision of advice to or on
behalf of a municipal entity or obligated person with respect to
municipal escrow investments that renders a person a municipal
advisor.\382\
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\381\ See infra Section III.A.1.c.iv. at notes 642-645 and
accompanying text (discussing that certain routine selling
activities would not constitute municipal advisory activities).
\382\ See also infra notes 637-641 and accompanying text
(discussing when advice given by a broker-dealer is considered to be
``solely incidental'' to the conduct of his business as a broker or
dealer).
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Also, consistent with the definition of proceeds of municipal
securities that the Commission is adopting, the Commission is including
a written representation component in the definition of municipal
escrow investments. Accordingly, Rule 15Ba1-1(h)(2) states that, in
determining whether or not funds to be invested or reinvested
constitute municipal escrow investments for purposes of Rule 15Ba1-
1(h), a person may rely on representations in writing made by a
knowledgeable official of the municipal entity or obligated person
whose funds are to be invested or reinvested regarding the nature of
such investments, provided that the person seeking to rely on such
representations has a reasonable basis for such reliance.\383\ As with
the written representation component under the definition of proceeds
of municipal securities, under Rule 15Ba1-1(h), a person need not
obtain a separate written representation each time an investment is
made, and can instead rely on a prior written representation if the
person has a reasonable basis for reliance. For this purpose, the same
standard and principles apply in determining whether a person has a
reasonable basis for such reliance as discussed previously with respect
to reliance on representations regarding proceeds determinations.\384\
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\383\ See Rule 15Ba1-1(h)(2).
\384\ See supra notes 364-365 and accompanying text.
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Other Comments on the Scope of the Proposed Interpretation of
``Investment Strategies''
In addition to responses to specific requests for comment, the
Commission received a number of other comments regarding its proposed
interpretation of the statutory definition of investment
[[Page 67497]]
strategies. For example, one commenter requested that the Commission
clarify that the term ``investment strategies'' does not include
separate accounts supporting insurance contracts or their underlying
investment vehicles.\385\ The commenter reasoned that the funds
invested in such insurance contracts are not proceeds of municipal
securities, but are employer and employee contributions.\386\ Another
commenter argued that the term ``municipal financial product'' should
not include ``an insurance product tailored to a municipal entity,''
because ``such products . . . are already quite well regulated.'' \387\
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\385\ See Committee of Annuity Insurers Letter I.
\386\ See id. The commenter explained that variable annuity
contracts issued by its members are supported by insurance company
separate accounts. Insurance company separate accounts could be
limited to insurance contracts issued only to governmental
retirement plans. The commenter noted that, if the Commission adopts
its proposal to define municipal entity as including 457 plans and
403(b) plans, these insurance company separate accounts could then
be viewed as pooled investment vehicles limited to municipal entity
investors (i.e., 457 plans and 403(b) plans). The commenter noted
that the definition of investment strategies could be read to imply
that an insurance company separate account, whose assets are limited
to contributions from insurance contracts held by governmental
retirement plans, is an investment strategy. The commenter stated
that it has found no indication in the legislative history that
Congress intended this result. The commenter noted that the funds
invested in these insurance contracts are not proceeds of municipal
securities, but rather employer and employee contributions. In the
case of employee contributions from salary deduction arrangements,
such salary funds are equity funds of the employees upon receipt,
regardless of the source of those salaries, and thus are not
proceeds of municipal securities.
\387\ See Kutak Rock Letter.
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The Commission agrees that employee contributions are not proceeds
of municipal securities because these funds are derived from salary
deduction arrangements with individual employees and not from the
issuance of a municipal security. Therefore, a person providing advice
with respect to such contributions would be exempt from the definition
of municipal advisor to the extent their municipal advisory activities
are limited to such advice. Whether a person providing advice with
respect to employer contributions will be exempt, however, will depend
upon whether such funds are proceeds of municipal securities. In
general, public pension plans do not include proceeds of municipal
securities because proceeds of tax-exempt municipal securities
generally cannot be spent to fund investments for pension
liabilities.\388\ Further, the Commission agrees that a person
providing advice with respect to other insurance products tailored to a
municipal entity would not be engaged in municipal advisory activities
if the insurance products do not involve the investment of proceeds of
municipal securities because the final rules narrow the focus of the
term ``investment strategies'' to those involving investments of
proceeds of municipal securities and municipal escrow investments with
a new exemption in Rule 15Ba1-1(d)(3)(vii).
---------------------------------------------------------------------------
\388\ See 26 U.S.C. 148(a)(2) and Treas. Reg. Sec. 1.148-1(e)
(investment property definition).
---------------------------------------------------------------------------
ix. Pooled Investment Vehicles
As discussed above, the Commission proposed to interpret the
statutory definition of the term ``investment strategies'' to include
``pools of assets that invest funds held by or on behalf of a municipal
entity.'' \389\ Further, as part of the discussion of the term
``investment strategies,'' the Commission noted in the Proposal that,
to the extent a person is providing advice to certain pooled investment
vehicles in which a municipal entity has invested funds along with
other investors, such pooled investment vehicles would not be
considered funds ``held by or on behalf of a municipal entity.'' \390\
Consequently, a person providing advice to such vehicle would not have
to register as a municipal advisor. However, the Commission noted that,
to the extent that the pooled investment vehicle is a LGIP, the pooled
investment vehicle would be considered to be funds ``held by or on
behalf of'' a municipal entity and a person providing advice with
respect to a LGIP would have to register as a municipal advisor, absent
eligibility for some other exclusion or exemption.\391\
---------------------------------------------------------------------------
\389\ See supra Section III.A.1.b.viii. See also proposed Rule
15Ba1-1(b).
\390\ See Proposal, 76 FR 830.
\391\ See id., at note 98.
---------------------------------------------------------------------------
The Commission requested comment on whether it should modify or
clarify its proposed interpretation of the circumstances under which a
pooled investment vehicle would be considered to involve funds ``held
by or on behalf of a municipal entity,'' including whether the proposed
interpretation should no longer apply if municipal entities are not
considered to be the ``primary investors'' in the pooled investment
vehicle or if funds of municipal entities exceed a certain threshold in
the pooled investment vehicle.\392\ The Commission received several
comment letters addressing the interpretation.
---------------------------------------------------------------------------
\392\ See id., at 835.
---------------------------------------------------------------------------
One commenter supported the Commission's proposed interpretation,
without further request for modification.\393\ Two commenters opposed
any approach to determine municipal advisory status based on whether
municipal entities were the ``primary investors'' in the pooled
vehicle, citing the difficulty of making such a determination on an
ongoing basis.\394\ Another commenter urged the Commission to reiterate
that an adviser to a pooled investment vehicle in which a municipal
entity or obligated person invests is not a municipal advisor by virtue
of providing advice to such a vehicle, and that purchasing an interest
in a vehicle does not create an advisory engagement between the
investor and the vehicle's adviser.\395\ This commenter suggested that,
``so long as there is at least one bona fide investor that is not a
municipal entity or obligated person, the adviser to the vehicle should
not be a municipal advisor.'' \396\ The commenter also stated that not
exempting advisors to pooled vehicles would particularly limit
investment choices for public pension funds.\397\
---------------------------------------------------------------------------
\393\ See American Bankers Association Letter I. This commenter
urged the Commission to reiterate its position in the final rules
and clarify that the interpretation applies to collective investment
funds. A collective investment fund (``CIF'') is a bank-administered
trust that holds commingled assets that meet specific criteria
established by 12 CFR 9.18. The bank acts as a fiduciary for the CIF
and holds legal title to the fund's assets. CIFs allow banks to
avoid costly purchases of small lot investments for their smaller
fiduciary accounts. See Office of the Comptroller of the Currency,
Collective Investment Funds, available at http://www.occ.treas.gov/topics/capital-markets/asset-management/collective-investment-funds/index-collective-investment-funds.html. The Commission notes that a
CIF would have to contain no proceeds of municipal securities or
fall within an exclusion or exemption to not require municipal
advisor registration. See infra Section III.A.1.c.viii. (discussing
the bank exemption).
\394\ See letter from Stuart J. Kaswell, Executive Vice
President and Managing Director, General Counsel, Managed Funds
Association, dated February 22, 2011 (``MFA Letter'') (stating that
``imposing such an artificial threshold would create uncertainty for
private fund managers, require burdensome, ongoing monitoring of the
level of municipal entity investments, and limit or even prevent
municipal entities from investing in private funds''). See also
Kutak Rock Letter (suggesting that terminology involving the concept
of ``municipal entities are the primary investors'' not be utilized,
because ``it is too difficult to determine just what `primary'
means[,]'' and that too many difficult questions regarding an
objective, numbers-based approach used to determine primary
investorship would arise).
\395\ See SIFMA Letter I.
\396\ Id.
\397\ See id. Specifically, the commenter stated that absent the
suggested exemptions, fewer pooled investment vehicles would be
offered to municipal entities (particularly public pension plans)
and obligated persons, which would disserve municipal entities and
obligated persons by limiting their access to important vehicles for
the long-term investment of their funds. The commenter also stated
that local government investment pools are often the only available
option for the short-term investment of operating funds and are
subject to state laws, which often include a fiduciary duty. The
commenter stated that the Proposal likely would reduce the number of
local government investment pool options available to
municipalities.
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[[Page 67498]]
The Commission has carefully considered these comments and is not
adopting its proposed interpretation of when a pooled investment
vehicle will be considered to be funds held by or on behalf of a
municipal entity. It is also not adopting an interpretation that would
tie the determination of whether a person providing advice to a pooled
investment vehicle is a municipal advisor, to whether municipal
entities are the primary investors in the pooled investment vehicle.
Instead, consistent with the narrowed approach that the Commission is
adopting for ``investment strategies,'' the Commission is interpreting
a pooled investment vehicle to be an investment strategy, and an
advisor to such a pool to be a municipal advisor, when the pooled
investment vehicle contains proceeds of an issuance of municipal
securities, regardless of whether all funds invested in the vehicle are
funds of municipal entities.\398\ In such a case, an advisor to such a
pooled investment vehicle will be required to register as a municipal
advisor, unless an exclusion or exemption applies.
---------------------------------------------------------------------------
\398\ See Rule 15Ba1-1(d)(1) (defining ``municipal advisor'')
and Rule 15Ba1-1(b) (defining ``investment strategies'' as including
the statutorily identified items: ``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'').
---------------------------------------------------------------------------
The Commission recognizes commenters' concerns that requiring
advisors to pooled investment vehicles that include funds of municipal
entities to register as municipal advisors could have the effect of
limiting investment choices for municipal entities, including
investment choices for public pension funds. As noted above, however,
the Commission is exempting from the definition of municipal advisor
persons that provide advice with respect to investment strategies that
are not plans or programs for the investment of the proceeds of
municipal securities or the recommendation of and brokerage of
municipal escrow investments.\399\ Contrary to the construction under
the proposed definition of ``investment strategies,'' \400\ under the
definition of ``investment strategies'' as adopted and the exemption in
Rule 15Ba1-1(d)(3)(vii), whether or not the funds invested in a pooled
investment vehicle are considered to be ``funds held by or on behalf of
a municipal entity'' does not determine whether a person providing
advice to such a vehicle is required to register as a municipal
advisor. Rather, under the rule as adopted, the determination of
whether a person providing advice to a pooled investment vehicle is
required to register as a municipal advisor depends upon the narrower
inquiry of whether the funds in the pooled investment vehicle
constitute ``proceeds of municipal securities that are not municipal
derivatives or guaranteed investment contracts, and the recommendation
of and brokerage of municipal escrow investments.'' \401\ Also, the
Commission notes that many advisors to pooled investment vehicles will
be registered investment advisers or employees of municipal entities.
Therefore, many advisors would or could be either exempted or excluded
from registration as municipal advisors.\402\ Moreover, the Commission
believes that this approach to pooled investment vehicles appropriately
focuses protection on those activities related to investment of the
proceeds of municipal securities and related escrow investments, with
respect to which there has been significant enforcement activity.\403\
---------------------------------------------------------------------------
\399\ See supra Section III.A.1.b.viii. (discussing the
exemption as it relates to the application of the statutory
definition of ``investment strategies'').
\400\ See supra note 389 and accompanying text.
\401\ See Rule 15Ba1-1(b).
\402\ See infra Sections III.A.1.c.v. and III.A.1.c.i.
(discussing, respectively, the exclusion for registered investment
advisers and their associated persons and an exemption for employees
of municipal entities and obligated persons).
\403\ See supra note 287.
---------------------------------------------------------------------------
One commenter expressed concern that pooled investment vehicles
whose investors are limited to one or more municipal entities (e.g., a
government retirement pension plan) would be considered investment
strategies under the Proposal.\404\ This commenter suggested that the
term ``investment strategies'' should not include insurance company's
separate accounts supporting variable annuity contracts (and their
underlying investment vehicles) offered to or held by municipal
entities, even if the assets of the separate account are limited only
to contributions from municipal entities.\405\
---------------------------------------------------------------------------
\404\ See Committee of Annuity Insurers Letter I.
\405\ See id.
---------------------------------------------------------------------------
To the extent that an insurance company's separate accounts
supporting variable annuity contracts offered to or held by municipal
entities do not include ``proceeds of municipal securities,'' persons
providing advice with respect to such accounts would not be required to
register as municipal advisors because they would be exempt with
respect to such municipal advisory activity.\406\ Specifically, the
Commission notes that, as a result of the exemption in Rule 15Ba1-
1(d)(3)(vii) adopted today, a person providing advice with respect to
investment strategies that are not ``plans or programs for the
investment of the proceeds of municipal securities or the
recommendation of and brokerage of municipal escrow investments'' will
be exempt from the definition of municipal advisor with respect to such
activities. Further, the definition of ``proceeds of municipal
securities'' is limited to the monies derived by a municipal entity
from the sale of municipal securities, investment income derived from
such monies, and other monies of a municipal entity (or obligated
person) held in funds under legal documents for the municipal
securities that are reasonably expected to be used as security or a
source of payment for the debt service on the municipal securities, and
investment income from the investment or reinvestment of such
funds.\407\ If, however, such separate accounts supporting variable
annuity contracts offered to or held by municipal entities do include
``proceeds of municipal securities,'' advice with respect to such
accounts would not be eligible for the exemption in Rule 15Ba1-
1(d)(3)(vii) and such activity could be municipal advisory activity
triggering the registration requirement.
---------------------------------------------------------------------------
\406\ See Rule 15Ba1-1(d)(3)(vii).
\407\ See supra Section III.A.1.b.viii. (discussing the
exemption pursuant to Rule 15Ba1-1(d)(3)(vii), and the terms
``investment strategies'' and ``proceeds of municipal securities'').
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x. Solicitation of a Municipal Entity or Obligated Person
The definition of municipal advisor in Exchange Act Section
15B(e)(4) includes a person that undertakes a solicitation of a
municipal entity or obligated person on behalf of specified
persons.\408\ Exchange Act Section 15B(e)(9) provides that the term
``solicitation of a municipal entity or obligated person''
[[Page 67499]]
means ``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 [15 U.S.C. 80b-2]) 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 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.'' \409\
---------------------------------------------------------------------------
\408\ See 15 U.S.C. 78o-4(e)(4)(A)(ii). The Commission notes
that the definition of municipal advisor under Section 15B(e)(4)(A)
means, in part, a person that ``undertakes a solicitation of a
municipal entity.'' Also, Section 15B(a)(1)(B), which establishes
the registration requirement, specifically refers to solicitations
of obligated persons. Notwithstanding the omission of the term
``obligated person'' in the definition of municipal advisor, the
Commission interprets the definition of municipal advisor to include
a person who engages in the solicitation of an obligated person
acting in the capacity of an obligated person for the reasons
discussed above. See supra note 138 and accompanying text.
See also supra note 178 (citing Chapman and Cutler Letter and
discussing that an obligated person does not become a municipal
entity by virtue of issuing securities with respect to which it is
an obligated person).
\409\ 15 U.S.C. 78o-4(e)(9).
The Commission notes that Rule 15Ba1-1(n) (which, as adopted,
provides that the term ``solicitation of a municipal entity or
obligated person'' has the same meaning as Section 15B(e)(9) of the
Exchange Act, with certain exemptions) is only applicable with
respect to whether or not a person meets the definition of municipal
advisor and therefore will be required to register with the
Commission (unless an exemption or exclusion applies). The
Commission is not otherwise altering its interpretation of
``solicitation'' as used in other contexts.
As the Commission has explained, the Commission generally views
solicitation, in the context of broker-dealers, as including any
affirmative effort intended to induce transactional business. See
Registration Requirements for Foreign Broker-Dealers, Securities
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30017-
18 (July 18, 1989) (explaining that solicitation includes, among
other things, calls encouraging use of a party to effect
transactions).
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In connection with the statutory definition, the Commission
discussed in the Proposal its interpretation of ``solicitation of a
municipal entity or obligated person'' and stated in the Proposal that,
unless an exclusion applies, any third-party solicitor that seeks
business on behalf of a broker, dealer, municipal securities dealer,
municipal advisor, or investment adviser from a municipal entity must
register as a municipal advisor.\410\ The Commission noted that the
determination of whether a solicitation of a municipal entity requires
registration is not based on the number, or size, of investments that
are solicited.\411\ The Commission also specifically stated that the
exclusion from the definition of municipal advisor for a broker-dealer
serving as an underwriter would not apply to a broker-dealer acting as
a placement agent for a private equity fund that solicits a municipal
entity or obligated person to invest in the fund.\412\
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\410\ See Proposal, 76 FR 831. Thus, as stated in the Proposal,
a third-party solicitor seeking business on behalf of an investment
adviser from a municipal pension fund or LGIP would be required to
register as a municipal advisor.
In addition, depending on the facts and circumstances, the
third-party solicitor may also need to register as a broker-dealer
pursuant to Section 15(a) of the Exchange Act. See 15 U.S.C.
78o(a)(1). See also supra note 409 (discussing solicitation in the
context of broker-dealer regulation).
\411\ See Proposal, 76 FR 831. As discussed in the Proposal, a
solicitation of a single investment of any amount from a municipal
entity would require the person soliciting the municipal entity to
register as a municipal advisor.
\412\ See id., at 832, note 108 and accompanying text.
The Commission also noted that including such activities within
the scope of municipal advisory activities is consistent with the
Exchange Act. See id. (citing Exchange Act Sections 15B(e)(4)(A) and
(B) (including placement agents and solicitors that undertake a
solicitation of a municipal entity in the definition of municipal
advisor); S. Rep. No. 176 at 148, 111th Cong., 2d. Sess. 148 (2010)
(noting that Section 975 would not prohibit solicitation of a
municipal entity, but would subject solicitors to the registration
requirement and MSRB regulation); and letter from Senator
Christopher J. Dodd, U.S. Senate Committee on Banking, Housing and
Urban Affairs, to Elizabeth M. Murphy, Secretary, Commission, dated
February 2, 2010).
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The Commission received approximately 14 comment letters regarding
the definition of ``solicitation of a municipal entity or obligated
person.'' As discussed in more detail below, a number of commenters
requested further clarification regarding the statutory definition of,
and the Commission's proposed interpretations of, that term. The
Commission has carefully considered issues raised by commenters on its
proposed interpretation and is adopting a rule \413\ to define
``solicitation of a municipal entity or obligated person.'' The
Commission's interpretation of ``solicitation of a municipal entity or
obligated person'' in Rule 15Ba1-1(n) is substantially the same as its
proposed interpretation, and includes certain clarifications discussed
below designed to address commenters' concerns.\414\ In addition, the
Commission notes that, both in its proposed interpretation and adopted
rule, a broker, dealer, municipal securities dealer, municipal advisor,
or investment adviser, soliciting on its own behalf, as explained below
\415\--or an affiliate of a broker, dealer, municipal securities
dealer, municipal advisor, or investment adviser soliciting on behalf
of such entity--would not fall within the definition of ``solicitation
of a municipal entity or obligated person.'' Accordingly, such person
would not need to register as a municipal advisor.
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\413\ See Rule 15Ba1-1(n).
\414\ See id. See notes 419-420 and 446-447, and accompanying
text (discussing Rule 15Ba1-1(n)).
\415\ See text accompanying infra note 418.
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Mailings, Advertisements, and Other General Information
Commenters stated that the Commission should explicitly exclude
certain activities from the definition of solicitation of a municipal
entity or obligated person. For example, one commenter recommended that
``generic `mass mailing' solicitations, or institutional advertising''
should not be considered solicitation under the proposed rules,
especially if such mass mailings are not targeted to a small group of
particular municipal entities or obligated persons.\416\ This commenter
noted that the same argument would apply with respect to newspaper or
periodical ads, brochures, TV, radio, or Internet ads.\417\
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\416\ See Kutak Rock Letter.
\417\ See id.
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The Commission agrees with commenters that advertisements \418\ or
solicitations do not trigger an obligation for a third-party to
register as a municipal advisor, provided such activity is undertaken
by a broker, dealer, municipal securities dealer, municipal advisor, or
investment adviser on behalf of itself as opposed to on behalf of a
third party. Accordingly, the Commission is adopting Rule 15Ba1-1(n)
with a clarification to address advertising and the scope of the rule
with respect to solicitation of obligated persons.\419\ Specifically,
Rule 15Ba1-1(n), as adopted, clarifies that ``solicitation of a
municipal entity or obligated person'' does not include ``advertising
by a broker, dealer, municipal securities dealer, municipal advisor, or
investment adviser.'' \420\
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\418\ See, e.g., FINRA Rule 2210(a)(5) (defining a ``retail
communication'' as meaning ``any written (including electronic)
communication that is distributed or made available to more than 25
retail investors within any 30 calendar-day period'').
\419\ See Rule 15Ba1-1(n).
\420\ Id.
The Commission notes, however, that while such communications
would not trigger the requirement to register as a municipal adviser
under the solicitation prong of the definition of ``municipal
adviser,'' depending on the facts and circumstances, including the
content of such communications, such activity may be considered to
be advice for purposes of the registration requirement. See supra
Section III.A.1.b.i. (discussing the advice standard in general).
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Assistance With Requests for Proposals
It is a relatively common industry practice for municipal entities
to request that a financial advisor, bond counsel, or other market
professional assist in the review of requests for proposals (``RFP'')
for underwriter, financial advisory, or
[[Page 67500]]
investment advisory services.\421\ A person assisting a municipal
entity or obligated person in selecting a broker-dealer, investment
adviser, or financial advisor as part of an RFP process established by
the municipal entity or obligated person would not be considered to be
undertaking a solicitation for purposes of the definition of municipal
advisor in Rule 15Ba1-1(d)(1), because such person would not be
soliciting ``on behalf of'' such broker-dealer, investment adviser, or
financial advisor.\422\ Such person could, however, be engaging in
other municipal advisory activities with respect to assistance in the
selection process.\423\
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\421\ For example, one commenter expressed concern that an
investment adviser providing advice to a client regarding the
selection or retention of another investment manager could
constitute a solicitation of a municipal entity or obligated person
under Section 15B(e)(9) of the Exchange Act. See infra note 705 and
accompanying text.
\422\ See Rule 15Ba1-1(n) (defining solicitation of a municipal
entity or obligated person).
\423\ See infra note 556 and accompanying text. See also infra
Section III.A.1.c.ii. (discussing generally responses to RFPs and
municipal advisor registration). Moreover, such activity may
constitute investment advice under the Investment Advisers Act. See,
e.g., SEC v. Bolla, 401 F.Supp.2d 43 (D.D.C. 2005), aff'd in
relevant part, SEC v. Washington Investment Network, 475 F.3d 392
(D.C. Cir. 2007) (person selecting investment advisers for clients
meets the Investment Advisers Act's definition of ``investment
adviser'').
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Endorsement of Financial Products and Services by Associations
The Commission received approximately nine comment letters from
various associations that endorse third parties offering products and
services to the associations' members (``endorsement
arrangements'').\424\ According to commenters, in these endorsement
arrangements, the third parties, which typically include investment
advisers, broker-dealers, and mutual fund companies, compensate the
associations or their for-profit subsidiaries through a royalty
arrangement or through a marketing or sponsorship fee, depending on the
association's level of involvement in providing information to its
members.\425\ The commenters expressed concern that the associations'
compensated endorsement of investment advisory, municipal advisory, or
broker-dealer businesses to their members, some of whom are municipal
entities, could potentially be interpreted as solicitation of a
municipal entity or obligated person.\426\ Many of these commenters
believed that the Proposal did not provide sufficient guidance about
the statutory definition of ``solicitation.'' The statutory definition
of solicitation includes ``direct or indirect communication with a
municipal entity or obligated person,'' thus creating uncertainty
regarding the possible inclusion of such endorsements.\427\ One
commenter noted that investment advisory, municipal advisory, or
broker-dealer businesses that are endorsed by associations are not
directed specifically at municipal entities, but rather are prepared
and circulated without regard to whether the audience may include
municipal entities.\428\
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\424\ See, e.g., letters from James D. Campbell, CAE, Executive
Director, Virginia Association of Counties, dated June 22, 2011
(``Virginia Association of Counties Letter''); Jeff Spartz,
Executive Director, Association of Minnesota Counties, dated June
24, 2011 (``Association of Minnesota Counties Letter''); Robert Hay,
Jr., Manager, Public Policy, ASAE Center for Association Leadership,
dated July 8, 2011 (``ASAE Center for Association Leadership
Letter''); Steven R. Michaud, President, Maine Hospital Association,
dated July 14, 2011 (``Maine Hospital Association Letter''); Anthony
Burke, President and CEO, AHA Solutions, Inc., dated July 18, 2011
(``AHA Solutions Letter''); Paul McIntosh, Executive Director,
California State Association of Counties, dated July 29, 2011
(``California State Association of Counties Letter'').
\425\ See, e.g., ASAE Center for Association Leadership Letter.
\426\ See ASAE Center for Association Leadership Letter and
Maine Hospital Association Letter.
\427\ See ASAE Center for Association Leadership Letter; Maine
Hospital Association Letter; AHA Solutions Letter.
\428\ See ASAE Center for Association Leadership Letter.
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Two commenters recommended that the definition of solicitation
exempt ``advertisement, endorsement, sponsorship, and similar services
offered by persons who are not municipal advisors, brokers, dealers,
municipal securities dealers, or similar persons engaged in the
financial advisory service industry.'' \429\ One stated that compliance
with the registration rules would create a significant administrative
burden and would not create any material public benefits.\430\ The
other commenter requested that the Commission clarify the meaning of
``indirect communication'' within the definition of solicitation.\431\
Similarly, other commenters stated that the Commission should exempt
national and state associations representing state and local
governments from municipal advisor registration.\432\ These commenters
argued that their staffs do not directly contact public employees or
offer advice to public agencies or public employees.\433\
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\429\ See Maine Hospital Association Letter; AHA Solutions
Letter.
\430\ See Maine Hospital Association Letter.
\431\ See AHA Solutions Letter.
\432\ See Virginia Association of Counties Letter and California
State Association of Counties Letter.
\433\ See Virginia Association of Counties Letter and California
State Association of Counties Letter.
These commenters stated that they do not directly or indirectly
engage in the offer or sale of particular products or services to
government employees, do not make any product or investment
recommendations to existing or prospective clients, give any
investment advice on their own behalf or on behalf of any third
party supplier, or accept any clients on behalf of any third party
supplier. These commenters also stated that the cost of registration
and compliance, along with unknown consequences of state required
registration due to the rules promulgated by the Commission, would
unfairly disadvantage associations representing public agencies.
One of the commenters stated that such associations should
receive an exemption in order to offer their membership access to
value-added education and services through publicly solicited
contracts. The commenter noted that associations representing non-
governmental organizations are not required to register under the
proposed rule and yet are able to endorse programs for their
memberships that meet their standards of approval. See Virginia
Association of Counties Letter.
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At this time, the Commission is not providing a general exemption
for national and state associations that engage in endorsement
arrangements. An organization that receives compensation for endorsing
a broker, dealer, municipal securities dealer, municipal advisor, or
investment adviser is soliciting a municipal entity or obligated person
within the meaning of the statute. However, the Commission notes that
its interpretation in Rule 15Ba1-1(n) with respect to excluding
advertising from ``solicitation of a municipal entity or obligated
person'' may apply to some of these associations. For example, if an
association's ``endorsement'' qualifies as ``advertising'' by a broker,
dealer, municipal securities dealer, municipal advisor, or investment
adviser, pursuant to Rule 15Ba1-1(n), it would not be required to
register as a municipal advisor. Such a determination, however, would
be based on the particular facts and circumstances.
The Commission does not believe at this time that it is appropriate
to provide a blanket exemption to associations that are not able to
take advantage of Rule 15Ba1-1(n), because these associations are being
directly or indirectly compensated for recommending a broker, dealer,
municipal advisor, or investment adviser to municipal entities or
obligated persons. In addition, these associations may, in certain
cases, be compensated in direct relation to the number of municipal
entities that engage the endorsed product or service provider.
[[Page 67501]]
Uncompensated Recommendations
Some commenters stated that the Exchange Act and the Proposal are
unclear about when uncompensated recommendations might be deemed to be
solicitations for purposes of the rule.\434\ Several commenters stated
that uncompensated recommendations should not be considered to be
solicitations because the statutory text only refers to ``direct or
indirect compensation.'' \435\ One commenter stated further that, if
uncompensated recommendations are interpreted to be solicitations, it
``will chill significantly the provision of information to municipal
entities. . . .'' \436\ Other commenters suggested that the
solicitation prong should not apply if the municipal entity or
obligated person requests an introduction.\437\
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\434\ See, e.g., letters from Joy A. Howard, Principal, WM
Financial Strategies, dated February 21, 2011 (``Joy Howard WM
Financial Strategies Letter''); John Dotson, Vice President and
General Counsel, Chevron Energy Solutions, dated February 22, 2011
(``Chevron Letter''); Amy Natterson Kroll and W. Hardy Calcott,
Bingham McCutchen LLP, on behalf of the National Association of
Energy Service Companies, dated February 22, 2011 (``NAESCO
Letter''); State of Indiana Letter.
\435\ See Chevron Letter; NAESCO Letter.
\436\ See NAESCO Letter.
\437\ See, e.g., letter from Deron S. Kintner, Executive
Director, Indianapolis Local Public Improvement Bond Bank, dated
February 22, 2011 (``Indianapolis Local Public Improvement Bond Bank
Letter'') (stating that a person who solicits advice from
individuals should be free to solicit advice and recommendations
without having to either engage those individuals and compensate
them or subject them to fiduciary duties).
---------------------------------------------------------------------------
The Commission notes that an introduction is not necessarily a
solicitation. Moreover, whether an introduction is a solicitation does
not depend on whether a municipal entity or obligated person requests
an introduction or the introduction is provided without request.
Rather, for purposes of Rule 15Ba1-1(n), the solicitation determination
is based on whether the person providing the introduction receives
direct or indirect compensation for providing the introduction.\438\
For example, a person could respond to a request from a municipal
entity with a particular recommendation and then subsequently receive
payment from the recommended entity. In this example, the solicitation
would trigger the registration requirement.
---------------------------------------------------------------------------
\438\ See Rule 15Ba1-1(n) and 15 U.S.C. 78o-4(e)(9) (which
defines ``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'' made on behalf of certain specified entities).
---------------------------------------------------------------------------
The statutory definition of ``solicitation of a municipal entity or
obligated person'' provides that the solicitation must be performed for
``direct or indirect compensation.'' \439\ Thus, persons that are not
compensated for soliciting a municipal entity or obligated person would
not be required to register as municipal advisors. The Commission
notes, however, that Commission staff has broadly construed the term
``direct or indirect compensation'' in other contexts.\440\ In
addition, as noted in the Proposal, other regulatory agencies have
interpreted indirect compensation to include non-monetary
compensation.\441\
---------------------------------------------------------------------------
\439\ See 15 U.S.C. 78o-4(e)(9).
\440\ For example, under the Investment Advisers Act, Commission
staff has taken the position that compensation generally includes
the receipt of any economic benefit, whether in the form of an
advisory fee, some other fee relating to services rendered, a
commission, or some combination of the foregoing. See Applicability
of the Investment Advisers Act to Financial Planners, Pension
Consultants, and Other Persons Who Provide Investment Advisory
Services as a Component of Other Financial Services, Investment
Advisers Act Release No. 1092 (October 8, 1987).
\441\ See Proposal, 76 FR 832, note 113.
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Solicitation of Obligated Persons
Exchange Act Section 15B(e)(9) provides, in part, that the term
``solicitation of a municipal entity or obligated person'' is ``for the
purpose of obtaining or retaining an engagement . . . of a broker,
dealer, municipal securities dealer, or municipal advisor for or in
connection with municipal financial products . . . .'' \442\ One
commenter asked the Commission to clarify that the meaning of
``municipal financial products'' with respect to the ``solicitation of
an obligated person'' includes municipal derivatives, guaranteed
investment contracts, and investment strategies of the municipal entity
only, and not of the obligated person.\443\ The commenter stated that
obligated persons may include large entities with numerous and varied
funds and investments, many of which may have nothing to do with the
transactions pursuant to which they have become obligated persons.\444\
In addition, the commenter stated that if the municipal advisor
definition includes persons who advise obligated persons or solicit
obligated persons with respect to the funds, securities, or investment
strategies of the obligated person, ``the reach of the registration
requirement would expand in potentially unpredictable ways.'' \445\
---------------------------------------------------------------------------
\442\ 15 U.S.C. 78o-4(e)(9).
\443\ See ABA Letter.
\444\ See id.
\445\ Id.
---------------------------------------------------------------------------
The Commission agrees with the comment that solicitation with
respect to an obligated person applies only when an obligated person is
acting in its capacity as an obligated person.\446\ The Commission is,
therefore, adopting Rule 15Ba1-1(n), which clarifies that, in the case
of solicitation of an obligated person, the definition of
``solicitation of a municipal entity or obligated person'' does not
include 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.'' \447\
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\446\ The Commission also discusses above when a person is an
``obligated person.'' See supra Section III.A.1.b.iii.
\447\ See Rule 15Ba1-1(n). The solicitation could require the
solicitor to register with the Commission as a broker-dealer. See
generally Securities Exchange Act Release No. 27017 (July 11, 1989),
54 FR 30013 (July 18, 1989) (discussing solicitation).
---------------------------------------------------------------------------
As discussed above, with respect to the definition of obligated
person, the Commission believes that the municipal advisor registration
regime should apply in the same manner to advisors of obligated persons
as to advisors of municipal entities.\448\ The Commission further notes
that, because they are committed by contract or other arrangement to
support the payment of all or part of the obligations on municipal
securities, obligated persons serve the same role as municipal entities
with regard to municipal securities.\449\ Therefore, pursuant to the
Commission's clarification in Rule 15Ba1-1(n), a person soliciting an
obligated person with respect to the issuance of municipal securities
or municipal financial products will not meet the definition of
municipal advisor as a result of such activity unless the obligated
person is acting in its capacity as such.\450\
---------------------------------------------------------------------------
\448\ See supra note 227 and accompanying text.
\449\ See supra Section III.A.1.b.iii.
\450\ See id.
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One commenter asked when a person should know whether he or she is
soliciting an obligated person. Specifically, with respect to the
application of the proposed rules to persons who undertake a
solicitation of an obligated person, the commenter stated that a person
should be considered to have engaged in such activities only when it
has actual knowledge that it is (a) soliciting an obligated person,
acting in its capacity as an obligated person, and (b) engaging in
solicitation with respect to the issuance of municipal securities or
proceeds of municipal securities.\451\ Further, this commenter stated
that a person must be rendering services with
[[Page 67502]]
respect to the types of activities or instruments that make a person a
municipal advisor.\452\ Lastly, the commenter suggested that a person
need not affirmatively inquire as to the potential obligated person's
status or the funds' status.\453\
---------------------------------------------------------------------------
\451\ See SIFMA Letter I.
\452\ See id.
\453\ See id.
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The Commission believes that the commenter's suggestion, if
adopted, would allow the municipal advisor registration regime to be
too easily circumvented. An advisor could always argue that it did not
have ``actual knowledge'' that it was soliciting an obligated person
and therefore is not subject to regulation. The Commission instead
believes that a person that is soliciting an obligated person should
make a reasonable inquiry to a person in a position to know as to
whether it is soliciting for services related to the issuance of
municipal securities or municipal financial products, and whether the
person being solicited is an obligated person. For example, a person
may rely on the written representation of the obligated person, unless
such person has information that would cause a reasonable person to
question the accuracy of the representation.\454\ In such a case, a
person could not ignore the information and would need to make further
reasonable inquiry to verify the accuracy of the representation.\455\
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\454\ See Rule 15Ba1-1(m). Also, a person would only be a
municipal advisor as a result of soliciting an obligated person when
such obligated person is acting in the capacity of an obligated
person. See supra note 446 and accompanying text.
\455\ See also supra Section III.A.1.b.viii. at note 363 and
accompanying text (discussing the requirement to know when advice
relates to the proceeds of municipal securities).
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Other Exclusions and Exemptions From the Definition of ``Solicitation
of a Municipal Entity or Obligated Person''
Some commenters stated that the Commission should explicitly
exclude certain entities from the solicitation definition altogether.
For example, several commenters stated that placement agents for pooled
investment vehicles should not be considered solicitors.\456\ Another
commenter recommended that an investment adviser's employees who
solicit municipal entities as part of their regular responsibilities
should not be considered solicitors.\457\ The Commission has carefully
considered issues raised by commenters and has determined not to
provide specific exemptions from the definition of ``solicitation of a
municipal entity or obligated person.'' \458\
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\456\ See, e.g., SIFMA Letter I (stating that Section 975 of the
Dodd-Frank Act does not define ``solicitation'' to include
solicitation of a municipal entity or obligated person by a
placement agent for a pooled investment vehicle, such as a private
equity fund, hedge fund, LGIP, or mutual fund, all of which involve
the sale of securities by registered broker-dealers); ICI Letter
(stating that a ``placement agent soliciting a municipal entity to
invest in a pooled investment vehicle acts on behalf of the pooled
investment vehicle only, not on behalf of the adviser to the vehicle
nor on behalf of any of the other four enumerated categories of
persons contained in the definition'').
\457\ See letter from Monique S. Botkin, Assistant General
Counsel, Investment Adviser Association, dated February 22, 2011
(``IAA Letter'') (stating that ``[i]t would be illogical and
contravene the statutory intent of the Dodd-Frank Act for such an
exclusion to apply to an affiliate of an investment adviser and its
employees soliciting on behalf of its affiliated adviser, but not
for the same analysis to apply to an investment adviser and its own
employees soliciting on their employer's behalf'').
\458\ See infra note 465 and accompanying text.
---------------------------------------------------------------------------
Section 15B(e)(4)(A) of the Exchange Act states that the definition
of municipal advisor includes a person that undertakes a solicitation
of a municipal entity.\459\ Section 15B(e)(4)(B) of the Exchange Act
states that the definition of municipal advisor includes a number of
listed types of market participants (specifically financial advisors,
guaranteed investment contract brokers, third-party marketers,
placement agents, solicitors, finders, and swap advisors) if such
persons otherwise meet the definition of a municipal advisor under
Exchange Act Section 15B(e)(4)(A). In relevant part, Exchange Act
Section 15B(e)(4)(A)(ii) provides that a municipal advisor includes a
person that, on behalf of certain types of third-parties, undertakes a
solicitation of a municipal entity to engage such parties to perform
certain specified activities.\460\ In the case of placement agents, the
Commission agrees with commenters that a placement agent for a pooled
investment vehicle that is not a municipal entity (e.g., a hedge fund
or mutual fund) and that ``solicits'' a municipal entity to invest in
the fund does not, with respect to such activity, meet the statutory
definition of the term ``solicitation of a municipal entity or
obligated person'' in Exchange Act Section 15B(e)(9). Such a placement
agent does not meet the statutory definition of the term because it is
not soliciting on behalf of a third-party broker, dealer, municipal
securities dealer, municipal advisor, or investment adviser to obtain
or retain an engagement by a municipal entity or obligated person of
such third-party broker, dealer, municipal securities dealer, municipal
advisor, or investment adviser. Whether the placement agent otherwise
meets the definition of ``municipal advisor'' with respect to any
activity related to or in connection with its ``solicitation'' activity
(that does not, as discussed above, meet the statutory definition of
solicitation in Exchange Act Section 15B(e)(9)) would depend on the
facts and circumstances.\461\ By contrast, a placement agent that
undertakes a solicitation of a municipal entity for the purpose of
obtaining an engagement by the municipal entity of an unaffiliated
investment adviser to provide investment advisory services to the
municipal entity is a municipal advisor because it is soliciting on
behalf of an unaffiliated adviser to provide investment advisory
services.\462\ The Commission also agrees with commenters that
employees of a broker, dealer, municipal securities dealer, municipal
advisor, or investment adviser that solicit municipal entities as part
of their regular duties on behalf of their employer or an affiliate of
such employer are not municipal advisors, if they are acting within the
scope of their employment. Specifically, as provided in Exchange Act
Section 15B(e)(9), the term ``solicitation of a municipal entity or
obligated person'' means, in part, ``a direct or indirect communication
with a municipal entity or obligated person made by a person . . . on
behalf of a broker, dealer, municipal securities dealer, municipal
advisor, or investment adviser . . . that does not control, is not
controlled by, or is not under common control with the person
undertaking such solicitation . . . .'' \463\ As such, the term applies
only to third-party solicitors, and not to an entity acting on its own
behalf or on behalf of its affiliate. Employees acting in their
capacity as such on behalf of their
[[Page 67503]]
employer are acting as the agent of their employer and, consequently,
are not third-party solicitors that fall within the definition of
municipal advisor as a result of their solicitation activity.
---------------------------------------------------------------------------
\459\ See Exchange Act Section 15B(e)(9). See also Rule 15Ba1-
1(n).
\460\ See supra note 409 and accompanying text (setting forth
the definition of ``solicitation of a municipal entity or obligated
person'').
\461\ See infra notes 625-629 and accompanying text (discussing
when a placement agent may be a municipal advisor and when it may,
or may not, qualify for the exclusion for underwriters).
\462\ With respect to solicitations on behalf of investment
advisers, the relevant portion of the definition of a ``solicitation
of a municipal entity or obligated person'' in Exchange Act Section
15B(e) limits the scope of covered solicitations to those involving
solicitations for the purpose of obtaining or retaining an
engagement by a municipal entity or by an obligated person ``of an
investment adviser to provide investment advisory services to or on
behalf of a municipal entity.'' See also S. Rep. No. 111-176 at 148
(2010) (``Rather than effectively prohibiting such third-party
solicitation for investment advisory services, this section would
provide that activities of a municipal advisor, broker, dealer, or
municipal securities dealer to solicit a municipal entity to engage
an unrelated investment adviser to provide investment advisory
services to a municipal entity . . . would be subject to regulation
by the MSRB.'')
\463\ 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------
Pursuant to Rule 15Ba1-1(d)(3)(viii) and consistent with the
exemption from the definition of municipal advisor under Rule 15Ba1-
1(d)(3)(vii) for a person that provides advice with respect to
investment strategies that are not plans or programs for the investment
of the proceeds of municipal securities or the recommendation of and
brokerage of municipal escrow investments,\464\ the Commission is
exempting from the definition of municipal advisor under Rule 15Ba1-
1(d)(1) any person that undertakes a ``solicitation of a municipal
entity or obligated person'' (as defined in Rule 15Ba1-1(n) (17 CFR
240.15Ba1-1(n)) for the purpose of obtaining or retaining an engagement
by a municipal entity or by an obligated person of a broker, dealer,
municipal securities dealer, or municipal advisor for or in connection
with municipal financial products that are investment strategies, to
the extent that such investment strategies are not plans or programs
for the investment of the proceeds of municipal securities or the
recommendation of and brokerage of municipal escrow investments.\465\
As with respect to the exemption in Rule 15Ba1-1(d)(3)(vii), the
Commission believes that the exemption in Rule 15Ba1-1(d)(3)(viii) is
consistent with the public interest, the protection of investors, and
the purposes of Section 15B of the Exchange Act, because the exemption
tailors protection of municipal entities to those activities related to
the investment of the proceeds of municipal securities and related
escrow investments.\466\
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\464\ See supra Section III.A.1.b.viii.
\465\ See Rule 15Ba1-1(d)(3)(viii).
\466\ See note 328 and accompanying text.
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Marketing of Insurance Contracts
One commenter stated that solicitation should not include the
marketing of insurance contracts by broker-dealers to retirement plans
established by municipal entities.\467\ The Commission agrees that the
marketing of insurance contracts by broker-dealers is not solicitation
for purposes of the municipal advisor definition if it is not performed
on behalf of a third-party broker, dealer, investment adviser,
municipal securities dealer, or municipal advisor. As described above,
the definition of ``solicitation of a municipal entity or obligated
person'' only applies to third-party solicitations on behalf of these
specific kinds of entities.\468\
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\467\ See Committee of Annuity Insurers Letter I.
\468\ See supra note 463 and accompanying text. See also Rule
15Ba1-1(n).
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c. Exclusions and Exemptions From the Definition of ``Municipal
Advisor''
In addition to the exemption described above for persons providing
advice or soliciting engagements with respect to certain financial
products, the Commission discusses below its interpretations of certain
statutory exclusions, as well as specific activities-based exemptions
it is granting from the definition of ``municipal advisor.'' \469\
Also, the Commission discusses below exemptions of general
applicability to the extent a person is responding to an RFP or a
request for qualifications (``RFQ'') or to the extent a municipal
entity or obligated person is otherwise represented by a registered
municipal advisor, subject to certain conditions.
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\469\ For the exclusions and exemptions that were discussed in
the Proposal and that the Commission is adopting today, the
Commission has made minor, non-substantive changes to provide
greater clarity and consistency throughout the rules related to
exclusions and exemptions.
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i. Public Officials and Employees of Municipal Entities and Obligated
Persons
Exchange Act Section 15B(e)(4)(A) provides that the term
``municipal advisor'' excludes employees of a municipal entity.\470\ As
noted in the Proposal, one commenter suggested that the Commission
clarify that this exclusion would include any person serving as an
appointed or elected member of the governing body of a municipal
entity, such as a board member, county commissioner or city
councilman.\471\ This commenter stated that, because these persons are
not technically ``employees'' of the municipal entity (but rather
``unpaid volunteers''), they would not fall within the exclusion from
the definition of municipal advisor for ``employees of a municipal
entity.'' \472\
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\470\ 15 U.S.C. 78o-4(e)(4)(A).
\471\ See Proposal, 76 FR 834, n.140 and accompanying text
(citing letter from John P. Wagner, Kutak Rock LLP, to Elizabeth M.
Murphy, Secretary, Commission, dated September 28, 2010).
\472\ See id. See also 15 U.S.C. 78o-4(e)(4)(A).
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The Commission stated in the Proposal that the exclusion from the
definition of municipal advisor for ``employees of a municipal entity''
should include any person serving as an elected member of the municipal
entity's governing body to the extent that the person is acting within
the scope of his or her role as an elected member. The Commission also
stated that ``employees of a municipal entity'' should include a
governing body's appointed members to the extent such appointed members
are ex officio members by virtue of holding an elective office.\473\
The Commission stated its concern that appointed members are not
directly accountable for their performance to the citizens of the
municipal entity.\474\
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\473\ This would include persons appointed to fill the remainder
of the term for an elective office.
\474\ See Proposal, 76 FR 834.
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In the Proposal, the Commission requested comment on: (1) Whether
there are any persons who engage in uncompensated municipal advisory
activities, or municipal advisory activities for indirect compensation,
that the Commission should exclude from the definition of municipal
advisor; (2) whether ``employees of a municipal entity'' should include
elected members of a governing body of a municipal entity, and
appointed members of a municipal entity's governing body to the extent
such appointed members are ex officio members of the governing body by
virtue of holding an elective office, is appropriate; and (3) whether
there are other persons associated with a municipal entity who might
not be ``employees'' of a municipal entity but that the Commission
should exclude from the definition of municipal advisor.\475\
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\475\ See Proposal, 76 FR 837.
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The Commission received over 600 comment letters on its
interpretation of ``employee of a municipal entity.'' Commenters
represented a wide array of individuals and entities, including
representatives of: city and state governments; \476\ city and state
retirement systems; \477\ state university
[[Page 67504]]
systems; \478\ state housing, development, and port authorities; \479\
city transit authorities; \480\ special districts (such as healthcare,
water, sanitation, and other districts); \481\ public utility boards
and associations; \482\ airports, and airport authorities and
commissions; \483\ and individual volunteer or appointed board
members.\484\
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\476\ See, e.g., letter from Stevan Gorcester, Association of
Washington Cities, dated February 22, 2011; letter from William G.
Dressel, Jr., Executive Director, New Jersey League of
Municipalities, dated January 27, 2011; letter from Ken Miller,
Oklahoma State Treasurer, dated February 7, 2011; letter from Steve
Ritter, Assistant Finance Director, City of Huntsville, Texas, dated
January 10, 2011; letter from Jim D. Dunaway, City Manager, City of
Taylor, Texas, dated January 13, 2011; letter from Jacqueline M.
Kovilaritch, Assistant City Attorney, City of St. Petersburg,
Florida, dated January 19, 2011 (``City of St. Petersburg Letter'');
letter from Judith Hetherly, Mayor, City of Lampasas, Texas, dated
January 20, 2011; letter from Gary Herbert, Governor, State of Utah,
Salt Lake City, Utah, dated February 17, 2011; and National
Association of State Treasurers Letter.
\477\ See, e.g., Utah Retirement Systems Letter; letter from R.
Dean Kenderdine, Executive Director and Secretary to the Board,
Maryland State Retirement and Pension System, dated February 17,
2011; letter from Ann Fuelberg, Executive Director, Employees
Retirement System of Texas, dated February 18, 2011; letter from
Anthony B. Ross, Chairperson and Stephen C. Edmonds, Executive
Director, City of Austin Employees Retirement System, dated February
18, 2011; and Alaska Retirement Management Board Letter.
\478\ See, e.g., letter from Frank T. Brogan, Chancellor, State
University System of Florida, dated February 21, 2011; letter from
Calvin J. Anthony, Chairman, Oklahoma State University/Agricultural
and Mechanical Colleges Board of Regents, dated January 7, 2011
(``Oklahoma State University/Agricultural and Mechanical Colleges
Board of Regents Letter''); letter from Francisco G. Cigarroa, M.D.,
Chancellor, The University of Texas System, dated February 7, 2011;
letter from Michael D. McKinney, Chancellor, The Texas A&M
University System and Kent Hance, Chancellor, Texas Tech University
System, dated February 14, 2011; letter from Richard D. Legon,
President, Association of Governing Boards of Universities and
Colleges, dated February 15, 2011; letter from Dr. Brian McCall,
Chancellor of the Texas State University System, dated February 17,
2011; and letter from Peter J. Taylor, Executive Vice President--
Chief Financial Officer, The Regents of the University of
California, dated February 18, 2011 (``UCLA Regents Letter'').
\479\ See, e.g., letter from Rebecca L. Peace, Chief Counsel,
Pennsylvania Housing Finance Agency, Jayne B. Blake, Chief Counsel,
Pennsylvania Infrastructure Investment Authority, Stephen M. Drizos,
Executive Director, Pennsylvania Economic Development Financing
Authority, Carol A. Longwell, Deputy Chief Counsel, Pennsylvania
Economic Development Financing Authority, and Doreen A. McCall,
Chief Counsel, Pennsylvania Turnpike Commission, dated February 15,
2011 (``Pennsylvania Housing Finance Agency Letter''); and letter
from Tracy V. Drake, Chairman, Ohio Council of Port Authorities and
CEO, Columbiana County Port Authority, dated February 4, 2011.
\480\ See, e.g., letter from Carol B. Keefe, General Counsel,
Washington Metropolitan Area Transit Authority, Washington, District
of Columbia, dated February 14, 2011; and letter from David
Levinger, Chief Financial Officer, Dallas Area Rapid Transit, dated
February 22, 2011.
\481\ See, e.g., letter from John ``Chip'' Taylor, Executive
Director, Colorado Counties Inc., Sam Mamet, Executive Director,
Colorado Municipal League, and Ann Terry, Executive Director,
Special District Association of Colorado, dated January 26, 2011;
letter from Kathleen Durham, Chairman, South Broward Hospital
District, dated February 8, 2011; letter from James F. Heekin,
Counsel, Citrus County Hospital Board, Southeast Volusia Hospital
District, West Orange Healthcare District, February 14, 2011; letter
from Walt Sears, Jr., General Manager, Northeast Texas Municipal
Water District, dated January 24, 2011; and letter from Robert M.
Ball, A. A. E., Executive Director, Lee County Port Authority, dated
February 18, 2011; and letter from Edward G. Henifin, General
Manager and Steven G. deMik, Director of Finance, Hampton Roads
Sanitation District, dated February 22, 2011.
\482\ See, e.g., letter from David Modisette, California
Municipal Utilities Association, dated February 22, 2011; letter
from John S. Bruciak, Brownsville Public Utilities Board, dated
February 18, 2011; letter from David H. Wright, City of Riverside,
dated February 23, 2011; and letter from Susan N. Kelly, Senior Vice
President of Policy Analysis and General Counsel and Diane Moody,
Director, Statistical Analysis, American Public Power Association,
dated February 22, 2011 (``American Public Power Association
Letter'').
\483\ See, e.g., letter from Jeffery P. Fegan, Chief Executive
Officer, Dallas/Fort Worth International Airport, dated January14,
2011, letter from Phillip N. Brown, A.A.E., Executive Director,
Greater Orlando Aviation Authority, dated February 8, 2011; letter
from Emily Neuberger, Senior Vice President & General Counsel, Wayne
County Airport Authority, Michigan, dated February 14, 2011 (``Wayne
County Airport Authority Letter''); letter from Elaine Roberts,
President & CEO, Columbus Regional Airport Authority, dated February
16, 2011; letter from Thomas W. Anderson, General Counsel,
Metropolitan Airports Commission, dated February 17, 2011; and
letter from Breton K. Lobner, General Counsel, San Diego County
Regional Airport Authority, dated February 22, 2011.
\484\ See, e.g., letter from Richard R. Vosburg, Chartered
Financial Analyst, Germantown, Tennessee, dated January 24, 2011
(``Vosburg Letter''); and letter from William Dalton, dated February
28, 2011 (``Dalton Letter'').
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The comments dealt predominantly with the Commission's proposed
view that ``employees of a municipal entity'' should include elected
members of a municipal entity's governing body, and appointed members,
to the extent such appointed members are ex officio members of the
governing body by virtue of holding an elective office. Many commenters
asserted that the Commission's proposed interpretation of municipal
advisor is overly broad or overreaching and should exclude all members
of a municipal entity's governing board.
The majority of commenters stated, in particular, that appointed
board members should not be treated differently from elected board
members or officials and disagreed with the Commission's statement that
appointed board members are not directly accountable. Many of the
commenters asserted that state and local laws applicable to officials
of a municipal entity do not distinguish between appointed or elected
members and that all members are subject to the same legal obligations,
including fiduciary duties, codes of conduct, open meeting laws, and
conflicts of interest and ethics laws.\485\ For example, commenters
asserted that appointed officials of municipal non-profit corporations,
trusts, and pension funds have a duty to act in the interests of the
corporation, trust, or the fund.\486\ Many commenters also asserted
that appointed board members are accountable to the elected officials
that appointed them or for whom they work.\487\ Many also noted that
appointed board members may be removed for cause \488\ and are subject
to civil suit.\489\ Others observed that appointed board members are
more accountable than elected officials.\490\
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\485\ See, e.g., Darrell Buchbinder, The Port Authority of New
York and New Jersey, dated February 18, 2011; National Association
of State Treasurers Letter; Letter from Martin R. Hopper, General
Manager, M-S-R Public Power Agency, dated February 18, 2011 (``M-S-
R-Power Agency Letter''); letter from Meredith J. Jones, NYCEDC,
dated February 18, 2011 (``NYCEDC Letter''); and UCLA Regents
Letter; letter from Laura King, Minnesota State Colleges and
Universities, dated February 22, 2011.
Many of these commenters also explained that certain municipal
entity governing boards are established or operating pursuant to
state or local statute. See id. See also letter from JoAnn E. Levin,
Chief Solicitor, City of Baltimore, dated February 3, 2011; and
letter from Mark Page, Director of Management and Budget, The City
of New York, dated February 22, 2011 (``NYC Management and Budget
Letter'').
\486\ See, e.g., letter from Acting Governor Earl Ray Tomblin,
Chairman of the Board; Glen B. Gainer, Auditor of the State of West
Virginia and Roger Hunter, Chairman of the Investment Committee, and
Guy Bucci, Chairman of the Legal Committee, West Virginia Investment
Management Board, dated February 22, 2011; and letter from Joanne
Handy, President and CEO, Aging Services of California, dated
February 22, 2011; letter from Charles R. Noll, President,
Pennsylvania Local Government Investment Trust, dated February 18,
2011 (``Pennsylvania Local Government Investment Trust Letter'');
letter from Keith Bozarth, Executive Director, State of Wisconsin
Investment Board, dated February 22, 2011; and letter from Peter H.
Mixon, California Public Employees' Retirement System, dated
February 22, 2011 (``CALPERS Letter'').
\487\ See, e.g., letter from John Murphy, Executive Director,
National Association of Local Housing Finance Agencies, dated
January 27, 2011; NYC Management and Budget Letter; and letter from
Bob A. Newmark, Housing Finance Authority, dated February 11, 2011.
\488\ See, e.g., letter from Gottlieb Fisher PLLC, on behalf of
the Boards of Trustees for King County Rural Library District, Fort
Vancouver Intercounty Rural Library District, Pierce County Rural
Library District LaConner Rural Partial-County Library District,
Sno-Isle Intercounty Rural Library District, Spokane County Rural
Library District, Walla Walla County Rural Library District, and
Whitman County Rural Library District, dated February 11, 2011
(``Gottlieb Fisher Letter''); letter from Linda Beaver, Nebraska
Educational Finance Authority, dated February 16, 2011 (``Nebraska
Educational Finance Authority Letter''); Alaska Retirement
Management Board Letter; Robert W. Barnes, Idaho Falls Redevelopment
Agency, dated February 18, 2011; and letter from Jeffrey W. Letwin,
Esq., Partner, Schnader Harrison Segal Lewis LLP, Pittsburgh,
Pennsylvania, dated February 8, 2011.
\489\ See, e.g., letter from Jeffrey W. Letwin, Esq., Partner,
Schnader Harrison Segal Lewis LLP, Pittsburgh, Pennsylvania, dated
February 8, 2011; letter from Gary Kimball, President, Specialized
Public Finance, Inc., dated February 22, 2011 (``Specialized Public
Finance Letter''); letter from Gary Parsons, General Manager, Texas
Municipal Power Agency, dated February 22, 2011 (``Texas Municipal
Power Agency Letter''); and letter from John W. Rubottom, General
Counsel, Lower Colorado River Authority, dated February 15, 2011.
\490\ See, e.g., letter from Bill Lockyer, Treasurer, State of
California, dated February 22, 2011 (``California State Treasurer's
Office Letter''); Texas Municipal Power Agency Letter; letter from
John D. Clark, III, Executive Director/CEO, Indianapolis Airport
Authority, dated February 22, 2011; and letter from Victor
Vandergriff, Chairman, North Texas Tollway Authority, dated February
11, 2011.
---------------------------------------------------------------------------
Additionally, many commenters asserted that board members are the
decision and policy makers who receive advice from third parties who
are paid for providing services and that board members themselves are
not
[[Page 67505]]
``advisors.'' \491\ Many commenters asserted that members of governing
boards are the intended beneficiaries of the proposed regulation.\492\
Further, some commenters asserted that the Proposal would usurp state
laws governing duties and responsibilities of appointed board members
of municipal entities.\493\ Many commenters also stated that, in its
current form, the Proposal would deter much needed citizen volunteers
from serving on governing boards of municipal entities or would chill
the deliberative process of such boards. These commenters reasoned that
volunteers would fear that their participation in votes on, or
discussions of, financial matters will be deemed ``advice'' that would
subject them to registration.\494\
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\491\ See, e.g., letter from Michael D. Nosler, General Counsel
and Assistant Attorney General, Colorado State University System,
dated February 21, 2011; letter from Barbara J. Thompson, Executive
Director, National Council of State Housing Agencies, dated February
22, 2011; letter from Luther Strange, Attorney General, State of
Alabama, dated February 22, 2011; CALPERS Letter; letter from Ronnie
G. Jung, Executive Director, Teacher Retirement System of Texas,
dated February 22, 2011; Stephanie L. Hamlett, Executive Director,
Virginia Resources Authority, dated February 22, 2011; and Dalton
Letter.
\492\ See, e.g., letter from David R. Fine, City Attorney,
Denver, dated February 9, 2011 (``Denver Letter''); letter from
James F. Zay, Chairman, Du Page Water Commission, dated February 11,
2011; letter from Angela I. Carmon, City Attorney, City of Winston-
Salem, North Carolina, dated February 14, 2011; letter from David J.
Kincaid, City Manager, City of Safford, Arizona, dated February 14,
2011 (``City of Safford Letter''); and letter from Donald Dicklich,
County Auditor-Treasurer, Duluth, Minnesota, dated February 16,
2011.
\493\ See, e.g., letter from Steven J. Baumgardt, Finance
Director, City of Tolleson, Arizona, dated March 3, 2011 (``City of
Tolleson Letter''); letter from Joe Pizzillo, Vice Mayor, City of
Goodyear, Arizona, dated February 14, 2011 (``City of Goodyear
Letter''); letter from Patricia Branya, Director, Miami-Dade County,
dated February 14, 2011; and letter from Elwood G. ``Woody'' Farber,
President, New Mexico Educational Assistance Foundation, dated
February 15, 2011. One commenter questioned whether, if an appointed
member of a governing body is deemed a municipal advisor, the
federal fiduciary obligations to the municipal entity override state
and local law provisions for exculpation, indemnification, and other
protections of board members. See NABL Letter.
\494\ See, e.g., City of Tolleson Letter; City of Goodyear
Letter; letter from Richard D. Legon, President, Association of
Governing Boards of Universities and Colleges, dated February 15,
2011; letter from Edward G. Henifin, General Manager and Steven G.
deMik, Director of Finance, Hampton Roads Sanitation District, dated
February 22, 2011; letter from Scott Jordan, Executive Office for
Administration and Finance, dated February 22, 2011; letter from
Granger Vinall, Chairman of the Board of Directors and Kevin J.
Burns, Chief Executive Officer, UA Healthcare, Inc., dated February
22, 2011; and letter from Ronald H. Paydo, President, Medina County
Port Authority, dated February 18, 2011.
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Commenters also stated that the Proposal is unclear with respect to
whether: (1) Appointed, rather than elected, officials (such as city
controllers, managers, and commissioners) would be ``employees;'' \495\
(2) the employee of one municipal entity (such as an employee of a
municipal entity that is the sponsor of a pension plan) would be
covered by the exclusion when serving as an appointed member of the
board of another municipal entity (such as on the board of the
sponsored pension plan) or otherwise performing services for other
related municipal entities; \496\ and (3) board members that were
``elected,'' but were not elected by the citizens of the municipal
entity, would be considered ``employees of a municipal entity.'' \497\
Some commenters stated that designees of board members should also be
covered by the exclusion.\498\ One commenter suggested that ``employees
and board members of a municipal entity should be excluded [from the
definition of municipal advisor] to the extent they provide advice to
an obligated person (and acting in the purview of their duties).''
\499\
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\495\ See, e.g., Cynthia M. Davenport, Attorney at Law, Flynn &
Davenport, LLC, Troy, Missouri, dated January 18, 2011; City of St.
Petersburg Letter; Denver Letter; and City of Safford Letter.
\496\ See, e.g., letter from Michael Hairston, EFRC, dated
February 22, 2011; NYC Management and Budget Letter; M-S-R-Power
Agency Letter (explaining that the M-S-R Public Power Agency uses
the services of employees of its member municipal entities to sit on
standing committees of the agency and to fulfill the duties of
offices of the agency; and commenting that employees of its members
that are seconded to the agency should have the same exemption when
they perform services for the agency as when the employees are
acting within the scope of their employment responsibilities
providing services for the benefit of the member entity); letter
from Hawkins Delafield & Wood LLP, dated February 16, 2011
(commenting that ``an employee of municipal entity A who provides
services to, but is not an employee of, municipal entity B, should
be exempt under Section 15B(e)(4)(A) if both entities operate for
the benefit of the same governmental unit, whether at the state,
county, or municipal level''); letter from Susan Combs, Texas
Comptroller of Public Accounts, dated February 22, 2011 (describing
that employees of Texas's Office of the Comptroller may provide
advice to other municipal entities within the state in connection
with their duties to the Office of the Comptroller); and letter from
Amadeo Saenz, Texas Department of Transportation, dated February 22,
2011 (commenting that employees of the Texas Department of
Transportation that are appointed to the non-profit entity that
issues bonds on behalf of the Texas Transportation Commission should
be excluded because they are employees assuming a decision-making
responsibility based on the duties of their employment).
One commenter also stated that the Proposal is unclear, in the
case of a non-profit entity formed for the benefit of a municipal
entity, whether employees of the municipal entity that sit on the
board of such non-profit would be excluded from the definition of
``municipal advisor'' as ``employees'' of the municipal entity. See,
e.g., letter from Angela I. Carmon, City Attorney on behalf of North
Carolina Municipal Leasing Corporation, dated February 22, 2011.
The term ``municipal entity'' means, in part, ``any State,
political subdivision of a State, or corporate instrumentality.''
See Rule 15Ba1-1(g). The Commission notes that such employees would
be ``employees of a municipal entity,'' and therefore excluded from
the definition of municipal advisor, to the extent the non-profit
entity is itself a municipal entity (e.g., if the non-profit entity
is a corporate instrumentality of a State).
\497\ See, e.g., Pennsylvania Local Government Investment Trust
Letter.
\498\ See, e.g., NYC Management and Budget Letter; and letter
from Tim Kenny, Nebraska Investment Finance Authority, dated
February 22, 2011.
\499\ Kutak Rock Letter. This commenter was concerned that
otherwise, the municipal entity and obligated person would not be
able to coordinate with respect to a financing for the obligated
person.
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Many commenters also stated that boards of municipal entities are
legally inseparable from the municipal entity.\500\ One commenter
stated that if the governing body of a municipal entity, as a whole, is
not a part of the ``municipal entity,'' then any third party soliciting
or providing advice to the governing body with respect to municipal
financial products or the issuance of municipal securities would not be
subject to the registration requirements.\501\
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\500\ See, e.g., Utah Retirement Systems Letter; Nebraska
Educational Finance Authority Letter; State of Indiana Letter; NABL
Letter; and letter from Gregory W. Smith, General Counsel/Chief
Operating Officer, Colorado Public Employees' Retirement
Association, dated February 22, 2011.
\501\ See Utah Retirement Systems Letter.
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Additionally, some commenters asserted that the Proposal would
restrict municipal entities from soliciting advice from citizens, and
would subject to the registration requirements members of the general
public submitting written comments or giving oral statements to the
board of a municipal entity.\502\ Another commenter stated that the
Proposal would require registration of a former board member, if the
Chairman of the current board contacts that former board member with
questions about a prior issuance.\503\
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\502\ See, e.g., letter from Annise D. Parker, Mayor, City of
Houston, Texas, dated February 22, 2011; Squire Sanders & Dempsey
Letter.
\503\ See Indianapolis Local Public Improvement Bond Bank
Letter.
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After considering the comments, the Commission has determined to
exempt from the definition of municipal advisor, pursuant to its
authority under Section 15B(a)(4), all members of a municipal entity's
governing body, its advisory boards and its committees, as well as
persons serving in a similar official capacity with respect to the
municipal entity, to the extent they are acting within the scope of
their official capacity, regardless of whether such members or
officials are employees of the municipal entity. Specifically, Rule
15Ba1-1(d)(3)(ii) exempts from the definition of municipal advisor
``[a]ny
[[Page 67506]]
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 \504\ to
the extent that such person is acting within the scope of such person's
official capacity'' \505\ and ``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.'' \506\
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\504\ Comments regarding the treatment of such governing persons
and employees of obligated persons, and how this exemption addresses
such comments, are separately discussed further below.
\505\ Rule 15Ba1-1(d)(3)(ii)(A).
\506\ Rule 15Ba1-1(d)(3)(ii)(B).
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The Commission agrees with commenters that like employees, a
municipal entity's officials, as well as members of a municipal
entity's governing body and other officials serving in a similar
capacity (including members of advisory boards and committees), whether
or not employed by a municipal entity, typically act on behalf of the
municipal entity. The Commission also believes that if a local
government official or appointed board member of a municipal entity, in
the scope of his or her duties to that municipal entity, provides
advice to another municipal entity, such advice would not require the
person to register as a municipal advisor because such person would be
acting within the scope of his or her duties to the municipal entity.
Rule 15Ba1-1(d)(3)(ii) also clarifies the Commission's interpretation
of the statutory exclusion from the definition of ``municipal advisor''
for employees of municipal entities by providing that such employees
are exempt ``to the extent that such person is acting within the scope
of such person's employment.'' \507\ Consequently, as described above
with respect to governing board members and officials, an employee of
one municipal entity that provides advice, within the scope of his or
her employment as such, to another municipal entity or obligated person
would be exempt from the definition of ``municipal advisor.''
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\507\ See Rule 15Ba1-1(d)(3)(ii).
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The exemption in Rule 15Ba1-1(d)(3)(ii) would extend to all
designees of public officials or members of a municipal entity's
governing body, to the extent such designation is made pursuant to
existing rules of the municipal entity for designating or delegating
authority. The Commission believes that under such scenario, the
designee would be serving ``in a similar official capacity'' \508\ as
the person for whom they are acting. Further, the Commission notes that
the exemption from registration includes members of advisory boards
\509\ and committees,\510\ acting within the scope of their capacity as
such \511\ because, as with respect to members of the governing body or
other government officials, when acting within the scope of their
official capacity such persons are acting on behalf of the municipal
entity.
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\508\ See id.
\509\ Commenters provided some examples of advisory board
composition and activities. See, e.g., Combs Letter (describing that
the ``Comptroller's Investment Advisory Board,'' which advises the
state's trust company which in turn manages state funds, is unlike
an investment adviser in that it doesn't assist with the selection
of specific investments or investment professionals; that it
provides general guidance but has no control over what purchases and
sales are made with state funds; and that although the board members
have no fiduciary duty, they also have no decisionmaking power); and
letter from Gregg Abbott, State of Texas, dated February 22, 2011
(``State of Texas Letter'') (noting that distinguishing between
governing boards and advisory boards is unworkable as some advisory
boards are subcommittees of governing boards, some are made up of a
combination of governing board members and other citizen volunteers,
and some have no governing board members).
\510\ Some municipal entity boards also have committees that may
or may not be comprised of members of the board. See, e.g., letter
from Jerome Cochrane, University of Pittsburgh, dated February 22,
2011 (certain committees of the boards of certain Pennsylvania State
universities include ``non-voting committee members, representing
members of the public, alumni, faculty, staff and student bodies'').
\511\ The Commission notes that the exemption for advisory board
and committee members includes volunteer members of such boards and
committees.
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The Commission does not intend to impede the deliberative process
that municipal entities engage in with their citizens. Accordingly, the
registration requirement for municipal advisors does not apply to
persons who comment on municipal financial products or the issuance of
municipal securities by making use of public comment forums provided by
municipal entities or other public forums. Additionally, responding to
factual questions about a past issuance by a former board member would
not constitute municipal advisory activities, because providing such
information in response to questions under such circumstances is
factual and therefore does not constitute advice with respect to such
issuance.\512\
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\512\ See supra Section III.A.1.b.1. (discussing the advice
standard in general).
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The Commission agrees with commenters that individuals who engage
in deliberative and decision-making functions with respect to municipal
financial products or the issuance of municipal securities as part of
their duties as members of a governing body should not have to register
as municipal advisors. Such individuals represent the municipal entity
that is the intended recipient of the protections of the municipal
advisor registration regime, and the Commission does not consider such
deliberative and decision-making functions to be advice. Additionally,
board members and other officials (appointed and elected alike, as well
as their duly appointed designees) may be subject to state and local
law, including fiduciary duties and ethics laws, and the statutory
qualifications for such members' board positions may be significant to
the mission of the municipal entity. Accordingly, the Commission does
not believe that imposing an additional layer of regulation, including
the fiduciary duty imposed upon municipal advisors,\513\ would provide
a significant additional benefit. The Commission agrees with commenters
that whether a public official or other member of a governing body of a
municipal entity is appointed or elected is not the sole factor in
determining whether such individual is accountable to the municipal
entity he or she serves. Board members, officials, and employees would
be required to register, however, if they are engaged by other
municipal entities or obligated persons to provide services as
compensated advisors in addition to their normal duties as an employee,
official, or board member of the municipal entity.\514\
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\513\ Section 15B(c)(1) of the Exchange Act (as amended by the
Dodd-Frank Act) imposes a fiduciary duty on municipal advisors when
advising municipal entities. See Proposal, 76 FR 827, note 60 and
accompanying text.
\514\ Compare with supra note 507 and accompanying text.
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For the reasons described above, the Commission finds it consistent
with the public interest, the protection of investors, and the purposes
of Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) to exempt any 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 to the extent that such person is acting within the
scope of such person's official capacity.\515\ Accordingly, such
persons are not required to register as municipal advisors.
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\515\ See Rule 15Ba1-1(d)(3)(ii)(A).
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Employees and Officials of Obligated Persons
Section 15B(e)(4) of the Exchange Act excludes from the definition
of municipal advisor persons who are employees of a municipal entity,
but does not extend such exclusion to employees of obligated persons.
In the
[[Page 67507]]
Proposal, the Commission asked whether employees of obligated persons
should be excluded, to the extent they are providing advice to the
obligated person, acting in its capacity as an obligated person, in
connection with municipal financial products or the issuance of
municipal securities.\516\ In addition, the Commission asked whether
there are types of persons, other than employees of obligated persons,
who should be excluded from the definition of municipal advisor.\517\
In response, the Commission received several comments.
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\516\ See Proposal, 76 FR 837.
\517\ See id.
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Some commenters stated that employees, officers, and directors of
obligated persons should be excluded from the definition of municipal
advisor when they provide advice to the obligated person with respect
to municipal financial products or the issuance of municipal
securities.\518\ More specifically, some commenters stated that board
members of obligated persons acting within the scope of their duties do
not give ``advice'' and that it is the obligation of board members to
communicate with fellow board members and staff.\519\ For example, one
commenter stated that municipal advisors typically have multiple
clients, hold themselves out as advisors, and generally do not exercise
decision making authority for the municipal entity or obligated
person.\520\ On the other hand, according to this commenter, directors
and employees of obligated persons act on behalf of and in the interest
of entities with which they are affiliated and do not hold themselves
out as advisors.\521\ They act for obligated persons in connection with
municipal offerings only as part of their responsibilities to the
obligated person.\522\ Other commenters stated that members of
governing boards of obligated persons are already subject to state and
federal laws, such as laws governing non-profit entities, conflict of
interest laws, ethics laws, and open meeting laws.\523\ Commenters also
made similar statements with respect to employees of obligated
persons.\524\ Further, some commenters stated that officers, directors,
and employees of obligated persons are no different from those of
municipal entities,\525\ and an obligated person can only act through
its board and employees.\526\ One commenter suggested, however, that
individual board members and employees should not be exempt from
registration if they are engaged to provide services for a nonprofit
organization as compensated advisors.\527\
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\518\ See, e.g., NABL Letter; ABA Letter; letter from Duncan
Gallagher, EVP and Chief Financial Officer, Allina Health System,
dated February 22, 2011 (``Allina Health System Letter''; letter
from Jeffrey S. Bromme, Senior Vice President and Chief Legal
Officer and C. Robert Foltz, Associate Chief Legal Officer--
Treasury, Adventist Health System Sunbelt Healthcare Corporation,
dated February 11, 2011 (``Adventist Health System Letter'').
\519\ See, e.g., letter from Charles A. Samuels, Mintz Levin
Cohn Ferris Glovsky & Popeo, P.C., on behalf of the National
Association of Health & Educational Facilities Finance Authorities,
dated February 17, 2011 (``National Association of Health &
Educational Facilities Finance Authorities Letter''). See also
Allina Health System Letter; Chapman and Cutler Letter; letter from
Latham & Watkins, dated February 22, 2011 (``Latham & Watkins
Letter''); and letter from David W. Lowden, Chair, the Committee on
Non-Profit Organizations, Association of the Bar of the City of New
York, dated February 14, 2011 (``New York City Bar Letter'').
\520\ See Latham & Watkins Letter.
\521\ See id.
\522\ See id.
\523\ See, e.g., Kutak Rock Letter; National Association of
Health & Educational Facilities Finance Authorities Letter; Latham &
Watkins Letter; letter from Susan Ellen Wagner, Executive Director,
Healthcare Trustees of New York State, dated February 16, 2011
(``Healthcare Trustees of New York State Letter''); William C.
Daroff, Vice President for Public Policy & Director of the
Washington Office, Jewish Federations of North America, dated
February 25, 2011 (``Jewish Federations of North America Letter'').
\524\ See, e.g., National Association of Health & Educational
Facilities Finance Authorities Letter; Latham & Watkins Letter; New
York City Bar Letter; and letter from Corinne Johnson, Executive
Director, Colorado Health Facilities Authority, Cris White,
Executive Director, Colorado Housing and Finance Authority, Jo Ann
Soker, Executive Director, Colorado Educational and Cultural
Facilities Authority, dated February 18, 2011 (``Colorado Health
Facilities Letter'').
\525\ See, e.g., South Lake County Hospital District Letter. See
also Latham & Watkins Letter.
\526\ See, e.g., Squire Sanders & Dempsey Letter. See also
Latham & Watkins Letter; MSRB Letter.
\527\ See New York City Bar Letter.
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Several commenters stated that the MSRB Study,\528\ the legislative
history of the Dodd-Frank Act, and the Proposal indicate that the term
``municipal advisor'' is meant to capture professionals that offer
advisory services in a financial marketplace.\529\ One commenter stated
that for decades, in regulating the market for financial advice,
Congress and the Commission have expressly declined to regulate
internal advice provided by employee to employer.\530\ The commenter
stated that a departure from this established practice should not be
inferred, absent a clear indication from Congress, and nothing in the
language or history of the Dodd-Frank Act signals that Congress
intended to affect a fundamental shift in policy.\531\
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\528\ In April 2009, the MSRB issued a study titled
``Unregulated Municipal Market Participants: A Case for Reform,'' in
which the MSRB advocated for the regulation of intermediaries in the
municipal securities market (such as swap advisors and financial
advisors). This study was referenced by the Commission in the
Proposal. See Proposal, 76 FR 825, n.8.
\529\ See, e.g., letters from Michael B. Koffler and James K.
Hasson, Jr., Sutherland Asbill & Brennan LLP on behalf of
Universities, dated February 22, 2011 (``Universities Letter'');
Richard D. Legon, President, Association of Governing Boards of
Universities and Colleges, dated February 15, 2011 (``Association of
Governing Boards of Universities and Colleges Letter'') (stating
that board members and employees of obligated persons are not
discussed in the preamble and cost estimates of the Proposal). See
also letters from Molly Corbett Broad, President, American Council
on Education, dated February 22, 2011 (``American Council on
Education Letter''); Daniel G. Kirch, M.D., President and CEO,
Association of American Medical Colleges, dated February 16, 2011
(``Association of American Medical Colleges Letter'').
\530\ See American Council on Education Letter (providing as an
example in support of their statement that existing registration
requirements, such as those under the Investment Advisers Act, cover
firms and persons in the business of providing advice, and that the
requirements do not regulate employment relationships). See also
Association of Governing Boards of Universities and Colleges Letter
(noting that Commission staff has taken the position, in the context
of a No-Action Letter under the Investment Advisers Act, that
internal relationships are unlike the commercial relationships
between an investment adviser and its clients that the Investment
Advisers Act was intended to regulate).
\531\ See American Council on Education Letter.
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Some commenters stated that the proposed rules would make it
difficult for obligated persons to recruit and retain board members and
employees,\532\ discourage officers and board members from engaging in
matters that are traditionally within their purview,\533\ and disrupt
the process of borrowing and operations of borrowers and issuers.\534\
Other commenters stated that the proposed rules could substantially
increase the cost of financing \535\ and could cause a potential
borrower to forego projects using the economic development options
offered by states and avoid the issuance of municipal bonds.\536\
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\532\ See, e.g., letter from Richard L. Clarke, DHA, FHFMA,
President and CEO, Healthcare Financial Management Association,
dated February 22, 2011 (``Healthcare Financial Management
Association Letter''); Latham & Watkins Letter; and New York City
Bar Letter.
\533\ See, e.g., Association of American Medical Colleges
Letter; and New York City Bar Letter.
\534\ See, e.g., National Association of Health & Educational
Facilities Finance Authorities Letter.
\535\ See, e.g., letter from Christopher B. Meister, Executive
Director, Illinois Finance Authority, dated February 22, 2011
(``Illinois Finance Authority Letter''). See also SIFMA Letter I.
\536\ See, e.g., State of Indiana Letter; National Association
of State Treasurers Letter; and New York City Bar Letter.
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As discussed above, one commenter suggested that ``employees and
board members of a municipal entity should be excluded from regulation
to the extent they provide advice to an obligated person (and acting in
the
[[Page 67508]]
purview of their duties).'' \537\ Likewise, employees and board members
of an obligated person should be excluded from regulation to the extent
they provide advice to a municipal entity.\538\ On the other hand,
another commenter stated that employees, officers, and directors of an
obligated person should be exempt to the extent they provide advice
solely to the obligated person and not to a municipal entity.\539\ One
other commenter stated that when an obligated person solicits conduit
issuers to issue bonds on behalf of the obligated person, such
solicitation should not require the obligated person or its board
members or employees to register as municipal advisors.\540\
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\537\ See supra note 499 and accompanying text.
\538\ See Kutak Rock Letter.
\539\ See ABA Letter.
\540\ See NABL Letter. See also letter from James E. Potvin,
Chair and Robert W. Giroux, Executive Director, Vermont Educational
and Health Buildings Financing Agency, dated February 22, 2011
(``Vermont Educational and Health Buildings Financing Agency
Letter''); and National Association of State Treasurers Letter;
letter from Paul Goldstein, Vice President of Finance, Treasury/
Accounting and Chief Financial Officer, Orlando Health, Inc., dated
February 18, 2011 (``Orlando Health Letter''). Some commenters
stated generally that obligated persons should not be required to
register as municipal advisors. See, e.g., Latham & Watkins Letter.
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After considering the comments, the Commission agrees with
commenters that board members, officers, and employees of obligated
persons should be treated in the same manner as board members,
officers, and employees of municipal entities and is using its
statutory authority to provide an exemption for such persons that is
parallel to the exemption with respect to municipal entities described
above.\541\ The Commission believes that this exemption is appropriate,
because such individuals, when acting in the scope of their duty to the
obligated person, are accountable to the obligated person. Further,
board members, officers, and employees of obligated persons serve
similar functions as board members, officers, and employees of
municipal entities. Consequently, the Commission is exempting from the
definition of municipal advisor any employee of an obligated person
acting within the scope of such person's employment, as well as any
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, an obligated person to the extent they are acting
within the scope of their duties.\542\ The Commission believes that,
like municipal entities, obligated persons and persons who perform
decision-making functions for, or otherwise act on behalf of, obligated
persons, when fulfilling their duty to the obligated person, are also
the intended beneficiaries of the protections afforded by the municipal
advisor registration requirement. As with respect to municipal
entities, board members, officials, and employees of obligated persons
would be required to register, however, if they are engaged by other
municipal entities or obligated persons to provide services as
compensated advisors in addition to their normal duties as an employee,
official, or board member of the obligated person.\543\
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\541\ See Rule 15Ba1-1(d)(3)(ii); and supra notes 504-505 and
accompanying text.
\542\ See Rule 15Ba1-1(d)(3)(ii). See also notes 504 and 506 and
accompanying text.
\543\ As described above, a local government official or
appointed board member of a municipal entity would not be required
to register as a municipal advisor if he or she provides advice, in
the scope of his or her duties to that municipal entity employer, to
another municipal entity. See supra notes and 496 and 507
accompanying text. In contrast, if such a person is engaged and
compensated outside the scope of such duties, he or she would not be
eligible for the exemption and would be required to register.
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For the reasons described above, the Commission finds it consistent
with the public interest, the protection of investors, and the purposes
of Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) to exempt any: (1) 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, an obligated person to the extent that such person is
acting within the scope of such person's official capacity; and (2)
employee of an obligated person to the extent that such person is
acting within the scope of such person's employment.\544\ Accordingly,
such persons are not required to register as municipal advisors.
---------------------------------------------------------------------------
\544\ See Rule 15Ba1-1(d)(3)(ii).
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With regard to the application of the rules to employees or
governing body members of an obligated person who solicit conduit
issuers to issue bonds on behalf of the obligated person, the
Commission notes that these persons are not acting as advisors.\545\
Instead, they act as principals seeking an issuance of municipal
securities by a municipal entity on behalf of the obligated person
pursuant to an arm's-length loan (or similar) agreement under which the
obligated person will be required to pay debt service and other costs
upon bond issuance. The Commission notes that these individuals would
not be required to register as municipal advisors, because they are not
advising a municipal entity with respect to the issuance of municipal
securities or soliciting a municipal entity on behalf of a broker,
dealer, municipal securities dealer, municipal advisor, or investment
adviser for the purpose of obtaining or retaining an engagement for
such person. However, an employee, governing board member or other
official of an obligated person could still be deemed to be engaged in
municipal advisory activities (which include solicitation activities)
if his or her recommendations cannot be properly characterized as
negotiations of the terms by which the obligated person is agreeing to
engage in the borrowing through the municipal entity.\546\
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\545\ See supra note 540 and accompanying text.
\546\ See supra Section III.A.b.i. (discussing the advice
standard in general) and Section III.A.b.x. (discussing solicitation
of a municipal entity or obligated person).
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Regardless of an individual's title as a member of a governing
body, an employee, or other official (appointed or elected) of a
municipal entity or obligated person, the Commission notes that the
exemptions described above do not apply to the extent such individual
acts outside of the scope of authority of his or her position.\547\
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\547\ The exemption only applies ``to the extent such person is
acting within the scope of such person's official capacity'' or
``employment,'' as applicable. See Rule 15Ba1-1(d)(3)(ii).
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ii. Responses to Requests for Proposals or Requests for Qualifications
In the Proposal, the Commission requested comment about banks that
respond to municipal entities' RFPs regarding investment products
offered, such as money market mutual funds or other exempt
securities.\548\ The Commission received a number of comments regarding
responses to RFPs or RFQs by banks and other entities.\549\
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\548\ See Proposal, 76 FR 837.
\549\ See also supra notes 421-423 and accompanying text
(discussing RFPs and RFQs in the context of the solicitation prong,
including whether a market professional's activities assisting a
municipal entity or obligated person in their selection of another
market professional as part of an RFP process constitute municipal
advisory activities); and infra Section III.A.1.c.vii. (discussing
the treatment of responses by attorneys to RFPs from municipal
entities and obligated persons).
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Several commenters stated that responses to RFPs and RFQs should
not require a person to register as a municipal advisor. For example,
one commenter suggested that, with respect to municipal derivatives,
responding to RFPs or RFQs from a municipal entity or obligated person
does not constitute ``advice.'' \550\ Similarly, another commenter
stated generally that certain
[[Page 67509]]
activities should be expressly excluded from the definition of
``advice,'' including responding to RFPs or RFQs and providing terms on
which a financial institution would be prepared to enter into a
transaction or purchase securities issued by a municipal entity.\551\
This commenter also stated that bid documents submitted in response to
a municipal entity's request for private financing proposals should not
constitute advice.\552\ Another commenter concurred that responses to
RFPs should not be treated as advice.\553\
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\550\ See BNY Letter.
\551\ See Letter from Nick Butcher, Senior Managing Director,
Macquarie Capital Advisors, dated February 22, 2011 (``Macquarie
Letter'').
\552\ See Macquarie Letter.
\553\ See OCC Letter. This commenter stated, among other things,
that banks respond to RFPs on a competitive basis, and many
municipalities are required by statute to issue RFPs to banks for
their operating accounts. See id.
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The Commission has carefully considered the issues raised by
commenters on the Proposal and agrees that responses to RFPs or RFQs
alone do not constitute municipal advisory activities.\554\ Therefore,
the Commission is adopting Rule 15Ba1-1(d)(3)(iv), which exempts from
the definition of municipal advisor ``[a]ny person providing a response
in writing or orally to a request for proposals or qualifications from
a municipal entity or obligated person for services in connection with
a municipal financial product or the issuance of municipal securities;
provided however, that such person does not receive separate direct or
indirect compensation for advice provided as part of such response.''
\555\
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\554\ For a discussion of RFPs and RFQs in the context of the
solicitation prong, see supra notes 421-423 and accompanying text.
\555\ The Commission notes that FINRA applies a similar approach
in connection with the application of its suitability rule to
broker-dealers. See FINRA Rule 2111. In a recent Regulatory Notice,
FINRA explained that, where a registered representative makes a
recommendation to purchase a security to a potential investor, the
suitability rule would apply to the recommendation if that
individual executes the transaction through the broker-dealer with
which the registered representative is associated or the broker-
dealer receives or will receive, directly or indirectly,
compensation as a result of the recommended transaction. See FINRA
Regulatory Notice 12-55. For purposes of the municipal advisor
registration rules, if a person is selected as a result of an RFP or
RFQ, any applicable law or rule (e.g., fair dealing, suitability,
fiduciary duty) will apply to that person's activities in the role
for which the person was selected.
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Responses to RFPs or RFQs are provided at the request of, and
established by, a municipal entity or obligated person as part of a
competitive process. Therefore, it is reasonable to believe that the
municipal entity or obligated person would understand that service
providers respond to RFPs and RFQs in order to obtain business and
would not rely on such responses as it would on advice from its
advisor. Further, persons who respond to RFPs or RFQs are likely to be
already regulated entities, such as registered municipal advisors,
brokers, dealers, or investment advisers. Accordingly, their responses
may be subject to fair dealing, suitability, or other standards.
Moreover, if a person is selected by a municipal entity or obligated
person as a result of an RFP or RFQ, such person could be required to
register as a municipal advisor for its subsequent activities.
For the same reasons discussed above for other RFPs, the exemption
pursuant to Rule 15Ba1-1(d)(3)(iv) also includes responses to so-called
``mini-RFPs'' that might only be distributed to service providers that
have been pre-screened or pre-qualified by the municipal entity or
obligated person. For the exemption to apply, a person providing advice
in response to an RFP or RFQ may not be separately compensated for
advice given as part of the RFP or RFQ process. Further, the
compensation such person receives, if hired as a result of the RFP or
RFQ, is not direct or indirect compensation for the advice provided as
part of the RFP or RFQ. However, assisting with the preparation of an
RFP or RFQ on behalf of a municipal entity or obligated person, or
assisting in the selection of a broker-dealer, investment adviser, or
financial advisor as part of an RFP process, could constitute municipal
advisory activity. Specifically, in assisting in the preparation of an
RFP or RFQ, a person could provide advice with respect to the
parameters of such RFP or RFQ, such as the potential use of municipal
financial products or the issuance of municipal securities. Further, in
assisting in the selection of a broker-dealer, investment adviser, or
municipal advisor as part of an RFP process, a person could provide
advice with respect to the responses to the RFP, including responses
related to the use of municipal financial products or the issuance of
municipal securities.\556\
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\556\ A person assisting a municipal entity or obligated person
in selecting a broker-dealer, investment adviser, or financial
advisor as part of an RFP process established by the municipal
entity or obligated person would not, however, be considered to be
undertaking a solicitation for purposes of the definition of
municipal advisor in Rule 15Ba1-1(d)(1), because such person would
not be soliciting ``on behalf of'' such broker-dealer, investment
adviser, or financial advisor. See supra Section III.A.1.b.x.
(discussing generally solicitation of a municipal entity or
obligated person). See also Rule 15Ba1-1(n) (defining solicitation
of a municipal entity or obligated person).
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For the foregoing reasons, the Commission finds it consistent with
the public interest, the protection of investors, and the purposes of
Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) \557\ to exempt persons responding to
RFPs and RFQs from the definition of municipal advisor, subject to the
limitations described above.
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\557\ Pursuant to Section 15B of the Exchange Act, the
Commission may exempt any class of municipal advisors from any
provision of Section 15B or the rules and regulations thereunder, if
it ``finds that such exemption is consistent with the public
interest, the protection of investors, and the purpose of [Section
15B].'' See 15 U.S.C. 78o-4(a)(4).
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iii. Municipal Entity or Obligated Person Represented by an Independent
Municipal Advisor
In the Proposal, the Commission sought comment on whether it should
provide other exclusions from the definition of municipal advisor.\558\
Several commenters suggested that a person providing advice with
respect to municipal financial products or the issuance of municipal
securities should not be regulated as a municipal advisor if the
municipal entity or obligated person is otherwise represented by a
municipal advisor with respect to the transaction.\559\ One commenter
argued that the Commission should provide that a person will not be
regulated as a municipal advisor to a municipal entity or obligated
person if such municipal entity or obligated person is or will be
represented by an ``independent advisor'' that is a registered
municipal advisor (or that is eligible for an exception) and any
relevant documentation states that: (1) The person is not acting as an
``advisor;'' and (2) the municipal entity or obligated person is not
relying on any advisory communications from such person.\560\ According
to another commenter, ``when a municipality has engaged an independent
financial advisor in connection with a proposed transaction,
unaffiliated counterparties or potential counterparties to the
transaction should not be deemed to be providing advice to the
municipality as it has already elected an entity to fulfill that
role.'' \561\ Another commenter stated that, in most cases where a bank
is ``providing a municipal derivative or other bank products and
services to a municipal entity or obligated person, a third party
[[Page 67510]]
advisor is providing advice on the transaction to the municipal entity
or obligated person.'' \562\ This commenter suggested that the
existence of such a third party relationship should be viewed as
evidence that the municipal entity or obligated person is not relying
on the bank for advice.\563\
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\558\ See Proposal, 76 FR 838.
\559\ See, e.g., SIFMA Letter I; letter from Adella M. Heard,
Senior Vice President and Assistant General Counsel, First Tennessee
Bank National Association, dated February 18, 2011 (``First
Tennessee Bank National Association Letter''); BNY Letter.
\560\ See SIFMA Letter I.
\561\ See First Tennessee Bank National Association Letter.
\562\ See BNY Letter.
\563\ See BNY Letter.
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The Commission has carefully considered these comments and is
adopting Rule 15Ba1-1(d)(3)(vi), which exempts from the municipal
advisor definition any person engaging in municipal advisory activities
in a circumstance in which a municipal entity or obligated person is
otherwise represented by an independent registered municipal advisor
with respect to the same aspects of a municipal financial product or an
issuance of municipal securities, provided that the following
requirements are met.\564\ First, an independent registered municipal
advisor must be providing advice with respect to the same aspects of
the municipal financial product or issuance of municipal securities as
the person seeking to rely on Rule 15Ba1-1(d)(3)(vi).\565\ For purposes
of Rule 15Ba1-1(d)(3)(vi), the term ``independent registered municipal
advisor'' means a municipal advisor registered pursuant to Section 15B
of the Exchange Act and the rules and regulations thereunder and that
is not, and within at least the past two years was not, associated
\566\ with the person seeking to rely on Rule 15Ba1-1(d)(3)(vi). The
Commission believes that a two year cooling-off period represents an
appropriate period of time to help remove any actual or perceived
influence over a municipal advisor's ability to exercise independent
judgment when engaging in municipal advisory activities.\567\ Second, a
person seeking to rely on this exemption must receive from the
municipal entity or obligated person a representation in writing that
it is represented by, and will rely on the advice of, an independent
registered municipal advisor, and such person has a reasonable basis
for relying on the representation.\568\ Third, such person must provide
the required disclosures to the municipal entity or obligated person,
and provide a copy of such disclosures to the municipal entity's or
obligated person's independent registered municipal advisor. With
respect to a municipal entity, such person must disclose in writing to
the municipal entity that, by obtaining such representation from the
municipal entity, such person is not a municipal advisor and is not
subject to the fiduciary duty established in Section 15B(c)(1) of the
Exchange Act with respect to the municipal financial product or
issuance of municipal securities.\569\ With respect to an obligated
person, such person must disclose in writing to the obligated person
that, by obtaining such representation from the obligated person, such
person is not a municipal advisor with respect to the municipal
financial product or issuance of municipal securities.\570\ The rule
also requires that each such disclosure must be made at a time and in a
manner reasonably designed to allow the municipal entity or obligated
person to assess the material incentives and conflicts of interest that
such person may have in connection with the municipal advisory
activities.\571\ The level and timing of disclosure required may vary
according to the issuer's knowledge or experience.\572\
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\564\ See Rule 15Ba1-1(d)(3)(vi).
\565\ See Rule 15Ba1-1(d)(3)(vi)(A).
\566\ For purposes of the definition of ``independent registered
municipal advisor'' in Rule 15Ba1-1(d)(3)(vi), the criteria for
association set forth in Section 15B(e)(7) (15 U.S.C. 78o-4(e)(7))
will apply. See Rule 15Ba1-1(d)(3)(vi)(A).
\567\ A two-year period is also used to determine whether an
individual is a ``public representative'' for purposes of MSRB Board
membership. Specifically, for purposes of determining whether an
individual is a public representative, the MSRB defined the term
``no material business relationship'' to mean that, at a minimum,
the individual is not and, within the last two years, was not
associated with a municipal securities broker, municipal securities
dealer, or municipal advisor, and that the individual does not have
a relationship with any municipal securities broker, municipal
securities dealer, or municipal advisor, whether compensatory or
otherwise, that reasonably could affect the independent judgment or
decision making of the individual. See Securities Exchange Act
Release No. 63025 (September 30, 2010), 75 FR 61806, 61808 (October
6, 2010) (SR-MSRB-2010-08). Further, Rule 206(4)-5(a)(1) under the
Investment Advisers Act prohibits investment advisers from receiving
compensation for providing advice to a ``government entity'' within
two years after a ``contribution'' to an ``official'' of the
government entity has been made by the investment adviser or by any
of its ``covered associates.'' See 17 CFR 275.206(4)-5(a)(1). In
adopting this rule, the Commission stated that the two-year time out
is intended to discourage advisers from participating in pay-to-play
practices by requiring a cooling off period during which the effects
of a political contribution on the selection process can be expected
to dissipate. See Political Contributions Final Rule, 75 FR 41026.
\568\ See Rule 15Ba1-1(d)(3)(vi)(B). The same standards and
principles apply in determining whether a person has a reasonable
basis for reliance as discussed previously with respect to reliance
on representations regarding proceeds determinations. See supra
notes 364-365 and accompanying text.
\569\ See Rule 15Ba1-1(d)(3)(vi)(C)(1).
\570\ See Rule 15Ba1-1(d)(3)(vi)(C)(2).
\571\ See Rule 15Ba1-1(d)(3)(vi)(C)(3). The CFTC's business
conduct standards for swap dealers and major swap participants
contain similar standards for disclosure to counterparties.
Specifically, CFTC Rule 23.431(a) states that: ``At a reasonably
sufficient time prior to entering into a swap, a swap dealer or
major swap participant shall disclose to any counterparty to the
swap (other than a swap dealer, major swap participant, security-
based swap dealer, or major security-based swap participant)
material information concerning the swap in a manner reasonably
designed to allow the counterparty to assess [risks,
characteristics, and conflicts of interest related to the swap.]''
17 CFR 23.431(a).
\572\ The Commission believes that some municipal advisors are
already familiar with this disclosure level and timing standard. See
Interpretive Notice Concerning the Application of MSRB Rule G-17 to
Underwriters of Municipal Securities (August 2, 2012), available at
http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-17.aspx?tab=2 (stating that ``[t]he level of disclosure
required may vary according to the issuer's knowledge or experience
with the proposed financing structure or similar structures,
capability of evaluating the risks of the recommended financing, and
financial ability to bear the risks of the recommended financing, in
each case based on the reasonable belief of the underwriter''); MSRB
Notice 2013-08 (March 25, 2013) MSRB Answers Frequently Asked
Questions (FAQS) Regarding an Underwriter's Disclosure Obligations
to State and Local Government Issuer Under Rule G-17, available at
http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2013/2013-08.aspx (referencing the requirement under the
Interpretive Notice Concerning the Application of MSRB Rule G-17
that the arm's length nature of the relationship be provided ``At
the earliest stages of the relationship, generally at or before a
response to a request for proposals or promotional materials are
delivered to an issuer.'').
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The requirement that a copy of the disclosure be provided to the
independent registered municipal advisor is not intended to alter the
nature of the duty owed by the municipal advisor to its municipal
entity or obligated person client or the nature of such municipal
advisor's engagement.
The Commission believes that exempting persons advising a municipal
entity or obligated person from the definition of municipal advisor
when the municipal entity or obligated person is represented by an
independent registered municipal advisor is consistent with the public
interest, the protection of investors, and the purposes of Section 15B
of the Exchange Act. The Commission believes that Rule 15Ba1-
1(d)(3)(vi) will allow parties to a municipal securities transaction
and others who are not registered municipal advisors to share advice
with municipal entities and obligated persons so long as the municipal
entity or obligated person is represented by an independent registered
municipal advisor. A municipal entity represented by an independent
registered municipal advisor will have the benefits associated with the
regulation of municipal advisors. Such benefits include, but are not
limited to, standards of conduct, training, and testing for municipal
[[Page 67511]]
advisors that may be required by the Commission or the MSRB, other
requirements unique to municipal advisors that may be imposed by the
MSRB,\573\ and fiduciary duty. While independent registered municipal
advisors do not owe a fiduciary duty to obligated persons, the
Commission notes that they have a duty to deal fairly with obligated
persons under MSRB Rule G-17.\574\ Also, as noted by commenters, the
engagement by a municipal entity or obligated person of an independent
registered municipal advisor indicates that the municipal entity or
obligated person intends to rely on the advice of that advisor. Rule
15Ba1-1(d)(3)(vi) requires that this intention be further evidenced by
a written representation that the municipal entity or obligated person
will rely on the advice of an independent registered municipal advisor.
Further, Rule 15Ba1-1(d)(3)(vi) requires the person receiving such
representation to have a reasonable basis for relying on the
representation.
---------------------------------------------------------------------------
\573\ See supra note 190.
\574\ See MSRB Rule G-17.
---------------------------------------------------------------------------
So long as a municipal entity or obligated person is represented by
and relies on an independent registered municipal advisor, the
Commission believes it is appropriate to allow municipal entities and
obligated persons to receive as much advice and information as possible
from a variety of sources, even if the providers of such advice are not
subject to a fiduciary duty. The Commission does not seek to curtail
the receipt of important advice and information so long as the
municipal entities and obligated persons are represented by and rely on
independent registered municipal advisors who are subject to a
fiduciary or other duties and who can help the municipal entities and
obligated persons evaluate the advice and identify potential conflicts
of interest. Further, the requirement that a person seeking to rely on
this rule provide a copy of the disclosures under Rule 15Ba1-
1(d)(3)(vi)(C) to the independent registered municipal advisor will
help timely inform the independent registered municipal advisor that
the municipal entity or obligated person is receiving advice from a
person seeking to rely on Rule 15Ba1-1(d)(3)(vi).
In addition, certain persons that may engage in municipal advisory
activities could also be counterparties to a municipal entity or
obligated person, such as swap dealers and security-based swap dealers.
The requirement for such persons to register as municipal advisors
could be inconsistent with their roles as counterparties to the
municipal entity or obligated person. While the Commission is
separately providing certain exemptions for counterparties of municipal
entities and obligated persons,\575\ such persons may also consider
whether they can rely on this exemption.
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\575\ See, e.g., infra Section III.A.1.c.vi. (discussing an
exemption for swap dealers).
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iv. Broker, Dealer, or Municipal Securities Dealer Serving as an
Underwriter
Exchange Act Section 15B(e)(4)(C) provides that the term
``municipal advisor'' does not include a broker, dealer, or municipal
securities dealer serving as an underwriter (as defined in Section
2(a)(11) of the Securities Act) (the ``underwriter exclusion'').\576\
In the Proposal, the Commission proposed to interpret this statutory
underwriter exclusion to apply solely to a broker, dealer, or municipal
securities dealer serving as an underwriter in connection with the
issuance of municipal securities.\577\ Further, the Commission proposed
that this exclusion would not apply when such persons are acting in a
capacity other than as an underwriter, and that, for example, this
exclusion would not apply to advice with respect to the investment of
bond proceeds or municipal derivatives.\578\
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\576\ See 15 U.S.C. 78o-4(e)(4)(C).
\577\ See Proposal, 76 FR 832 and proposed Rule 15Ba1-
1(d)(2)(ii). See also Temporary Registration Rule Release, 75 FR
54467, note 19. In the Proposal, the Commission stated its belief
that Congress excluded from the definition of municipal advisor a
broker, dealer, or municipal securities dealer acting as an
underwriter on behalf of a municipal entity or obligated person in
connection with the issuance of municipal securities because such
activity is already subject to MSRB rules. See Proposal, 76 FR 832,
note 107.
\578\ See Proposal, 76 FR 832.
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In the Proposal, the Commission requested comment on whether its
interpretation of the statutory exclusion from the definition of
municipal advisor for a broker, dealer, or municipal securities dealer
serving as an underwriter was appropriate.\579\ The Commission received
approximately 20 comment letters addressing the scope of this
underwriter exclusion. Most commenters suggested that this exclusion
should cover broker-dealer activities already subject to
regulation,\580\ and some commenters suggested that it should cover
broker-dealer activities that are solely incidental to underwriting an
issuance of municipal securities.\581\ By contrast, other commenters
supported a more limited scope for the underwriter exclusion, stating,
for example, that ``[u]nless the Commission recognizes and implements
in an appropriate manner the narrow character of the underwriter
definition referenced in the Dodd-Frank Act, the Commission will be
diminishing otherwise important protections for municipal entities and
obligated persons provided in that Act.'' \582\ Another commenter
suggested that the Commission clarify that an underwriter is not
permitted to provide ``advice'' with respect to the structure, timing,
or terms of the bond issue it seeks to purchase and distribute.\583\
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\579\ See id., at 836.
\580\ See, e.g., letter from JoAnn Bourne, Senior Executive Vice
President, Global Treasury Management, Union Bank, N.A., dated
February 18, 2011 (``Union Bank Letter'') (stating the belief that,
while the Dodd-Frank Act only provided an exclusion for brokers and
dealers when they are serving as underwriters, Congress did not
intend to impose an additional level of regulation on broker-dealers
when they are providing advice that is already subject to
regulation); SIFMA Letter I; and letter from Noreen Roche-Carter,
Chair, Tax & Finance Task Force, Large Public Power Council, dated
February 22, 2011 (``Large Public Power Council Letter'') (stating
that ``[b]y limiting that exemption to instances where the broker-
dealer is acting as an underwriter, we are concerned this will limit
the types of services provided to our members by broker-dealers
compared to what has traditionally been provided to our members'').
\581\ See infra note 637 and accompanying text.
\582\ See, e.g., letter from Robert Doty, AGFS, dated February
22, 2011 (``Doty Letter I'').
\583\ See letter from Colette-Irwin Knott, CIPFA, President,
National Association of Independent Public Finance Advisors, dated
February 22, 2011 (``NAIPFA Letter'').
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The Commission has carefully considered comments submitted about
the underwriter exclusion in the Proposal, as discussed further below,
and is adopting its proposed interpretation of the statutory
underwriter exclusion, with modifications and clarifications designed
to address commenters' concerns. Specifically, Rule 15Ba1-1(d)(2)(i)
provides that the term ``municipal advisor'' shall not include a
``broker, dealer, or municipal securities dealer serving as an
underwriter of a particular issuance of municipal securities 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.''
Under the Commission's modified interpretation of the underwriter
exclusion, if a broker, dealer, or municipal securities dealer is
serving as an underwriter of a particular issuance of municipal
securities, the underwriter exclusion would include advice provided by
that underwriter within the scope of underwriting and would generally
include advice with respect to the structure, timing, terms, and other
similar matters concerning that issuance of municipal securities.
[[Page 67512]]
It is important to note that the following advice would be outside
the scope of an underwriting for purposes of this exclusion: (1) Advice
on investment strategies; (2) advice on municipal derivatives; and (3)
advice otherwise identified by the Commission to be outside the scope
of an underwriting.\584\ Such advice generally is not within the scope
of serving as an underwriter on an issuance of municipal securities and
can raise issues that implicate the policy objectives of municipal
advisor registration. For example, municipal entities suffered
significant losses in the financial crisis related to advice on complex
municipal derivatives,\585\ and advice on investments,\586\ such as
refunding escrow investments provided by underwriters \587\ and
investments involving fraud in investment bidding procedures,\588\ has
been the subject of significant enforcement activity. In other
circumstances, such advice may create conflicts of interest for an
underwriter, such as when the advice addresses whether to issue debt or
whether to conduct a competitive sale instead of a negotiated
underwriting. In addition, as discussed further below, the underwriter
exclusion does not include all activities that may be solely incidental
to an underwriting, such as advice on investment strategies or advice
on municipal derivatives, because these activities are not within the
scope of an underwriting and are activities for which municipal
entities and obligated persons require the protections afforded by
municipal advisors.
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\584\ See infra note 612 and accompanying text.
\585\ See supra note 3 and accompanying text.
\586\ See supra note 106 and accompanying text.
\587\ See supra note 380 and accompanying text.
\588\ See supra note 287 and accompanying text.
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Although, as noted above, ``issuance of municipal securities''
should be construed broadly,\589\ the Commission believes that, in
order for a person to be ``serving as an underwriter'' \590\ with
respect to an issuance of municipal securities, there must be a
relationship to a particular transaction.\591\ For example, a
contractual engagement by a municipal entity of a broker-dealer to
serve as underwriter on a specific planned transaction for the issuance
of municipal securities would constitute the requisite engagement on a
particular issuance of municipal securities. By contrast, an engagement
by a municipal entity of a broker-dealer to serve as underwriter for
some period of time or to serve as a member of an underwriting ``pool''
without specifying the broker-dealer's assignment expressly to serve as
underwriter on one or more particular planned transactions would not
constitute serving as an underwriter on a particular issuance of
municipal securities. Further, an underwriter providing advice with
respect to related transactions or tranches on which it is not engaged
would be acting within the scope of the underwriter exclusion only if
such advice is also related to the tranche or transaction on which the
underwriter is engaged. For example, an underwriter may give advice
about the timing of a sale of a related transaction on which it is not
engaged by noting that shifting the timing of such sale will have a
positive impact on market demand for the transaction on which it is
engaged. Such advice would fall within the underwriter exclusion
because such advice concerns the timing of the particular issuance of
municipal securities for which it is acting as underwriter and is not
regarded by the Commission as being outside the scope of an
underwriting.
---------------------------------------------------------------------------
\589\ See supra Section III.A.1.b.vii (discussing the term
``issuance of municipal securities'').
\590\ See Rule 15Ba1-1(d)(2)(i).
\591\ See, e.g., In re Laser Arms Corp. Sec. Litig., 794 F.Supp.
475, 484 (S.D.N.Y. 1989) (citing L. LOSS, THE FUNDAMENTALS OF
SECURITIES REGULATION 278 (1983)). As set forth in Section 2(11) of
the Securities Act, the definition of a statutory underwriter turns
on the relationship of the party and the offering. Professor Loss
has observed that ``[t]he term `underwriter' is defined not with
reference to the particular person's general business but on the
basis of his relationship to the particular offering.''
---------------------------------------------------------------------------
The Commission recognizes, however, that a municipal entity issuer
may wish to request advice on an issuance of municipal securities from
a broker-dealer serving as a member of its underwriting ``pool'' that
does not yet have a specific assignment or from a broker-dealer engaged
on related transactions or tranches. In such circumstances, the broker-
dealer could respond within the requirements of one of the other
exemptions of general applicability discussed above. For example, if
the municipal entity issuer was seeking the advice in response to a
``mini-RFP'' sent to members of the underwriting pool, the broker-
dealer could respond and provide advice within the limitations of the
exemption for responses to RFPs and RFQs.\592\ In addition, if the
municipal entity is represented by an independent registered municipal
advisor with respect to such issuance of municipal securities, the
broker-dealer could respond and provide advice if the requirements of
the exemption available when a municipal entity is otherwise
represented by an independent registered municipal advisor with respect
to the same aspects of the issuance of municipal securities were
satisfied.\593\ Finally, depending on the nature of the requested
information and the response, it might be considered a communication or
effort to win business that is not municipal advisory activity.\594\
---------------------------------------------------------------------------
\592\ See supra Section III.A.1.c.ii.
\593\ See supra Section III.A.1.c.iii.
\594\ See infra notes 615-618 and accompanying text.
---------------------------------------------------------------------------
In response to commenters that suggested that underwriters should
not be permitted to provide ``advice'' with respect to the structure,
timing and terms of the bond issue it seeks to purchase and
distribute,\595\ the Commission points out that, subsequent to the
Proposal, the MSRB provided additional interpretive guidance under MSRB
Rule G-17, which requires that brokers, dealers, and municipal
securities dealers acting as underwriters make certain disclosures to
municipal issuers about the roles of underwriters in negotiated sales
of municipal securities, including disclosures about their duty of fair
dealing with a municipal issuer (but not a fiduciary duty to a
municipal issuer) and their actual or potential, material conflicts of
interest. The Commission continues to believe that allowing
underwriters to give advice within the scope of an underwriting with
respect to the structure, timing, terms, and other similar matters
concerning an issuance is consistent with the aim of improving the
quality of advice that municipal entities and obligated persons
receive, because these Rule G-17 disclosure requirements should assist
them in clarifying the duties of underwriters to municipal issuers,
identifying conflicts of interest, and appropriately evaluating the
advice they receive from underwriters with that informed
perspective.\596\
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\595\ See, e.g., NAIPFA Letter.
\596\ See MSRB Notice 2012-25 (May 7, 2012) (Securities and
Exchange Commission Approves Interpretive Notice on the Duties of
Underwriters to State and Local Government Issuers). In response to
comments on this Rule G-17 interpretive guidance, the MSRB also
indicated that it would continue to study whether to impose a
suitability standard on the types of financial products (including
types of bond structures) that may be sold to municipal entities.
See letter from Margaret Henry, General Counsel, Market Regulation,
MSRB, dated February 13, 2012, available at http://www.sec.gov/comments/sr-msrb-2011-09/msrb201109-24.pdf.
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The Commission continues to believe that a broker, dealer, or
municipal securities dealer engaging in municipal advisory activities
outside the scope of underwriting a particular issuance of municipal
securities should be subject to municipal advisor registration, absent
the availability of another exemption or exclusion. With respect to the
treatment of advice on municipal derivatives as
[[Page 67513]]
outside the underwriter exclusion, the Commission notes that one
purpose of the municipal advisor provision in the Dodd-Frank Act was to
address concerns about advice to municipalities on complex municipal
derivatives in which municipalities suffered significant losses in the
financial crisis.\597\
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\597\ See S. Rep. No. 111-176, at 38 (2010).
---------------------------------------------------------------------------
Several commenters requested additional guidance from the
Commission regarding the types of activities that would fall within the
Commission's interpretation of the statutory underwriter exclusion for
activity within the scope of an underwriting of an issuance of
municipal securities. For example, one commenter stated that the
exclusion should clearly extend to a full range of activities ``closely
related'' to the underwriting.\598\ Another commenter asserted that
certain municipal advisory activities and, in particular, certain
``transaction-related services'' provided by underwriters are integral
to fulfilling the function of an underwriter in a professional manner
but did not specify which activities were integral.\599\ A few
commenters stated that the Proposal did not provide sufficient guidance
regarding the scope of the underwriter exclusion and requested further
clarification.\600\
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\598\ See SIFMA Letter I. This commenter recommended that
covered activities for the underwriter exclusion should include: (1)
Advice regarding the issuance of municipal securities, municipal
financial products, or any other securities in the context of an
underwriting; (2) advice on the advisability of a municipal
derivative (including entering into a new derivative or amending or
terminating an existing derivative) in connection with an
underwriting; (3) advice in the capacity of a member of the
municipal entity or obligated person's underwriting pool, even if
not in the context of a particular deal, or other services after the
closing of an issuance of municipal securities but which relate to
the issuance for which the underwriter acted as an underwriter; (4)
communications and analyses that are part of an effort or
presentation to obtain business from the municipal entity or
obligated person, or otherwise part of seeking to serve as an
underwriter on future transactions; (5) assistance on related
transactions and related tranches of the offering; and (6) service
as a dealer-manager on a related tender or exchange offer for
outstanding securities.
\599\ See letter from Alan Polsky, Chair, MSRB, dated November
9, 2011 (``MSRB Letter II'') (including a listing of transaction-
related services of which, according to the commenter, some may be
appropriately performed by a broker-dealer as part of an
underwriting). See also letter from Robert K. Dalton, Vice Chairman,
George K. Baum & Company, dated December 20, 2011 (the ``Baum
Letter'') (noting that in the text of their November 9, 2011 letter
the MSRB noted that not only transaction-related services are
integral to an underwriting). But see NAIPFA Letter and letter from
Colette Irwin-Knott, President, NAIPFA, dated November 30, 2011
(``NAIPFA Letter II'') (stating its belief that certain of such
transaction-related services listed in the MSRB's letter are not so
``integrally related'' to an underwriter's duties to warrant
exclusion from regulation as a municipal advisor).
\600\ See, e.g., letter from Robert J. Stracks, Counsel, BMO
Capital Markets GKST Inc., dated February 22, 2011 (``BMO Capital
Markets Letter'') (stating that the Commission has made no attempt
to clarify the myriad of confusing issues it has raised with respect
to the exclusion for underwriters); Joy Howard WM Financial
Strategies Letter (stating that ``it is unclear what trigger event
would create an underwriting relationship as opposed to a municipal
advisory relationship''); Bond Dealers of America Letter (noting
that the underwriter exclusion is not clearly defined).
---------------------------------------------------------------------------
Set forth below are non-exclusive examples of activities that the
Commission considers to be within or outside the scope of the
underwriter exclusion to the municipal advisor definition,
respectively.
Examples of Activities Within the Scope of Serving as an Underwriter of
a Particular Issuance Municipal Securities for Purposes of the
Underwriter Exclusion
The Commission agrees with those commenters \601\ that stated that
it is not possible to provide an exhaustive list of all activities that
would be considered to be within the scope of an underwriting. As a
general matter, the Commission considers activities that are integral
to the purchase and distribution of a particular issuance of municipal
securities on which a broker, dealer, or municipal securities dealer is
engaged to serve in the capacity as underwriter to be within the scope
of the underwriter exclusion. The Commission also considers activities
that are integral to fulfilling the role of an underwriter, such as the
obligations of underwriters under the antifraud provisions of the
federal securities laws and obligations of underwriters under MSRB
rules, to be within the scope of an underwriting.\602\
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\601\ See, e.g., MSRB Letter II.
\602\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799, 2811-28812 (July 10, 1989); Securities Exchange
Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33123-33125
(June 10, 2010); See also MSRB Rules G-17 and G-19.
---------------------------------------------------------------------------
The Commission considers the following activities, identified by
commenters,\603\ to be within the scope of the underwriting exclusion:
\604\ (1) advice regarding the structure, timing, terms, and other
similar matters concerning a particular issuance of municipal
securities (except as otherwise provided herein with respect to advice
on investment strategies, municipal derivatives, or other activities
identified by the Commission as outside the scope of an underwriting);
(2) preparation of rating strategies and presentations related to the
issuance being underwritten; (3) preparations for and assistance with
investor ``road shows'' and investor discussions related to the
issuance being underwritten; (4) advice regarding retail order periods
and institutional marketing if the municipal entity has determined to
engage in a negotiated sale; (5) assistance in the preparation of the
preliminary and final official statements for the municipal securities;
(6) assistance with the closing of the issuance of municipal
securities, including negotiation and discussion with respect to all
documents, certificates, and opinions needed for such closing; (7)
coordination with respect to obtaining CUSIP numbers and the
registration of the issue of municipal securities with the book-entry
only system of the Depository Trust Company; (8) preparation of post-
sale reports for such municipal securities; and (9) structuring of
refunding escrow cash flow requirements necessary to provide for the
refunding and defeasance of an issue of municipal securities (provided,
however, that the recommendation of and brokerage of particular
municipal escrow investments is outside the scope of the underwriting
exclusion).
---------------------------------------------------------------------------
\603\ See, e.g., MSRB Letter II; NAIPFA Letter; NAIPFA Letter
II; SIFMA Letter I; and Baum Letter.
\604\ This list of activities includes examples of activities
that the Commission considers to be within the scope of an
underwriting; the list does not purport to cover all possible
activities qualifying for the underwriter exclusion.
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Examples of Activities Outside the Scope of Serving as an Underwriter
of a Particular Issuance of Municipal Securities for Purposes of the
Underwriter Exclusion
Several commenters \605\ also requested clarification as to whether
certain strategic, transaction-related, and post-issuance activities
would be considered acting within the scope of the underwriter
exclusion. The Commission notes that an underwriter providing certain
advice outside the scope of the underwriter exclusion would not be
required to be registered as a municipal advisor in order to provide
that advice if: (a) the advice does not relate to a municipal financial
product \606\ or the issuance of municipal securities,\607\ (b) the
advice is given in response to a request for proposal \608\ or is
otherwise permitted when seeking to obtain
[[Page 67514]]
business,\609\ or (c) the advice is given when the municipal entity has
engaged an independent registered municipal advisor.\610\
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\605\ See, e.g., NAIPFA Letter.
\606\ See supra Section III.A.1.b.iv. (discussing the definition
of ``municipal financial products'').
\607\ See supra Section III.A.1.b.vii. (discussing the term
``issuance of municipal securities'').
\608\ See supra Section III.A.1.c.ii. (discussing the exemption
for responses to RFPs and RFQs).
\609\ See infra notes 615 and 616 and accompanying text
(discussing communications or efforts to win business).
\610\ See supra Section III.A.1.c.iii. (discussing the exemption
when the municipal entity or obligated person is represented by an
independent municipal advisor).
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The Commission considers the following activities, identified by
commenters,\611\ to be outside the scope of the underwriter exclusion:
\612\ (1) advice on investment strategies; (2) advice on municipal
derivatives (including derivative valuation services); (3) advice on
what method of sale (competitive sale \613\ or negotiated sale \614\) a
municipal entity should use for an issuance of municipal securities;
(4) advice on whether a governing body of a municipal entity or
obligated person should approve or authorize an issuance of municipal
securities; (5) advice on a bond election campaign; (6) advice that is
not specific to a particular issuance of municipal securities on which
a person is serving as underwriter and that involves analysis or
strategic services with respect to overall financing options, debt
capacity constraints, debt portfolio impacts, analysis of effects of
debt or expenditures under various economic assumptions, or other
impacts of funding or financing capital projects or working capital;
(7) assisting issuers with competitive sales, including bid
verification, true interest cost (TIC) calculations and
reconciliations, verifications of bidding platform calculations, and
preparation of notices of sale; (8) preparation of financial
feasibility analyses with respect to new projects; (9) budget planning
and analyses and budget implementation issues with respect to debt
issuance and collateral budgetary impacts; (10) advice on an overall
rating strategy that is not related to a particular issuance of
municipal securities on which a person is serving as an underwriter,
including advice and actions taken on behalf of a municipal entity or
obligated person between financing transactions; (11) advice on overall
financial controls that are not related to a particular issuance of
municipal securities on which a person is serving as an underwriter; or
(12) advice regarding the terms of requests for proposals or requests
for qualification for the selection of underwriters or other
professionals for a project financing and advice regarding review of
responses to such requests, including matters regarding compensation of
such underwriters or other professionals.
---------------------------------------------------------------------------
\611\ See, e.g., MSRB Letter II; NAIPFA Letter; NAIPFA Letter
II; SIFMA Letter I; and Baum Letter.
\612\ For broker-dealers serving as underwriters for a
particular issuance of municipal securities, these activities would
not be excluded from the definition of municipal advisor because
they are not within the scope of an underwriting of such issuance of
municipal securities. This list of activities includes examples of
activities that the Commission considers to be outside the scope of
the underwriter exclusion; the list does not purport to cover all
possible activities not qualifying for the underwriter exclusion.
\613\ Competitive sale is a method of sale chosen by an issuer,
requesting underwriters to submit a firm offer to purchase a new
issue of municipal securities. The issuer awards the municipal
securities to the ``winning'' underwriter or syndicate presenting a
bid complying with the terms of a Notice of Sale that provides the
lowest interest rate cost according to stipulated criteria set forth
in the Notice of Sale. See definition of ``Competitive Sale'' in
MSRB Glossary.
\614\ Negotiated sale is the sale of a new issue of municipal
securities by an issuer directly to an underwriter or underwriting
syndicate selected by the issuer. See definition of ``Negotiated
Sale'' in MSRB Glossary.
---------------------------------------------------------------------------
The Commission believes the above-listed activities are not within
the scope of the underwriter exclusion because the activities are
either not specific to a particular issuance of municipal securities
for which a broker, dealer or municipal securities dealer could be
serving as an underwriter or the activities are not integral to
fulfilling the role of an underwriter.
Communications or Efforts to Win Business
A few commenters asked whether communications and analyses that are
part of an effort to win business would be considered municipal
advisory activity.\615\ The Commission notes that not all
communications with a municipal entity or obligated person constitute
municipal advisory activities. If the person has identified himself or
herself as seeking to obtain business, such as serving as an
underwriter on future transactions, whether such communications and
analyses constitute municipal advisory activities or the provision of
general information (as discussed further above \616\) will depend on
the specific facts and circumstances. For example, pursuant to the
Commission's interpretation of the treatment of the provision of
general information, the Commission believes that a broker-dealer who
provides information to a municipal entity regarding its underwriting
capabilities and experience or general market or financial information
that might indicate favorable conditions to issue or refinance debt
likely would not be treated as engaging in municipal advisory activity.
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\615\ See SIFMA Letter I. See also letter from Nathan R. Howard,
Esq., Municipal Advisor, WM Financial Strategies, dated February 22,
2011 (``Nathan R. Howard WM Financial Strategies Letter'') (stating
that when the services provided by a broker-dealer are merely
informational non-municipal advisory services, the broker-dealer
should be excluded from the definition of municipal advisor).
\616\ See supra Section III.A.1.b.i. (discussing, among other
things, the provision of general information).
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On the other hand, for purposes of this rule and in response to
comments,\617\ the Commission does not consider advice rendered by a
broker-dealer in its capacity as a member of an ``underwriting pool''
for a municipal entity or obligated person (and in the absence of a
designation of that broker-dealer to serve as underwriter on the
particular issuance of municipal securities on which the advice is
given) to be advice within the scope of the underwriting exclusion. An
underwriting pool generally includes a group of underwriters selected
by a municipal entity pursuant to an RFP or other process \618\ from
which the municipal entity may select one or more firms to underwrite a
specific transaction. As noted above, a broker-dealer that is merely a
part of an underwriting pool is not engaged to underwrite any
particular issuance, and therefore, is not acting as an underwriter. As
described above, however, depending on the particular facts and
circumstances, the broker-dealer's activities as part of an
underwriting pool may be within the requirements of one of the
exemptions of general applicability,\619\ may be considered to be an
effort to obtain underwriting business on its own behalf, or may be
otherwise exempt, which would not require municipal advisor
registration.
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\617\ See SIFMA Letter I.
\618\ See infra Section III.A.1.c.ii.
\619\ See supra notes 592 and 593 and accompanying text.
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Post-Offering Services
Commenters asked whether post-offering work performed by an
underwriter would qualify for the underwriter exclusion or whether it
would constitute municipal advisory activity requiring
registration.\620\ For purposes of this rule, the Commission considers
post-offering work performed by an underwriter to be municipal advisory
activity unless it is a request for information or services that would
have been provided as part of the underwriting (such as resending cash
flow and other similar information related to the offering) or is
required for an underwriter to fulfill its regulatory
[[Page 67515]]
obligations as underwriter.\621\ If an issuance has closed and the
underwriting period \622\ has terminated, the broker-dealer cannot be
considered to be acting as an underwriter with respect to the issuance
of municipal securities. Therefore, any advice or recommendation with
respect to the issuance of municipal securities or a municipal
financial product given after the termination of the underwriting
period generally would be municipal advisory activities. Accordingly,
broker-dealers should consider whether particular post-offering work
they provide would constitute advice with respect to the issuance of
municipal securities or a municipal financial product.
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\620\ See, e.g., SIFMA Letter I.
\621\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799, 28805, 2811-28812 (July 10, 1989); Securities
Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33123-
33125 (June 10, 2010); See also MSRB Rules G-17; G-19 and G-32.
\622\ For purposes of MSRB rules and Exchange Act Rule 15c2-12,
the underwriting period is the period in connection with a primary
offering of municipal securities ending on the later of the closing
of the underwriting or the sale of the last of the securities by the
syndicate. See definition of ``Underwriting Period'' in MSRB
Glossary.
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The Commission notes that assisting a municipal entity or obligated
person with filing annual financial information, audited financial
statements, or material event notices, as required by Rule 15c2-
12,\623\ after an issuance has closed and after the underwriting period
has terminated, would generally be outside the scope of the
underwriting exclusion. A determination as to whether or not these
activities would constitute advice would be based on all the facts and
circumstances.\624\
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\623\ 17 CFR 240.15c2-12.
\624\ See supra Section III.A.1.b.i (discussing the advice
standard in general).
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Broker-Dealers Acting as Placement Agents, Dealer-Managers, and
Remarketing Agents
A few commenters emphasized the similarity between private
placement agents and underwriters, and suggested that private placement
agents should be included in the underwriter exclusion.\625\ One
commenter stated that a private placement agent offering securities of
a municipal entity or obligated person in a private placement under the
Securities Act, even if the agent is not serving as an underwriter
within the strict meaning of Section 2(a)(11) of the Securities Act,
serves almost exactly the same role underwriters play in assisting
issuers.\626\ This commenter also noted that ``[a]ny uncertainty with
respect to a private placement agent's role can be adequately clarified
to municipal issuers or obligors through mandatory disclosures.'' \627\
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\625\ See SIFMA Letter I; Chapman & Cutler Letter (concurring
with SIFMA that the duties of placement agents with respect to the
sale and pricing of municipal securities are similar to the duties
of underwriters); Piper Jaffray Letter.
\626\ See Piper Jaffray Letter.
\627\ See id.
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The Commission believes that any registered broker-dealer who
participates in a particular issuance of municipal securities, whether
the broker-dealer is acting as agent (such as in a best-efforts
offering) or is acting as principal (such as in a firm commitment
offering) would not have to register as a municipal advisor if facts
and circumstances indicate that the registered broker-dealer is
performing municipal advisory activities that otherwise would be
considered within the scope of the underwriting of a particular
issuance of municipal securities as discussed above.\628\ Registered
broker-dealers are subject to regulation under the Exchange Act,
regardless of whether they act as principal or agent in a municipal
securities offering. The Commission does not believe that the
underwriter exclusion should be limited to a particular type of
underwriting or particular type of offering.\629\ Therefore, if a
registered broker-dealer, acting as a placement agent, performs
municipal advisory activities that otherwise would be considered within
the scope of the underwriting of a particular issuance of municipal
securities as discussed above, the broker-dealer would not have to
register as a municipal advisor.
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\628\ A registered broker-dealer acting as a placement agent in
the issuance of non-municipal securities, however, would not be able
to rely on the underwriter exclusion and, based on the facts and
circumstances, might be engaged in solicitation activity. See supra
note 462 and accompanying text (discussing when a placement agent
for an investment adviser to a pooled-investment vehicle would be
considered a third-party solicitor that falls within the definition
of municipal advisor). In addition, a placement agent may have other
duties, including a fiduciary duty to its client, that arise as a
matter of common law or another statutory or regulatory regime.
\629\ Whether or not a particular offering would be a
distribution for purposes of Section 2(a)(11) of the Securities Act
is a facts and circumstances determination. Whether there is a
``distribution'' does not affect the role of a registered broker-
dealer in a municipal securities offering for purposes of this
underwriter exclusion.
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In addition, the Commission has determined that a broker-dealer
acting as a dealer-manager for a tender offer, without more,\630\ would
not be municipal advisory activity because tender offers typically
involve only the purchase of municipal securities and the purchase is
not itself an advisory activity. Similarly, a broker-dealer acting as a
dealer-manager for an exchange offer would generally involve only two
transactions--the purchase of one security in the tender offer and the
underwriting of a particular issuance of municipal securities in
exchange for such tendered securities. Since the purchase itself is not
advisory activity and the underwriting of the new issue of municipal
securities would be excluded under the underwriter exclusion, neither
component of the exchange offer would be considered municipal advisory
activity.\631\
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\630\ However, if, for example, the registered broker-dealer
provides advice as to the benefits of a tender offer in comparison
to the alternative of issuing refunding bonds, then, depending on
the facts and circumstances, they might be engaged in municipal
advisory activity outside the scope of an underwriting.
\631\ Any advice or recommendations to undertake such a tender
or exchange offer, or regarding the timing or terms of such tender
or exchange offer, would have to be evaluated in the context of that
issuance or the issuance of other securities to determine if the
advice was advice with respect to the structure, timing, terms, or
other similar matters concerning an issuance being underwritten, and
thus within the underwriter exclusion.
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A few commenters also suggested that remarketing agents should be
included in the underwriter exclusion.\632\ Generally, the Commission
also would not consider a remarketing agent \633\ acting only in its
capacity as a remarketing agent to be a municipal advisor because the
mere remarketing of bonds likely would not constitute an issuance of
municipal securities. If, however, the remarketing constitutes a
primary offering,\634\ then the
[[Page 67516]]
remarketing agent would need to evaluate its activities to determine if
an exemption or exclusion from registration (such as the underwriter
exclusion) applies. A primary offering is an issuance of municipal
securities for purposes of the municipal advisor registration
regime.\635\ Similarly, if the activities of a remarketing agent
include providing advice (such as advice with respect to the investment
of proceeds) beyond merely determining a remarketing price for bonds
that have already been issued and that are not being reoffered, the
remarketing agent would need to evaluate its activities to determine if
an exception to registration (such as the investment adviser exclusion)
applies.
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\632\ See SIFMA Letter I (stating that activities in which a
remarketing agent engages when it resells an issuance in the
secondary market are similar to those of an underwriter of a primary
issuance by a municipal entity or obligated person); Chapman &
Cutler Letter (concurring with SIFMA that the duties of remarketing
agents with respect to the sale and pricing of municipal securities
are similar to the duties of underwriters).
\633\ A remarketing agent is a municipal securities dealer
responsible for reselling to investors securities (such as variable
rate demand obligations and other tender option bonds) that have
been tendered for purchase by their owner. The remarketing agent
also typically is responsible for resetting the interest rate for a
variable rate issue and may act as tender agent. See definition of
``Remarketing Agent'' in MSRB Glossary.
\634\ Whether a remarketing is a ``primary offering'' of the
municipal securities and whether the remarketing agent is an
underwriter for purposes of the Securities Act of 1933 will depend
on, among other matters, the level of issuer involvement in the
remarketing. Whether a particular remarketing is a primary offering
by the issuer of the securities requires an evaluation of relevant
provisions of the governing documents, the relationship of the
issuer to the other parties involved in the remarketing transaction,
and other facts and circumstances pertaining to such remarketing,
particularly with respect to the extent of issuer involvement. See,
e.g., Securities Exchange Act Release No. 62184A (May 27, 2010), 75
FR 33100, 33103 (June 10, 2010). Although not applicable in
determining whether an offering is a primary offering for purposes
of the Securities Act of 1933, the Commission also notes that for
purposes of Rule 15c2-12, a ``primary offering'' is defined to mean
``an offering of municipal securities directly or indirectly by or
on behalf of an issuer of such securities, including any remarketing
of municipal securities'' that meets certain specified conditions.
See 17 CFR 240.15c2-12(f)(7). See also Securities Exchange Act
Release No. 34961 (November 10, 1994), 59 FR 59590 (November 17,
1994).
\635\ See supra Section III.A.1.b.vii. (discussing the term
``issuance of municipal securities''). The Commission notes that,
although it is likely in such a circumstance for the underwriter
exemption to apply, if the agent is engaging in municipal advisory
activity that is outside of the scope of underwriting activity and
no other exemption or exclusion applies, such agent would be
required to register as a municipal advisor.
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Solely Incidental Services
Many commenters recommended that the municipal advisor registration
rules include an exclusion for broker-dealers that is similar in scope
to the broker-dealer exclusion under Section 202(a)(11)(C) of the
Investment Advisers Act.\636\ Specifically, these commenters stated
that the Commission should exclude from registration broker-dealers
that provide advice that is solely incidental to a transaction.\637\
These commenters generally noted that broker-dealers are already
regulated by the Commission and should not be subject to additional or
duplicative regulation.\638\
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\636\ Section 202(a)(11)(C) of the Investment Advisers Act
excludes from the definition of ``investment adviser'' a broker or
dealer ``whose performance of [advisory] services is solely
incidental to the conduct of his business as a broker or dealer who
receives no special compensation therefor.'' 15 U.S.C. 80b-
2(a)(11)(C).
\637\ See, e.g., Union Bank Letter (stating that advice supplied
that is ``solely incidental to the conduct of his business as a
broker or dealer and who receives no special compensation therefor''
(Section 202(a)(11) of the Investment Advisers Act) should be
excluded from the definition of ``advice''); SIFMA Letter I (stating
that ``broker-dealers providing advice that is solely incidental to
a transaction should be excluded from the definition of municipal
advisor for the same reason that registered investment advisers are
excluded (in some instances): they are already regulated'');
Financial Services Institute Letter (stating that broker-dealers
should be treated as in the Investment Advisers Act, i.e., where a
municipal entity enters into an ordinary brokerage transaction, any
incidental advice provided in the scope of that relationship should
not require the broker-dealer to register as a municipal advisor).
\638\ See, e.g., Union Bank Letter (stating that Congress did
not intend for broker-dealers and registered investment advisers
that already engage in regulated activities for their municipal
clients to be subject to the additional layer of regulation that
would accompany municipal advisor registration); ICI Letter (noting
that broker-dealers that are underwriters are already subject to
MSRB Rule G-37 and are also regulated by the Commission as broker-
dealers); SIFMA Letter I.
---------------------------------------------------------------------------
The Commission is not adopting an exemption from the definition of
municipal advisor for a broker-dealer that engages in municipal
advisory activities that are solely incidental to the conduct of its
business as a broker-dealer because the Commission believes that it has
otherwise addressed commenters' concerns regarding duplicative
regulation. As discussed above, the Commission is exempting from the
definition of municipal advisor persons that provide advice with
respect to investment strategies that are not plans or programs for the
investment of the proceeds of municipal securities and the
recommendation of and brokerage of municipal escrow investments.\639\
As discussed below, based on the application of the adopted rules,
broker-dealers that sell securities to municipal entities and obligated
persons would generally not be engaging in municipal advisory
activity.\640\ The application of the adopted rules limits the range of
municipal financial products to which duplicative regulation could
apply. As noted above, the Commission believes that registered broker-
dealers that engage in municipal advisory activities by advising on the
investment of proceeds of municipal securities or municipal escrow
investments should not be exempt from municipal advisor
registration.\641\
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\639\ See supra note 327 and accompanying text and Rule 15Ba1-
1(d)(3)(vii).
\640\ See infra note 644 and accompanying text.
\641\ See supra Section III.A.1.b.viii. (discussing the
Commission's views on why advice with respect to the investment of
proceeds of municipal securities should be subject to municipal
advisor registration notwithstanding the existence of other
regulatory regimes). See also infra Section III.A.1.c.v.
(discussing, among other things, the Commission's position that
registered investment advisers engaging in municipal advisory
activities are only excluded from registration to the extent their
activities are investment advice). Likewise, the Commission believes
that broker-dealers that engage in municipal advisory activities
that are outside of the scope of the underwriting of a particular
issuance of municipal securities should be regulated and registered
as municipal advisors.
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Broker-Dealers Selling Securities to Municipal Entities and Obligated
Persons
Several commenters suggested that, based on the Proposal, the
Commission appears to conclude that ``a broker-dealer that sells a
security to a municipal entity where it is not serving as an
underwriter'' is engaged in municipal advisory activity, because advice
is integral to the sale of securities.\642\ That is not the conclusion
of the Commission. The municipal advisor registration requirement does
not apply in the absence of advice (or solicitation). As noted above,
for purposes of the municipal advisor definition, ``advice'' includes,
without limitation, a recommendation that is particularized to the
needs and circumstances of a municipal entity or obligated person with
respect to municipal financial products or the issuance of municipal
securities, based on all the facts and circumstances.\643\ Thus, a
broker-dealer that effects a transaction that it has not recommended
will not be a ``municipal advisor'' with respect to such activity.\644\
However, the sale of a security to a municipal entity or obligated
person constitutes a municipal advisory activity if: (1) the monies
used to purchase such security are proceeds of municipal securities;
\645\ and (2) in executing such transaction, the broker-dealer also
recommends the investment or otherwise offers advice to the municipal
entity or obligated person about which securities to purchase or sell.
---------------------------------------------------------------------------
\642\ See Insurance Companies Letter (stating that the
Commission appears to conclude that every time a broker-dealer sells
a security to a municipal entity where it is not serving as an
underwriter, it must register as a municipal advisor, and that such
an approach seems inconsistent with Congressional intent due to pre-
existing broker-dealer regulation). See also ICI Letter (stating
that the Commission proposed that the broker-dealer exclusion means
that a broker, dealer or municipal securities dealer would be
eligible for the exclusion only when acting in its capacity as an
underwriter; and suggesting that the broker-dealer exclusion should
include brokers, dealers, and municipal securities dealers who
engage in additional activities while serving as underwriters to
municipal entities or obligated persons); and Large Public Power
Council Letter (expressing concern that the Commission is limiting
the broker-dealer exemption to situations in which the broker-dealer
is acting as an underwriter).
\643\ See supra Section III.A.1.b.i. (discussing the advice
standard in general).
\644\ See supra note 162 (discussing the term ``advice'' in
contexts outside of the municipal advisor definition).
\645\ See supra notes 330-343 and accompanying text (discussing
the definition of ``proceeds of municipal securities'').
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Another commenter urged the Commission to exclude broker-dealers
affiliated with life insurance companies from municipal advisor
registration,
[[Page 67517]]
because such ``limited service'' broker-dealers are substantively
different from ``full service'' broker-dealers.\646\ The Commission
notes that broker-dealers affiliated with insurance companies are only
required to register as municipal advisors to the extent their
activities constitute advice to (or solicitation of) a municipal entity
or obligated person with respect to municipal financial products or the
issuance of municipal securities. The mere fact that a broker-dealer is
affiliated with a life insurance company and may not sell as wide a
range of securities as other broker-dealers is not determinative as to
whether such broker-dealer must register as a municipal advisor. As
noted in the paragraph above, such broker-dealers may sell securities
to a municipal entity without triggering municipal advisor
registration.
---------------------------------------------------------------------------
\646\ See ACLI Letter (stating that the range of products
offered by these limited purpose broker-dealers is typically narrow
and focuses upon the distribution of variable insurance contracts
and mutual funds; and that such broker-dealers primarily elicit
orders from variable contract and mutual fund purchasers).
---------------------------------------------------------------------------
Broker-Dealers Providing Advice to Individual Plan Participants in a
Public Employee Benefit Plan
One commenter expressed concern that broker-dealers that provide
investment advice (such as asset allocation) to individual plan
participants in the context of a 403(b) retirement plan or a similar
defined contribution plan might trigger municipal advisor registration.
This commenter recommended that such broker-dealers be specifically
excluded from registration.\647\
---------------------------------------------------------------------------
\647\ See letter from Adym W. Rygmyr, Associate General Counsel,
TIAA-CREF Individual & Institutional Services, LLC, dated February
22, 2011 (``TIAA-CREF Letter'').
---------------------------------------------------------------------------
The definition of municipal advisor states that a municipal advisor
is a person that provides advice ``to or on behalf of a municipal
entity or obligated person.'' As described above, advice related to
investment strategies that would require registration is limited to
advice with respect to ``the investment of proceeds of municipal
securities . . . and the recommendation of and brokerage of municipal
escrow investments.'' \648\ Thus, the provision of investment advice to
individual plan participants in a public employee benefit plan is not a
municipal advisory activity, as long as the individual plan participant
is not a municipal entity.\649\
---------------------------------------------------------------------------
\648\ Rule 15Ba1-1(b) and Rule 15Ba1-1(d)(3)(vii).
\649\ See supra Section III.A.1.b.viii. (distinguishing
individual contributions from municipal entity contributions to 529
Savings Plans and public retirement plans, among other plans).
---------------------------------------------------------------------------
v. Registered Investment Advisers
Exchange Act Section 15B(e)(4)(C) 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.'' \650\ The
Commission proposed in Rule 15Ba1-1(d)(2)(ii) to interpret the
statutory exclusion for registered investment advisers from the
definition of municipal advisor.\651\ Specifically, the Commission
proposed that the term ``municipal advisor'' shall not include ``[a]n
investment adviser registered under the Investment Advisers Act of 1940
. . . or a person associated with such registered investment adviser,
unless the registered investment adviser or person associated with the
investment adviser engages in municipal advisory activities other than
providing investment advice that would subject such adviser or person
associated with such adviser to the Investment Advisers Act of 1940.''
\652\
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\650\ 15 U.S.C. 78o-4(e)(4)(C).
\651\ See proposed Rule 15Ba1-1(d)(2)(ii).
\652\ See id. See also Temporary Registration Rule Release, 75
FR 54467.
---------------------------------------------------------------------------
In the Proposal, the Commission stated that a registered investment
adviser or an associated person of a registered investment adviser
would fall within the definition of municipal advisor and be required
to register with the Commission as a municipal advisor if the adviser
or associated person engages in any municipal advisory activities
(including solicitation) that would not be investment advice subject to
the Investment Advisers Act.\653\ In the Proposal, the Commission
stated its belief that this interpretation is in furtherance of the
goals of the Dodd-Frank Act to regulate persons that engage in
municipal advisory activities.\654\
---------------------------------------------------------------------------
\653\ See Proposal, 76 FR 833.
\654\ See id.
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As discussed further below, the Commission received several
comments in response to its proposed interpretation of the statutory
exclusion relating to investment advisers. After careful consideration,
to address commenters' concerns, the Commission is modifying proposed
Rule 15Ba1-1(d)(2)(ii) to provide certain clarifications. Specifically,
Rule 15Ba1-1(d)(2)(ii), as adopted, provides 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.'' Moreover, the Commission clarifies in Rule 15Ba1-
1(d)(2)(ii) that ``investment advice,'' solely for purposes of this
rule, ``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.'' \655\
---------------------------------------------------------------------------
\655\ See Rule 15Ba1-1(d)(2)(ii).
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Interpretation of the Statutory Language
Several commenters stated that the Commission's proposed
interpretation is contrary to the plain meaning of the statute and
exceeds its intended scope.\656\ One commenter stated that the statute
excludes ``any'' registered investment adviser--without
limitation.\657\ Similarly, another commenter stated that the phrase
``who are providing investment advice'' refers only to the immediately
previous phrase, ``persons associated with such investment advisers''--
not to ``such registered advisers'' themselves.\658\ As such, this
commenter also encouraged the Commission to interpret the exclusion for
investment advisers to apply to all registered investment advisers, not
just those who are providing investment advice.\659\ Yet another
commenter stated that the statute's exclusion of investment advisers
``who are providing investment advice'' cannot be interpreted to only
exclude advisers providing ``investment advice'' subject to the
Investment Advisers Act, because not all ``investment advice'' requires
registration under the Investment Advisers Act (e.g., advice with
respect to instruments that are not securities).\660\ This commenter
stated that the Commission's interpretation would mean that ``[a
Commission]-registered investment adviser would be excepted from
municipal advisor registration for only some, but not all, of its
investment activities.'' \661\ The commenter described the Commission's
[[Page 67518]]
interpretation as ``without an apparent reason or policy
justification.'' \662\
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\656\ See, e.g., IAA Letter; ICI Letter; SIFMA Letter I; and
letter from Heidi Stam, Managing Director and General Counsel, The
Vanguard Group, Inc., dated February 22, 2011 (``Vanguard Letter'').
\657\ See Vanguard Letter. See also ICI Letter.
\658\ See ICI Letter. See also IAA Letter.
\659\ See ICI Letter.
\660\ See SIFMA Letter I. See also text accompanying infra notes
682 and 683.
\661\ SIFMA Letter I.
\662\ Id.
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In commenting that registered investment advisers should be
excluded broadly from municipal advisor registration, one commenter
stated that the municipal advisor registration requirement established
by the Dodd-Frank Act was ``primarily aimed at registering unregulated
persons.'' \663\ Registered investment advisers, in the view of some
commenters, are ``already subject to the fiduciary duties and
comprehensive registration and disclosure requirements mandated by the
Investment Advisers Act.'' \664\ The proposal would therefore subject
them to ``duplicative and overlapping regulation.''\665\
---------------------------------------------------------------------------
\663\ See Vanguard Letter.
\664\ Id. See also MFA Letter.
\665\ See Vanguard Letter.
---------------------------------------------------------------------------
Some commenters stated that the Commission's proposed
interpretation of the exclusion ``interjects ambiguity'' on how to
determine whether registered investment advisers must also register as
municipal advisors.\666\ These commenters stated that the Commission's
interpretation would create ``widespread uncertainty'' \667\ among
investment advisers regarding whether certain of their activities are
subject to regulation as municipal advisory activities. One commenter
stated that the uncertainty would be compounded by the lack of a
definition concerning the kind of investment advice that would exempt a
registered investment adviser from the municipal advisor registration
requirement.\668\
---------------------------------------------------------------------------
\666\ See, e.g., Vanguard Letter.
\667\ MFA Letter.
\668\ See Vanguard Letter.
---------------------------------------------------------------------------
One commenter requested that the Commission include a non-exclusive
interpretation that ``any advice provided by a registered investment
adviser pursuant to a written agreement with a municipal entity to whom
the adviser owes a fiduciary duty as an investment adviser constitutes
the rendering of investment advice.'' \669\ The requested
interpretation would thereby exempt the investment adviser from
registration as a municipal advisor.\670\
---------------------------------------------------------------------------
\669\ Id.
\670\ See id.
---------------------------------------------------------------------------
As stated above, the Commission is adopting a revised Rule 15Ba1-
1(d)(2)(ii). Under the rule the Commission is adopting today, a
registered investment adviser could provide advice concerning the
investment of proceeds in securities without registering as a municipal
advisor because it would be ``providing investment advice'' in its
capacity as a registered investment adviser. Further, if the advice is
provided pursuant to an advisory agreement that extends to investments
in both securities and non-security financial instruments, such advice
would still be excluded, because investment advice provided pursuant to
the advisory agreement would be investment advice for purposes of Rule
15Ba1-1(d)(2)(ii).\671\
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\671\ As discussed below, solely for purposes of the municipal
advisor registration rules, ``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, even if such activities are under an advisory
agreement. Also, investment advice provided pursuant to the advisory
agreement would be subject to the anti-fraud provisions of the
Investment Advisers Act. See 15 U.S.C. 80b-6(1) and 80b-6(2). The
Supreme Court has construed Investment Advisers Act Sections 206(1)
and (2) as establishing a fiduciary standard for investment advisers
that imposes the ``affirmative duty of `utmost good faith, and full
and fair disclosure of all material facts,' as well as an
affirmative obligation to `employ reasonable care to avoid
misleading'' ' their clients. SEC v. Capital Gains Research Bureau,
Inc., 375 U.S. 180, 194 (1963).
---------------------------------------------------------------------------
However, the Commission notes that, solely for purposes of the
municipal advisor registration rules, pursuant to Rule 15Ba1-
1(d)(2)(ii), ``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. Notwithstanding
that these activities may constitute advice under the Investment
Advisers Act, the Commission believes that this approach is appropriate
given that Section 15B(e) of the Exchange Act expressly designates
these activities as requiring municipal advisor registration.\672\
Accordingly, a registered investment adviser that provides these types
of advice to municipal entities or obligated persons would need to
register as a municipal advisor.
---------------------------------------------------------------------------
\672\ See 15 U.S.C. 78o-4(e)(4). The Commission notes that this
interpretation of the term investment advice relates solely to
whether a registered investment adviser, or an associated person of
such adviser, would need to register as a municipal advisor.
---------------------------------------------------------------------------
The Commission interprets the statutory language, which provides an
exclusion for registered investment advisers and associated persons
``who are providing investment advice,'' as evidence that Congress did
not intend to grant a blanket exemption from municipal advisor
registration for all registered investment advisers and their
associated persons regardless of the activities in which they are
engaged. The Commission believes the phrase ``who are providing
investment advice'' limits the exclusion. Under this interpretation, if
an associated person or a registered investment adviser engages in
municipal advisory activities that do not constitute ``investment
advice'' for purposes of Rule 15Ba1-1(d)(2)(ii), both the registered
investment adviser and the associated person of such adviser engaging
in the municipal advisory activities would be ``municipal advisors''
unless eligible for another exclusion or exemption.\673\
---------------------------------------------------------------------------
\673\ Consequently, both the registered investment adviser and
the associated person would be required to register, unless the
associated person meets the requirements of the exemption from
registration in Rule 15Bc4-1 discussed below. See infra Section
III.A.7.
---------------------------------------------------------------------------
The Commission further notes that the municipal advisor
registration and regulatory regime relates to issues that are unique to
municipal advisory activities--particularly the advice concerning
utilization of municipal derivatives, whether and how to issue
municipal securities, and the structure, timing, and terms of issuances
of municipal securities and other similar matters. The registration of
registered investment advisers as municipal advisors, to the extent
they engage in these activities, whether or not already subject to the
Investment Advisers Act, is necessary to provide the benefits
associated with the regulation of persons who engage in municipal
advisory activities. Such benefits include, but are not limited to,
standards of conduct, training, and testing for municipal advisors that
may be required by the Commission or the MSRB, and other requirements
unique to municipal advisors that may be imposed by the MSRB.\674\
---------------------------------------------------------------------------
\674\ See supra note 190.
---------------------------------------------------------------------------
The Commission believes that the clarifications described above
address the comments that the Commission's interpretation introduces
``ambiguity'' and will lead to ``widespread uncertainty'' among
registered investment advisers. In particular, permitting a Commission-
registered investment adviser to rely on the exclusion when providing
any advice under an investment advisory agreement that is subject to
the Investment Advisers Act, as long as such advice is not specifically
excluded from the definition of ``investment advice'' under Rule 15Ba1-
1(d)(2)(ii), will allow registered investment advisers to achieve
greater certainty about the scope of the exclusion at the time they
enter into an advisory
[[Page 67519]]
agreement.\675\ If an investment adviser firm engages in a municipal
advisory activity that is not within the registered investment adviser
exclusion, such as advice concerning the issuance of municipal
securities or the utilization of swaps by municipalities, the mere fact
that the firm is registered under the Investment Advisers Act would not
exempt that firm from registration as a municipal advisor.\676\
---------------------------------------------------------------------------
\675\ See also Ancillary or Additional Advisory Services
Provided by Investment Advisers section below.
\676\ The Commission acknowledges commenters' concerns that
there will be overlapping requirements for registered investment
advisers that engage in municipal advisory activities, just as there
are for investment advisers that engage in broker-dealer activities.
The Commission notes that it is permitting investment advisers that
have already filed a Form ADV with the Commission to incorporate by
reference in their Form MA certain information that they have
already supplied in Form ADV. See infra Sections II.A.2.
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As discussed above in Section III.A.1.b.viii., the Commission is
narrowing the application of the term ``investment strategies'' from
all plans, programs, or pools of assets that invest funds held by or on
behalf of a municipal entity to plans or programs for the investment of
the proceeds of municipal securities and the recommendation of and
brokerage of municipal escrow investments. Accordingly, the municipal
advisor registration regime, as adopted, will provide appropriate
protection for advice with respect to proceeds of municipal securities
while mitigating many of the commenters' concerns with respect to funds
of municipal entities other than proceeds of municipal securities.
Moreover, because advice provided to fewer types of plans, programs, or
pools of assets would require municipal advisor registration, the
Commission's exemption for persons providing advice with respect to
certain investment strategies will result in fewer registered
investment advisers having to register as municipal advisors compared
to Rule 15Ba1-1(b) as originally proposed.\677\ For example, under the
narrow scope of investment strategies, investment advisers who provide
advice to public employee benefit plans, participant-directed
investment plans such as 529, 403(b) or 457 plans that do not include
proceeds of municipal securities would not be required to register as
municipal advisors.
---------------------------------------------------------------------------
\677\ See supra Section III.A.1.b.viii. (discussing the term
``investment strategies'' and the exemption pursuant to Rule 15Ba1-
1(d)(3)(vii)).
---------------------------------------------------------------------------
As noted above, one commenter suggested that any advice pursuant to
a written agreement between an investment adviser and a municipal
entity to whom the adviser owes a fiduciary duty should be considered
investment advice and thus exclude the adviser from registration as a
municipal advisor.\678\ In the Commission's view, this approach fails
to recognize that the regulatory regime for municipal advisors set
forth in the Dodd-Frank Act includes more than a fiduciary duty.\679\
Accordingly, unless an exclusion or exemption applies, a municipal
advisor must register with the Commission and comply with the
applicable MSRB rules.\680\
---------------------------------------------------------------------------
\678\ See supra notes 669-670 and accompanying text (discussing
the Vanguard Letter).
\679\ See 15 U.S.C. 78o-4(c)(1). As noted above, benefits
associated with the regulation of municipal advisors also include,
but are not limited to, the application of standards of conduct,
training, and testing for municipal advisors that may be required by
the Commission or the MSRB, and other requirements unique to
municipal advisors that may be imposed by the MSRB. See supra note
190.
\680\ See, e.g., MSRB Rule G-17 (Conduct of Municipal Securities
and Municipal Advisory Activities).
---------------------------------------------------------------------------
Ancillary or Additional Advisory Services Provided by Investment
Advisers
Several commenters urged the Commission to carve out from the
definition of municipal advisor certain investment advisers that
provide various specific kinds of advice to municipal entities. For
example, some commenters noted that a registered investment adviser may
provide clients with services ancillary to its investment advice in
``the normal course of its advisory services.'' \681\ Such ancillary
service includes advice regarding investments other than securities
(e.g., bank deposits, currencies, real estate, futures, and forward
contracts),\682\ research, and reports.\683\ One commenter stated that
such services may not subject the adviser providing such services to
the Investment Advisers Act but would require the provider to register
as a municipal advisor. According to the commenter, an adviser would
have to ``segregate its activities into those that are exempt and those
which require registration as a municipal advisor and follow
potentially conflicting rules.'' \684\
---------------------------------------------------------------------------
\681\ See, e.g., MFA Letter.
\682\ See, e.g., MFA Letter and ICI Letter. See also SIFMA
Letter I and American Bankers Association Letter I.
\683\ See, e.g., MFA Letter.
\684\ American Bankers Association Letter I.
---------------------------------------------------------------------------
Another commenter stated that managers at investment adviser firms
``would need to regularly monitor each service they provide to
municipal entities,'' which would be ``burdensome for a private fund
manager or other investment manager'' and ``would divert resources from
the performance of [their] core advisory services.'' \685\ The
commenter stated that the proposed rules could also cause some managers
to ``choose to reduce the types of services they provide,'' which could
``harm fund managers and their municipal entity clients.'' \686\
---------------------------------------------------------------------------
\685\ See MFA Letter.
\686\ Id.
---------------------------------------------------------------------------
Another commenter suggested an exemption for a ``particularized
recommendation regarding the structuring or issuance of municipal
securities'' when such advice is provided in the context of the
investment adviser providing investment advisory services.\687\ For
example, according to this commenter, an investment adviser would be
exempt if it recommends changes to the terms of a municipal entity's
proposed bond offering so that the municipal entity can pay a lower
interest rate on the securities and invest the proceeds in less risky
investment vehicles.\688\
---------------------------------------------------------------------------
\687\ SIFMA Letter I.
\688\ See id.
---------------------------------------------------------------------------
The Commission carefully considered the comments received,
including comments regarding the burden for firm managers to monitor
each service provided by the firm to determine whether it would require
municipal advisor registration. The Commission, however, is not
exempting from the definition of municipal advisor a registered
investment adviser that engages in municipal advisory activities that
are ``in the ordinary course of'' investment advice or ``ancillary'' to
such investment advice. The determination of whether a particular
activity is ``in the ordinary course of'' or ``ancillary'' is very much
based on facts and circumstances. Thus, the Commission is concerned
that such a standard could be easily circumvented and could create a
pretext for abuse.\689\
---------------------------------------------------------------------------
\689\ See supra Section III.A.1.c.iv. (discussing broker-dealers
selling securities and solely incidental services).
---------------------------------------------------------------------------
The Commission interprets the registered investment adviser
exclusion to include any advice provided pursuant to an advisory
agreement. However, Rule 15Ba1-1(d)(2)(ii) excludes from ``investment
advice'' advice concerning: (1) Whether and how to issue municipal
securities; (2) the structure, timing, and terms of issuances of
municipal securities and other similar matters; and (3) municipal
derivatives. Additionally, the registered investment adviser exclusion
does not cover solicitation of a municipal entity or obligated person,
as defined in Rule 15Ba1-1(n). The Commission does not believe that it
is necessary to adopt most
[[Page 67520]]
of the interpretations or carve-outs from the municipal advisor
definition that commenters suggested because it anticipates that most
of these additional services would be covered by advisory agreements.
For example, as discussed above, a registered investment adviser that
advises a municipal entity to invest the proceeds of an issuance of
municipal securities in an asset class other than securities will not
be required to register as a municipal advisor, if that advice is
provided pursuant to an advisory agreement between the registered
investment adviser and the municipal entity. Similarly, if ancillary
services are provided pursuant to an advisory agreement and these
services are not of the type specifically excluded from ``investment
advice'' under Rule 15Ba1-1(d)(2)(ii), the investment adviser exclusion
would apply. The Commission believes that its interpretation of the
investment adviser exclusion should mitigate commenters' concerns
regarding segregating activities into those that are exempt and those
that are not and following potentially conflicting rules.\690\ The
Commission also believes that its interpretation should mitigate
commenters' concerns regarding the burden for a firm to monitor its
activities \691\ because a firm would only need to monitor for the
specific types of activities that are excluded from ``investment
advice'' under Rule 15Ba1-1(d)(2)(ii) and the activities that are not
covered by advisory agreements.
---------------------------------------------------------------------------
\690\ See supra note 684 and accompanying text.
\691\ See supra notes 685-686 and accompanying text.
---------------------------------------------------------------------------
The Commission is also not adopting a commenter's suggestion to
create a specific exemption for ``a particularized recommendation
regarding the structuring or issuance of municipal securities.'' \692\
The Commission believes that an adviser offering advice regarding the
issuance of municipal securities, including advice with respect to the
structuring, timing, terms, and other similar matters, clearly is a
municipal advisor because the statutory definition of municipal advisor
expressly includes such activities.
---------------------------------------------------------------------------
\692\ See supra notes 687-688 and accompanying text.
---------------------------------------------------------------------------
Affiliates of Investment Advisers Providing Municipal Advisory Services
As discussed above, Exchange Act Section 15B(e)(4)(A)(ii) includes
in the definition of municipal advisor a person that ``undertakes a
solicitation of a municipal entity.'' \693\ Section 15B(e)(9), however,
excludes a person that controls, is controlled by, or is under common
control with a registered investment adviser \694\ from the requirement
to register as a municipal advisor when it solicits municipal entities
or obligated persons on behalf of the affiliated investment
adviser.\695\ Thus, an affiliate of a registered investment adviser may
engage in such solicitation without registering as a municipal advisor.
Neither the statute nor the rules, as proposed, otherwise exclude an
affiliate of a registered investment adviser from the definition of
municipal advisor.
---------------------------------------------------------------------------
\693\ 15 U.S.C. 78o-4(e)(4)(A)(ii).
\694\ For purposes of this discussion, the term ``affiliate of a
registered investment adviser'' means such a person.
\695\ See 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------
One commenter stated that registered investment advisers ``often
assign or delegate management of a portion of their client's assets to
an affiliated entity . . . when they seek specialized expertise for
particular regions, strategies, or products.'' \696\ The commenter
stated that such affiliated entities ``are typically part of the same
organization as the registered adviser and are subject to the same or
similar compliance and management structures.'' \697\ Further, they are
usually ``organized as separate legal entities rather than branch
offices'' for ``tax or other purposes.'' \698\ The commenter stated
that, because the registered investment advisers themselves are exempt
from registration as municipal advisors when they provide investment
advice, it would be incongruous to require their affiliates to register
as municipal advisors.\699\ The commenter further stated that
registration would ``simply add costs to the industry and regulators
without additional public policy benefits.'' \700\
---------------------------------------------------------------------------
\696\ See MFA Letter.
\697\ Id.
\698\ Id.
\699\ Id.
\700\ Id.
---------------------------------------------------------------------------
The Commission disagrees that there should be a general exemption
for affiliates of registered investment advisers that engage in
municipal advisory activities. The Commission notes that Congress
explicitly exempted affiliates from the solicitation prong of the
municipal advisor definition, but not from the prong relating to
advisory and other activities. Accordingly, the Commission believes
that the statute does not contemplate exempting affiliates from
municipal advisor registration, except when an affiliate specifically
solicits business for its affiliated entity.
Further, as discussed below, the Commission does not believe that
any additional exemption is necessary or appropriate. In the case of
solicitations, the Commission notes that, although the statute excludes
solicitation by an affiliate from the definition of municipal
advisor,\701\ the Commission would still have regulatory authority over
the entity on whose behalf the affiliate is soliciting, as a municipal
advisor, if it engages in municipal advisory activities. If the entity
is also a registered investment adviser and falls under the investment
adviser exclusion in Rule 15Ba1-1(d)(2)(ii), the Commission would
continue to have regulatory authority over that entity as a registered
investment adviser. In a case where an affiliate of a registered
investment adviser is engaged in municipal advisory activities as a
municipal advisor, however, the Commission would not necessarily have
regulatory authority outside of the municipal advisor registration
regime. Also, as discussed more fully above, the Commission's exemption
for persons that provide advice with respect to investment strategies
that are not plans or programs for the investment of the proceeds of
municipal securities or the recommendation of and brokerage of escrow
investments \702\ should reduce the likelihood that specialized
expertise from affiliates, such as foreign affiliates, will require
registration.
---------------------------------------------------------------------------
\701\ See 15 U.S.C. 78o-4(e)(9) (defining ``solicitation of a
municipal entity or obligated person'').
\702\ See supra Section III.A.1.b.viii. (discussing the
Commission's application of the term ``investment strategies'').
---------------------------------------------------------------------------
Investment Adviser Solicitations and Referrals
Some commenters requested clarification on the exclusion for
investment advisers from the solicitation prong of the municipal
advisor definition. One commenter requested that the Commission confirm
that the exclusion for investment advisers applies to the investment
adviser and its employees ``who may solicit municipal entities as part
of their regular responsibilities to market the adviser's investment
advisory services or who may incidentally discuss the adviser's
advisory services with municipal entities.'' \703\
---------------------------------------------------------------------------
\703\ See IAA Letter.
---------------------------------------------------------------------------
The Commission agrees with this comment and notes that a registered
investment adviser that solicits on its own behalf does not fall within
the ``solicitation'' prong of the municipal advisor definition.
Exchange Act Section 15B(e)(9) provides that the term ``solicitation of
a municipal entity or obligated person'' means a
[[Page 67521]]
communication ``on behalf of a broker, dealer, municipal securities
dealer, municipal advisor, or investment adviser . . . that does not
control, is not controlled by, or is not under common control with the
person undertaking such solicitation.'' \704\ Thus, Section 15B(e)(9)
permits a registered investment adviser and its employees, who market
the adviser's investment advisory services, to solicit municipal
entities or obligated persons, including discussing the adviser's
advisory services, without triggering regulatory obligations, to the
extent such solicitation is on behalf of the registered investment
adviser. As discussed above, the same is true for affiliates of
registered investment advisers.
---------------------------------------------------------------------------
\704\ 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------
One commenter expressed concern that an investment adviser
providing advice to a client regarding the selection or retention of
another investment manager could constitute a solicitation of a
municipal entity or obligated person under Section 15B(e)(9) of the
Exchange Act.\705\ The Commission confirms that a registered investment
adviser will not be required to register as a municipal advisor in this
scenario, unless it receives direct or indirect compensation and acts
on behalf of the recommended investment adviser. Absent such facts, the
registered investment adviser is not soliciting on behalf of another
broker, dealer, municipal securities dealer, municipal advisor, or
investment adviser, and thus would not be engaging in solicitation
requiring municipal advisor registration.\706\
---------------------------------------------------------------------------
\705\ See Insurance Companies Letter.
\706\ However, such advice may be considered investment advice
under the Investment Advisers Act. See supra note 423.
---------------------------------------------------------------------------
State-Registered Investment Advisers
As a result of changes in the threshold for registration as an
investment adviser with the Commission,\707\ certain entities are not
required to register as investment advisers under the Investment
Advisers Act and instead are subject to state registration
requirements.\708\ In the Proposal, the Commission sought comment on
whether state-registered investment advisers should be exempt from the
municipal advisor definition to the extent they are providing advice
that otherwise would be subject to the Investment Advisers Act, but for
the operation of a prohibition on, or exemption from, Commission
registration.\709\
---------------------------------------------------------------------------
\707\ See 15 U.S.C. 80b-3a(a).
\708\ See Investment Advisers Act Release No. 3221 (June 22,
2011), 76 FR 42950 (July 19, 2011) (implementing the statutory shift
to the states the responsibility for oversight of investment
advisers that have between $25 million and $100 million of assets
under management). Approximately 2,400 Commission-registered
investment advisers withdrew their registrations and registered with
state securities authorities in 2012 and 2013.
\709\ See Proposal, 76 FR 836.
---------------------------------------------------------------------------
Several commenters supported an exemption for state-registered
investment advisers.\710\ One commenter, for example, stated that
``Congress has recognized the efficacy of state regulation of
investment advisers.'' \711\ Therefore, ``the Commission should
similarly recognize the efficacy of state regulation of investment
advisers, particularly since the provision of advice to municipal
entities is a matter of special interest to state authorities.'' \712\
Another commenter stated that state-registered investment advisers are
already subject to significant regulation by state regulators,
including fiduciary obligations with respect to investment management
activities. Consequently, the commenter stated that ``imposing an
additional layer of regulation on these persons would not provide an
appreciable regulatory benefit or increase the protection of municipal
entities or obligated persons.'' \713\
---------------------------------------------------------------------------
\710\ See, e.g., ABA Letter; MFA Letter; SIFMA Letter I; letter
from Rex A. Staples, General Counsel, North American Securities
Administrators Association, Inc., dated March 15, 2011 (``NASAA
Letter'').
\711\ ABA Letter.
\712\ Id.
\713\ SIFMA Letter I.
---------------------------------------------------------------------------
After considering the commenters' views, the Commission is not
adopting an exemption for state-registered investment advisers at this
time. The Commission notes that the statutory definition of municipal
advisor excludes only federally-registered investment advisers. The
Commission also notes that state regulation of investment advisers is
not always similar to regulation under the Investment Advisers Act. For
example, state-registered investment advisers are not subject to the
Commission's pay-to-play rule.\714\ Furthermore, because the Commission
is limiting the kinds of advice with respect to ``investment
strategies'' that would require a person to register as a municipal
advisor,\715\ the Commission believes that fewer state-registered
investment advisers will be required to register as municipal advisors
than as originally proposed.\716\
---------------------------------------------------------------------------
\714\ See Investment Advisers Act Release No. 3043 (July 1,
2010), 75 FR 41018, 41019 (July 14, 2010) (``Political Contributions
Final Rule'').
\715\ See supra Section III.A.1.b.viii.
\716\ For example, under the exemption pursuant to Rule 15Ba1-
1(d)(3)(vii), state-registered investment advisers who provide
advice to public employee benefit plans (including participant
directed plans or plans such as 529 Savings Plans, 403(b) plans, and
457 plans) that do not include proceeds of municipal securities
would not be required to register as municipal advisors.
---------------------------------------------------------------------------
Exempt Reporting Advisers
Finally, the Commission is not adopting the suggestion of one
commenter to exempt the category of ``Exempt Reporting Advisers'' from
registration as municipal advisors.\717\ The commenter stated that the
Exempt Reporting Advisers exemption from registration under the
Investment Advisers Act indicates that policy makers have determined
that ``such investment advisers are not of the type that must register
with the [Commission] and be subject to Commission oversight as a
registered investment adviser.'' \718\ The commenter stated that it
would be ``consistent with these policy determinations to similarly
exempt these advisers from the definition of municipal advisor in
connection with providing investment advice to a municipal entity.''
\719\
---------------------------------------------------------------------------
\717\ See MFA Letter (citing Investment Advisers Act Release No.
3111 (November 19, 2010), 75 FR 77190 (December 10, 2010) (Proposed
Exemptions for Advisers to Venture Capital Funds, Private Fund
Advisers with Less Than $150 Million in Assets Under Management, and
Foreign Private Advisers)). The Commission subsequently adopted the
exemption from registration under the Investment Advisers Act for
Exempt Reporting Advisers. See Investment Advisers Act Release No.
3222 (June 22, 2011), 76 FR 39646 (July 6, 2011) (Exemptions for
Advisers to Venture Capital Funds, Private Fund Advisers With Less
Than $150 Million in Assets Under Management, and Foreign Private
Advisers).
\718\ MFA Letter.
\719\ Id.
---------------------------------------------------------------------------
The Commission does not agree. The Commission believes that, if
Exempt Reporting Advisers engage in municipal advisory activities,
consistent with the protection of municipal entities and obligated
persons, and consistent with the policy objectives of Congress and this
rulemaking, they should not be exempt from the municipal advisor
registration requirement based on status. Specifically, while Congress
determined that Exempt Reporting Advisers do not need to be registered
in connection with their investment advisory activities, that does not
suggest that Exempt Reporting Advisers should similarly be exempt from
regulation as municipal advisors. Therefore, Exempt Reporting Advisers
who are exempt from registration as investment advisers must register
as municipal advisors if they engage in municipal advisory activities,
unless they qualify for an exclusion or exemption. However, as
discussed above, the Commission is exempting from the definition of
municipal advisor persons that provide advice with respect to
investment strategies that are not
[[Page 67522]]
plans or programs for the investment of the proceeds of municipal
securities or the recommendation of and brokerage of municipal escrow
investments.\720\ Accordingly, the Commission believes that fewer
Exempt Reporting Advisers will be required to register as municipal
advisors than as originally proposed. For example, under the narrow
scope of investment strategies, Exempt Reporting Advisers who provide
advice to private funds that do not include proceeds of municipal
securities would not be required to register as municipal advisors.
---------------------------------------------------------------------------
\720\ See supra Section III.A.1.b.viii.
---------------------------------------------------------------------------
vi. Registered Commodity Trading Advisors; Swap Dealers
Exchange Act Section 15B(e)(4)(C) excludes from the definition of
municipal advisor any commodity trading advisor registered under the
Commodity Exchange Act or persons associated with a commodity trading
advisor who are providing advice related to swaps. In the Proposal, the
Commission interpreted the statutory exclusion for registered commodity
trading advisors and their associated persons to apply only to such
persons when they are providing advice related to swaps, as that term
is defined in Section 1a(47) of the Commodity Exchange Act and Section
3(a)(69) of the Exchange Act,\721\ and any rules and regulations
promulgated thereunder.\722\ As proposed in Rule 15Ba1-1(d)(2)(iii), a
commodity trading advisor, or an associated person of a commodity
trading advisor, would be required to register with the Commission as a
municipal advisor if the commodity trading advisor, or an associated
person of the commodity trading advisor, engages in any municipal
advisory activities that are not advice related to swaps.\723\ Further,
a commodity trading advisor would be required to register with the
Commission if the advisor provides advice with respect to swaps on
behalf of a municipal entity or obligated person, but is not registered
as a commodity trading advisor under the Commodity Exchange Act or is
not a person associated with a registered commodity trading advisor
providing advice related to swaps.\724\
---------------------------------------------------------------------------
\721\ 7 U.S.C. 1a(47) and 15 U.S.C. 78c(a)(69). Consistent with
the statutory exclusion, the Commission's proposed interpretation of
the statutory exclusion would not apply when such persons are
providing advice with respect to security-based swaps.
\722\ See Proposal, 76 FR 833. See also Temporary Registration
Rule Release, 75 FR 54467.
\723\ See Proposal, 76 FR 833. As an example, the Commission
noted that if an advisor is providing advice to a municipal entity
with respect to engaging in a swap transaction and provides advice
to the municipal entity with respect to the structure of a municipal
securities offering, the advisor would have to register with the
Commission as a municipal advisor and would be subject to regulation
by the MSRB as a municipal advisor. See id.
\724\ See id.
---------------------------------------------------------------------------
The Commission requested comment on, and received several comments
regarding, its interpretation of the exclusion for commodity trading
advisors.\725\ One commenter agreed that the exclusion should only be
available when the registered commodity trading advisor is providing
advice related to swaps.\726\ This commenter believed that Congress
intended a single comprehensive municipal advisor regulatory structure
to govern advice to municipal entities, particularly in, but not
necessarily limited to, the context of a municipal securities
offering.\727\
---------------------------------------------------------------------------
\725\ See id., at 837.
\726\ See MSRB Letter.
\727\ See id.
---------------------------------------------------------------------------
Another commenter expressed concern that the Commission's proposed
interpretation of the exclusion could have the unintended consequence
of requiring commodity trading advisors to register as municipal
advisors if, ``in connection with providing advice about swaps, [a
commodity trading advisor] provide[s] clients or prospective clients
with research or advice about instruments other than swaps.'' \728\ The
commenter expressed concern that a registered commodity trading advisor
would need to register as a municipal advisor if these ancillary
services fall within the scope of municipal advisory activities and are
not deemed to be the type of advice described in the exclusion.
According to the commenter, the types of ancillary services that a
commodity trading advisor may provide to a municipal entity would be
subject to ``regular oversight by the [Commission] and CFTC.'' \729\ In
addition, the commenter stated that the rules would create widespread
uncertainty among registered commodity trading advisors regarding
whether the services they perform would require registration as
municipal advisors.\730\ According to the commenter, in order to comply
with the proposed rules, managers would need to regularly monitor each
service they provide to municipal entities, determine which of the
services are municipal advisory activities, and further determine which
of the services, if any, may not be deemed to be advice related to
swaps.\731\
---------------------------------------------------------------------------
\728\ MFA Letter.
\729\ Id. According to the commenter, such ancillary services
include providing clients or prospective clients with research or
advice about instruments other than swaps in connection with
providing advice about swaps.
The Commission notes that providing certain general information
to clients or prospective clients, such as research and general
information about products, would not be municipal advisory
activity. See supra Section III.A.1.b.i.
\730\ See MFA Letter.
\731\ See id.
---------------------------------------------------------------------------
Another commenter urged the Commission to ``honor a waiver, no-
action letters or other remedy from the CFTC regarding the requirement
to register as a commodity trading advisor.'' \732\ The same commenter
stated that ``the CFTC has established a `private advisor' limited
exemption from commodity trading advisor registration.'' \733\ Under
this exemption, a person does not have to register as a commodity
trading advisor if it has not provided commodity trading advice to more
than fifteen persons during the preceding twelve months and does not
hold itself out to the public as a commodity trading advisor.\734\ The
commenter suggested that the Commission should implement a similar
exemption for purposes of determining when a person must register as a
municipal advisor.\735\ In addition, the commenter stated that creating
an exemption for providing advice to a de minimis number of entities
would help distinguish between entities whose principal business is to
be a municipal advisor and others.\736\
---------------------------------------------------------------------------
\732\ ACES Power Marketing Letter.
\733\ See id. (citing Section 4m(1) of the Commodity Exchange
Act).
\734\ See id.
\735\ See id.
\736\ See id.
---------------------------------------------------------------------------
This commenter also expressed concern that a person must register,
regardless of the type of swap advice that may be contemplated and
irrespective of the relationship between the municipal entity and the
person seeking to offer advice.\737\ The commenter urged the Commission
to consider exclusions based on both: (1) The types of swaps
(specifically, limiting municipal derivatives to securities-based
swaps); and (2) the types of relationships between the municipal entity
and the person who is providing the advice (specifically, providing an
exclusion where the advisor acts as an agent and fiduciary of the
municipal entity).
---------------------------------------------------------------------------
\737\ See id.
---------------------------------------------------------------------------
Exclusion for Commodity Trading Advisors
The Commission is adopting the interpretation of the statutory
exclusion for commodity trading advisors substantially as proposed,
with some modifications to provide additional clarity on the scope of
advice that
[[Page 67523]]
would be excluded, in response to commenters' concerns. As adopted,
Rule 15Ba1-1(d)(2)(iii) provides that the term ``municipal advisor''
shall not include any commodity trading advisor registered under the
Commodity Exchange Act or person associated with a registered commodity
trading advisor,\738\ to the extent that such registered commodity
trading advisor or such person is providing advice that is related to
swaps (as defined in Section 1a(47) of the Commodity Exchange Act (7
U.S.C. 1a(47)) and Section 3(a)(69) of the Exchange Act (15 U.S.C.
78c(a)(69)), and any rules and regulations thereunder).\739\ The final
rule reflects minor, non-substantive modifications to provide greater
clarity and consistency with other organizational changes the
Commission is making to the exclusions and exemptions. Accordingly, the
exclusion from the municipal advisor definition will not be available
to a registered commodity trading advisor, or an associated person of a
registered commodity trading advisor, to the extent it engages in
municipal advisory activities that are not providing advice related to
swaps.\740\ As noted in the Proposal, while a registered commodity
trading advisor generally could provide advice related to swaps without
registering as a municipal advisor, a commodity trading advisor that is
not a registered commodity trading advisor would be required to
register as a municipal advisor if it provides advice related to swaps
to a municipal entity.\741\ Similarly, as noted in the Proposal, if a
registered commodity trading advisor provides advice with respect to an
issuance of municipal securities or any municipal financial product
other than the swap, the advisor must register as a municipal
advisor.\742\
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\738\ The Commission notes that Section 15B(e)(4)(C) excludes
from the definition of municipal advisor ``any commodity trading
advisor registered under the Commodity Exchange Act or persons
associated with a commodity trading advisor who are providing advice
related to swaps.'' The Commission believes it is reasonable to
interpret this exclusion to apply to registered commodity trading
advisors and persons associated with a registered commodity trading
advisor, as opposed to persons associated with any registered or
unregistered commodity trading advisor. The Commission notes that a
commenter also suggested this change. See MSRB Letter.
\739\ See Rule 15Ba1-1(d)(2)(iii).
\740\ The Commission notes, however, that to the extent a
registered commodity trading advisor registers as a municipal
advisor, its associated persons that are natural person municipal
advisors would be exempt from registration if he or she is an
associated person of an advisor that is registered with the
Commission pursuant to Section 15B(a)(2) of the Act and the rules
and regulations thereunder and engages in municipal advisory
activities solely on behalf of a registered municipal advisor. See
supra Section III.A.7. (discussing Rule 15Bc4-1).
\741\ See Proposal, 76 FR 833.
\742\ See id. The commodity trading advisor must also consider
whether its activities constitute ``solicitation of a municipal
entity or obligated person.'' See supra Section III.A.1.b.x.
(discussing solicitation of a municipal entity or obligated person).
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The Commission is not exempting from municipal advisor registration
persons that have received no-action letters from the CFTC or are
otherwise exempt from registration as commodity trading advisors.\743\
For example, a person may be exempted from registration as a commodity
trading advisor precisely because it engages in the types of activities
that are more akin to activities in which municipal advisors engage.
Thus, the Commission does not believe that a blanket exemption is
appropriate at this time. The Commission notes, however, that such
entities could apply for no-action or exemptive relief.\744\
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\743\ See supra notes 732-735 and accompanying text (discussing
comments related to CFTC no action letters and exemptions related to
commodity trading advisor registration).
\744\ Exchange Act Section 15B(a)(4) provides that the
Commission, by rule or order, upon its own motion or upon
application, may conditionally or unconditionally exempt any
municipal advisor or class of municipal advisors from any provision
of Section 15B or the rules or regulations thereunder, if the
Commission finds that such exemption is consistent with the public
interest, the protection of investors, and the purposes of Section
15B. See 15 U.S.C. 78o-4(a)(4). When requesting exemptive relief
pursuant to Section 15B(a)(4), a person may follow the procedures
for requesting exemptive relief pursuant to Section 36 of the
Exchange Act, as set forth in Rule 0-12 under the Exchange Act. See
17 CFR 240.0-12.
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The Commission is also not adopting an exemption for services
provided by a commodity trading advisor that are solely incidental or
ancillary to the commodity trading advisor's advice related to
swaps.\745\ To the extent the commodity trading advisor is providing
general information, however, such activities would not be municipal
advisory activities that would subject the advisor to registration as a
municipal advisor.\746\
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\745\ See supra notes 728-729 and accompanying text.
\746\ See supra Section III.A.1.b.i. (providing guidance on
``advice'' and discussing the provision of general information).
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Swap Dealers
Section 15B(e)(4)(C) of the Exchange Act does not include an
exclusion from the definition of municipal advisor for swap dealers or
security-based swap dealers. In its Proposal, the Commission requested
comment generally as to whether there are exclusions from the
definition of ``municipal advisor,'' other than those proposed, that
the Commission should consider.\747\
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\747\ See Proposal, 76 FR 838.
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Some commenters suggested that the exclusion should be extended to
swap dealers and security-based swap dealers because, otherwise,
registration as a municipal advisor would be duplicative.\748\ One such
commenter noted that Sections 731 and 764 of the Dodd-Frank Act have
provisions requiring registration by swap dealers and security-based
swap dealers with the CFTC and the Commission, respectively, and
provisions specifically covering such dealers' activities when acting
as advisors to ``special entities,'' which include state and local
governments.\749\ Another commenter stated that persons that will be
considered municipal advisors will often be engaged in business
activities other than providing advice to or on behalf of a municipal
entity or obligated person.\750\ The commenter expressed concern that
regulated persons, such as swap dealers, that may also provide advice
to a municipal entity or obligated person in connection with their
business as swap dealers, may be required to register as municipal
advisors.\751\ The commenter stated that it would be best to avoid dual
or multiple regulations by exempting any advice that is related to, or
given in connection with, another regulated activity. The commenter
also provided that, in the alternative, the Commission should
coordinate the definition of ``advice'' with that of other regulatory
regimes.\752\
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\748\ See, e.g., Kutak Rock Letter; SIFMA Letter I.
\749\ See Kutak Rock Letter. This commenter suggested that the
Proposal should be harmonized with other provisions of the Dodd-
Frank Act specifically addressing swap practices.
\750\ See SIFMA Letter I. The commenter stated that a swap
dealer that provides advice in connection with its other business
activity may be subject to CFTC regulation and, absent an exemption,
would become subject to additional regulation as a municipal
advisor. See id.
\751\ See id.
\752\ See id. In this context, this commenter cited as an
example the proposed CFTC business conduct standards for swaps.
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In its Business Conduct Standards for Swaps, the CFTC adopted
certain standards for swap dealers in their dealings with
counterparties to swap transactions, as well as for any swap dealer
that acts an advisor to a special entity.\753\ The CFTC's adopted
standards also include a safe harbor from the heightened protections
that would otherwise apply when a swap dealer acts as an advisor to a
special entity, if:
[[Page 67524]]
such swap dealer does not express an opinion as to whether the special
entity should enter into a recommended swap or trading strategy
involving a swap that is tailored to the particular needs or
characteristics of the special entity; the special entity represents in
writing that it will not rely on recommendations provided by the swap
dealer, and will rely on advice from an independent representative; and
the swap dealer discloses to the special entity that it is not
undertaking to act in the best interests of the special entity as
otherwise required under the CFTC's standards.\754\ Consistent with
this approach and for the reasons described below, the Commission
believes that it is appropriate to provide an exemption for certain
swap dealers.
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\753\ CFTC Rule 23.440(c)(1) provides that a swap dealer that
acts as an advisor to a special entity has ``a duty to make a
reasonable determination that any swap or trading strategy involving
a swap recommended by the swap dealer is in the best interests of
the Special Entity [as defined in CFTC Rule 23.401(c)].''
\754\ See Business Conduct Standards for Swaps, supra note 275.
See also CFTC Rule 23.440 (17 CFR 23.440).
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Specifically, to address commenters' concerns, the Commission is
exempting any swap dealer registered under the Commodity Exchange Act
or associated person of the swap dealer recommending a municipal
derivative or a trading strategy that involves a municipal derivative,
so long as the registered swap dealer or associated person is not
``acting as an advisor'' to the municipal entity or obligated person
with respect to the municipal derivative or trading strategy pursuant
to Section 4s(h)(4) of the Commodity Exchange Act and the rules and
regulations thereunder.\755\ For purposes of determining whether a swap
dealer is ``acting as an advisor'' under Rule 15Ba1-1(d)(3)(v), the
municipal entity or obligated person involved in the transaction will
be treated as a ``special entity'' \756\ under Section 4s(h)(2) of the
Commodity Exchange Act and the rules and regulations thereunder
(regardless of whether such municipal entity or obligated person is
otherwise a ``special entity'').\757\
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\755\ See Rule 15Ba1-1(d)(3)(v)(A).
\756\ Special entity is defined in Section 4s(h)(2)(C) of the
Commodity Exchange Act and the rules and regulations thereunder. See
17 CFR 23.401(c) (defining ``special entity,'' for purposes of
business conduct requirements for swap dealers and major swap
participants) and supra note 275 (discussing the protections
provided by the Dodd-Frank Act for special entities with respect to
derivative transactions).
\757\ See Rule 15Ba1-1(d)(3)(v).
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The Commission believes an exemption for swap dealers is
appropriate because, as discussed below, the exemption will apply the
standards that are applicable under the CFTC's existing regulatory
regime. As under such regime, the exemption will also preserve
consistent and comparable protections for municipal entities and
obligated persons. For example, for the exemption for registered swap
dealers to apply, a municipal entity or obligated person must have an
independent representative who is subject to a duty to act in the best
interests of its client.\758\ The Commission notes that independent
representatives would likely be commodity trading advisors, municipal
advisors, investment advisers, or ERISA fiduciaries \759\ that are also
subject to, or may become subject to,\760\ a fiduciary duty to their
clients.\761\ Moreover, regardless of whether a municipal entity or
obligated person is a special entity, the swap dealer will need to
comply with any applicable suitability standards and disclosure
requirements, which should offer another measure of protection for
municipal entities and obligated persons in addition to those noted
above. Further, in the context of interactions between swap dealers and
municipal entities and obligated persons, the exemptions will
incorporate the standards provided by the CFTC's Business Conduct
Standards for Swaps, which include a requirement that the swap dealer
disclose that it is not undertaking to act in the best interest of the
special entity.\762\ Therefore, municipal entities and certain
obligated persons may already be familiar with the notion that exempt
swap dealers are not undertaking to act in their best interest when
recommending a swap or a trading strategy involving a swap and could
more appropriately evaluate such recommendation. In addition, the
Commission believes the standards provided by the CFTC's Business
Conduct Standards for Swaps are appropriate for the swap dealer
exemption from the definition of municipal advisor, because they will
help provide clarity about: (1) when a swap dealer must register as a
municipal advisor; and (2) its relationship with municipal entities and
obligated persons.
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\758\ This is consistent with the blanket exemption where a
municipal entity or obligated person is represented by an
independent registered municipal advisor. See Rule 15Ba1-
1(d)(3)(vi).
\759\ See Business Conduct Standards for Swaps, 77 FR 9738.
\760\ The Commission notes that the CFTC has indicated that it
is ``considering developing rules for [commodity trading advisors]
that are comparable to rules adopted by the [Commission] or the MSRB
for municipal advisors.'' See Business Conduct Standards for Swaps,
77 FR 9739. Additionally, the CFTC has stated that it believes it
has harmonized its rules with the regulatory regime for municipal
advisors and will continue to work with the Commission as the
Commission's proposed rules for the registration of municipal
advisors are finalized. Id.
\761\ Municipal advisors, investment advisers, and ERISA
fiduciaries all owe fiduciary duties to their clients.
\762\ See supra note 754 (setting forth the disclosure
requirements for swap dealers under CFTC Rule 23.440).
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For these reasons, the Commission finds it consistent with the
public interest, the protection of investors, and the purposes of
Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) to exempt swap dealers from the
definition of municipal advisor, subject to the limitations described
above, and therefore not require such dealers to register as municipal
advisors.
The Commission is not adopting, at this time, an exemption for
security-based swap dealers. As a general matter, the Commission
understands that municipal entities currently do not typically enter
into security-based swap transactions.\763\ The Commission also notes
security-based swap dealers may, to the extent they would otherwise
meet the definition of ``municipal advisor,'' qualify for a different
exemption, such as the exemption in Rule 15Ba1-1(d)(3)(vi) when the
municipal entity or obligated person is otherwise represented by an
independent registered municipal advisor. Further, the Commission notes
that such entities could apply for no-action or exemptive relief.\764\
When the Commission considers adopting external business conduct rules
for security-based swap dealers, the Commission may also consider
amending the municipal advisor definition to include an exemption for
security-based swap dealers that is similar to the exemption for swap
dealers.\765\
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\763\ See, e.g., Transcript of the U.S. Securities and Exchange
Commission Birmingham Field Hearing on the State of the Municipal
Securities Market at 241 and 244.
\764\ See, e.g., supra note 744.
\765\ The Commission has proposed standards for security-based
swap dealers that are similar to those that the CFTC has adopted.
See Business Conduct Standards for Security-Based Swaps. Comments
received by the Commission on this proposal are available at http://www.sec.gov/comments/s7-25-11/s72511.shtml.
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vii. Accountants, Attorneys, Engineers and Other Professionals
The definition of municipal advisor in Exchange Act Section
15B(e)(4) excludes attorneys offering legal advice or providing
services of a traditional legal nature and engineers providing
engineering advice.\766\ As discussed more fully below, the Commission
proposed interpretations of the attorney and engineer exclusions and
also
[[Page 67525]]
proposed a limited exemption for accountants.\767\
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\766\ See 15 U.S.C. 78o-4(e)(4)(C).
\767\ See proposed Rule 15Ba1-1(d)(2)(iv)-(vi) and Proposal, 76
FR 833-834.
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Accountants Providing Attest Services
Exchange Act Section 15B(e)(4) does not explicitly exclude
accountants from the definition of municipal advisor. In the Proposal,
however, the Commission proposed to interpret the statutory definition
of municipal advisor to exempt any accountant, unless the accountant
engages in municipal advisory activities other than preparing or
auditing financial statements or issuing letters for underwriters. In
other words, the Commission proposed to exempt from the municipal
advisor definition accountants preparing financial statements, auditing
financial statements, or issuing letters for underwriters for, or on
behalf of, a municipal entity or obligated person.\768\ In the
Proposal, the Commission noted that it was not appropriate to exempt
accountants entirely, because accountants may provide advice to
municipal entities that includes advice about the structure, timing,
terms, and other similar matters concerning the issuance of municipal
securities.\769\
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\768\ See proposed Rule 15Ba1-1(d)(2)(vi).
\769\ See Proposal, 76 FR 833. The Commission noted that
accountants may also be engaged by municipal entities to provide
other services, such as conducting feasibility studies or preparing
financial projections and that, in defining municipal advisor in
Exchange Act Section 15B(e)(4), Congress only excluded attorneys
offering legal advice or services of a traditional legal nature or
engineers providing engineering advice. See id., at 833, notes 127-
128 and accompanying text.
---------------------------------------------------------------------------
The Commission requested comment on its proposed exemption for
accountants. In particular, the Commission requested comment on whether
the Commission should provide this exemption and whether there are
additional types of accounting services that should fall under the
exemption.\770\
---------------------------------------------------------------------------
\770\ See id., at 837.
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The Commission received approximately 11 comment letters that
addressed the proposed accountant exemption. Two commenters expressed
support for the accountant exemption as proposed and did not suggest
any changes.\771\ Several commenters, however, believed that the
proposed accountant exemption was too narrow and recommended including
additional services under the exemption.\772\
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\771\ See MSRB Letter (agreeing that the exemption should apply
solely when an accountant is preparing financial statements,
auditing financial statements, or issuing bring down, comfort or
``agreed upon procedures'' letters for underwriters); letter from
Kim M. Whelan, Co-President, Acacia Financial Group, Inc., dated
February 22, 2011 (``Acacia Financial Group Letter'') (stating that
``[t]o the extent accountants or engineers provide advice regarding
municipal financial products or issuance of municipal securities,
accountants and engineers should be considered Municipal
Advisors'').
\772\ See, e.g., State of Indiana Letter; letters from Deloitte
LLP, dated February 22, 2011 (``Deloitte Letter''); Gerald G.
Malone, H.J. Umbaugh & Associates, dated February 22, 2011
(``Umbaugh Letter''); letter from Susan S. Coffey, Senior Vice
President, Member Quality and International Affairs, American
Institute of Certified Public Accountants (``AICPA''), dated
February 25, 2011 (``AICPA Letter''); and Gary Higgins, President,
Registered Municipal Accountants Association of New Jersey, dated
February 22, 2011 (``RMAA Letter'').
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Several commenters recommended that attest, not just audit,
services should be part of the accountant exemption.\773\ The
performance of attest services is generally limited to certified public
accountants by state regulation and professional standards.\774\ One
commenter noted that audit services are a subset of the broader
category of attest services and both are subject to similar
professional standards, including an ``independence'' requirement.\775\
Another commenter also provided examples of services in this broader
category of attest services, all of which it believed would be subject
to professional standards: (1) Examinations, compilations, or agreed-
upon procedures engagements on projections or forecasts using AICPA
Statements on Standards for Attestation Engagements (``SSAEs''); (2)
performance of other types of agreed-upon procedures engagements; (3)
compliance audits (e.g., opinions on compliance with federal, state, or
local compliance requirements); and (4) review of debt coverage
requirements on outstanding bonds and verification of calculations of
escrow account requirements for advance refunding of bonds.\776\
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\773\ See, e.g., Deloitte Letter (stating that ``[a]udit
services are a subset of the broader category of attest services. .
. and we see no reason for the final rule to distinguish between the
two''); Umbaugh Letter (stating that attest services and tax
services (e.g., arbitrage rebate calculations on behalf of issuers)
do not appear to fit the ``municipal advisor'' definition); letter
from KPMG LLP, dated February 22, 2011 (``KPMG Letter'')
(recommending that the Commission include, at a minimum, specific
exemptions for attest services in the accountant exemption).
Commenters referred to the definition of the term ``attest
engagements'' by the AICPA as ``engagements . . . in which a
certified public accountant in the practice of public accounting . .
. is engaged to issue or does issue an examination, a review, or an
agreed-upon procedures report on subject matter, or an assertion
about the subject matter . . . that is the responsibility of another
party.'' See Deloitte Letter (citing AICPA Attestation Standards AT
Sec. 101.01). The Uniform Accountancy Act, which has been used as a
basis for state regulation of certified public accountants,
incorporates similar concepts. (See, e.g., Section 14(a) of The
Uniform Accountancy Act (5th ed. 2007), available at http://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf).
\774\ See, e.g., AICPA Code of Professional Conduct ET 201.01,
202.01; see also AICPA Attestation Standards AT Sec. 101.06
(providing that ``[a]ny professional service resulting in the
expression of assurance must be performed under AICPA professional
standards that provide for the expression of such assurance''); see
also, e.g., The Uniform Accountancy Act (5th ed. 2007), available at
http://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf.
\775\ See Deloitte Letter.
\776\ See AICPA Letter.
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Further, one commenter asked if the following services would be
included or excluded from the accountant exemption: (1) The preparation
of unaudited annual financial statements; (2) the provision of annual
independent audits of a municipal entity; (3) the review and
preparation of pro forma maturity schedules of principal and interest
on proposed bond issues; (4) the provision of budget, audit, and other
information to credit rating agencies; and (5) the preparation of the
``front end'' of offering statements and financial and demographic
information.\777\
---------------------------------------------------------------------------
\777\ See RMAA Letter.
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Several commenters also recommended extending the exemption to
services that non-certified public accountants can provide but are
subject to regulation and professional standards. For example, two
commenters stated that advice related to Generally Accepted Accounting
Principles (``GAAP'') and tax advice related to municipal securities
and derivatives should also fall under the accountant exemption.\778\
---------------------------------------------------------------------------
\778\ See KPMG Letter; AICPA Letter.
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In addition to these services, another commenter recommended, more
generally, that the Commission extend the accountant exemption to the
provision of non-attest services, such as certain tax and actuarial
services.\779\ Two other commenters stated that accountants and other
consultants who provide feasibility studies should not be considered
municipal advisors.\780\
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\779\ See Deloitte Letter.
\780\ See Gilmore & Bell Letter; State of Indiana Letter.
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One commenter suggested that accountants of conduit borrowers
should be exempt as municipal advisors.\781\
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\781\ See South Lake County Hospital Letter.
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The Commission has carefully considered issues raised by commenters
on the Proposal and is expanding the accountant exemption to include
accountants providing audit or other attest services. Specifically,
Rule 15Ba1-1(d)(3)(i), as adopted, provides that the term ``municipal
advisor'' shall
[[Page 67526]]
not include any accountant 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.\782\ To the extent commenters
requested clarification regarding whether specific activities would be
exempted, such activities would be exempted if they constitute audit or
other attest services,\783\ the preparation of financial statements, or
the issuance of letters for underwriters for, or on behalf of, a
municipal entity or obligated person.
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\782\ See Rule 15Ba1-1(d)(3)(i). In addition to adopting an
expanded accountant exemption, as compared to the Proposal, the
Commission is also making minor, non-substantive modifications to
provide greater clarity and consistency with other organizational
changes the Commission is making to the exclusions and exemptions.
\783\ See supra notes 776-777.
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The Commission believes that it is appropriate to include attest
services in general, and not just audit services in particular, among
the services that fall under the exemption. Both audit and other attest
services are generally subject to regulation and professional
standards,\784\ including independence requirements. Such independence
requirements could potentially conflict with municipal advisors'
fiduciary duty to the municipal entities they advise.\785\ Accountants
providing attest services are also required to meet general standards
related to adequate technical training and proficiency, adequate
knowledge of subject matter, suitability and availability of criteria,
and the exercise of due professional care.\786\ Accordingly, the
Commission believes that attest services, and not just audit services,
exemplify the types of services typically performed by accountants that
should not constitute the provision of advice within the meaning of
Exchange Act Section 15B(e)(4)(A)(i).\787\
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\784\ See, e.g., AICPA Code of Professional Conduct ET 201.01,
202.01; see also AICPA Attestation Standards AT Sec. 101.06
(providing that ``[a]ny professional service resulting in the
expression of assurance must be performed under AICPA professional
standards that provide for the expression of such assurance'').
\785\ See AICPA Attestation Standards AT Sec. 101.35 (``The
practitioner must maintain independence in mental attitude in all
matters relating to the engagement.''), 101.36 (``The practitioner
should maintain the intellectual honesty and impartiality necessary
to reach an unbiased conclusion about the subject matter or the
assertion. This is a cornerstone of the attest function.'').
\786\ See AICPA Attestation Standards AT Sec. 101.19 to 101.41.
\787\ See 15 U.S.C. 78o-4(e)(4)(A)(i).
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The Commission has considered whether various non-attest services
should also be included in the accountant exemption, such as tax
services (including arbitrage rebate services \788\) and advice
relating to GAAP. While the Commission acknowledges that such non-
attest services may represent activities provided by accountants, such
services are neither necessarily provided by certified public
accountants, nor necessarily subject to similar regulation and
professional standards as attest services. The Commission does not
believe it is appropriate to expand the exemption to cover activities
or services that non-accountants could perform. Accordingly, the
Commission is not including non-attest services in the accountant
exemption. Nevertheless, a person providing non-attest services would
only be required to register as a municipal advisor if such services
are within the scope of the municipal advisory activities definition.
---------------------------------------------------------------------------
\788\ See, e.g., supra note 773.
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Several commenters noted that non-attest services should be
included because accountants are already subject to other regulatory
regimes, including those of state boards of accountancy, the
Commission, and the Public Company Accounting Oversight Board.\789\ The
Commission does not believe those regimes, which are principally
focused on the certified public accountant's provision of attest
services,\790\ are sufficient to warrant further expansion of the
accountant exemption.
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\789\ See, e.g., KPMG Letter.
\790\ See Sarbanes-Oxley Act of 2002, as amended by Section 982
of the Dodd-Frank Act. 15 U.S.C. 7201 et seq. See, specifically,
Section 102 of the Sarbanes-Oxley Act of 2002. 15 U.S.C. 7212.
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As stated above and in the Proposal, accountants may provide advice
to municipal entities, including advice about the structure, timing,
terms, and other similar matters, and such advice may be the basis for
an issuance of municipal securities. Therefore, the Commission does not
believe that it is appropriate to exempt accountants from the
definition of municipal advisor entirely. In addition, although attest
services are often included as part of larger engagements, such as the
examination of prospective financial information that is included as
part of a feasibility study or acquisition study,\791\ the accountant
exemption includes only the attest portion of these engagements and
does not cover all services that comprise such engagements.\792\
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\791\ See AICPA Attestation Standards AT Sec. 101.05.
\792\ For example, the exemption would not apply to accountants
that provide consulting services to municipal entities, including
advice with respect to the structure, timing, terms, or other
similar matters concerning an issuance of municipal securities or a
municipal financial product, modeling future debt service coverage,
suggesting future rate schedules, tax advice related to municipal
securities and derivatives, and other non-attest services that
constitute municipal advisory activities. The scope of the
accountant exemption is different from the scope of the investment
adviser exclusion because, unlike accountant engagements that
include attest as well as other services, investment advice provided
pursuant to an advisory agreement would be subject to the anti-fraud
provisions of the Investment Advisers Act and a fiduciary duty. See
supra note 671.
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The Commission also notes that, according to the exemption provided
by Rule 15Ba1-1(d)(3)(i), feasibility studies concerning the issuance
of municipal securities or municipal financial products for which an
accountant provides only audit or attest services would not require the
accountant to register as a municipal advisor.\793\
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\793\ This is consistent with the approach for engineers that
provide feasibility studies discussed below in this section.
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Lastly, with respect to accountants of obligated persons, the
Commission notes that such accountants will be treated consistently
with accountants of municipal entities.\794\
---------------------------------------------------------------------------
\794\ See Rule 15Ba1-1(d)(3)(i). See also South Lake County
Hospital Letter.
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For these reasons, the Commission finds it consistent with the
public interest, the protection of investors, and the purposes of
Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) to exempt accountants from the
definition of municipal advisor, subject to the limitations described
above.
Attorneys Offering Legal Advice or Providing Services of a Traditional
Legal Nature
Section 15B(e)(4)(C) of the Exchange Act excludes from the
municipal advisor definition attorneys offering legal advice or
providing services that are of a traditional legal nature. In the
Proposal, the Commission proposed to interpret the exclusion to mean
that the term ``municipal advisor'' shall not include any attorney,
unless the attorney engages in municipal advisory activities other than
offering legal advice or providing services that are of a traditional
legal nature to a client of the attorney that is a municipal entity or
obligated person.\795\ In addition, the Commission proposed to
interpret advice from an attorney to his or her client with respect to
the structure, timing, terms, and other similar matters concerning the
issuance of municipal securities or municipal financial products to be
services of a traditional legal nature, if such advice is provided
within an attorney-client relationship specifically related to the
issuance of municipal securities or such municipal
[[Page 67527]]
financial products in conjunction with related legal advice.\796\
Further, in the Proposal, the Commission indicated that, for example,
the following advice would be considered to be services of a
traditional legal nature: (1) Advice comparing the structures, terms,
or associated costs of issuance of different types of securities or
financial instruments (such as fixed rate bonds or variable rate demand
obligations) given by an attorney hired to advise a municipal entity
client embarking on a bond offering; (2) advice concerning the tax
consequences of alternative financing structures; or (3) advice
recommending a particular financing structure due to legal
considerations, such as the limitations included in existing contracts
and indentures to which the issuer is a party.\797\ The Commission,
however, also stated in the Proposal that the following advice would
not be services of a traditional legal nature: (1) advice concerning
the financial feasibility of a project or a financing; (2) advice
estimating or comparing the relative cost to maturity of an issuance,
depending on various interest rate assumptions, or (3) advice
recommending a particular structure as being financially advantageous
under prevailing market conditions.\798\
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\795\ See Proposal, 76 FR 833-834. See also proposed Rule 15Ba1-
1(d)(2)(iv).
\796\ As an example, the Commission stated that advice comparing
the structures, terms, or associated costs of the issuance of
different types of securities or financial instruments (such as
fixed rate bonds or variable rate demand obligations) given by an
attorney hired to advise a municipal entity client embarking on a
bond offering, would be considered to be services of a traditional
legal nature, as would advice concerning the tax consequences of
alternative financing structures or advice recommending a particular
financing structure due to legal considerations such as the
limitations included in existing contracts and indentures to which
the issuer is a party. See Proposal, 76 FR 834.
\797\ See id.
\798\ See id.
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The Commission requested comment on numerous aspects of the
attorney exclusion, including whether the exclusion should only apply
to legal services to an attorney's municipal or obligated person
client; whether the Commission should provide an exclusion for all an
attorney's activities as long as that attorney has an attorney-client
relationship with the municipal entity or obligated person; and whether
the meaning of the term ``services of a traditional legal nature'' is
sufficiently clear.\799\
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\799\ See id., at 837.
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The Commission received approximately 20 comment letters regarding
the attorney exclusion. Two commenters generally supported the proposed
interpretation of the exclusion,\800\ although one of these commenters
recommended that the Commission continue to refine the attorney
exemption. The commenter suggested that exempted activity ``consists of
advice on legal matters such as the legal ramifications of such
structure, timing, terms and other matters, the appropriate
documentation thereof, and matters of a similar legal nature.'' \801\
Meanwhile, two other commenters stated that they did not support the
exclusion because advice provided by attorneys to financing teams is
generally financial in nature and represents municipal advisory
activity.\802\
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\800\ See MSRB Letter I (supporting the language of the attorney
exclusion, ``including in particular that such exclusion applies
solely when an attorney is providing legal advice or services that
are of a traditional legal nature to a client that is a municipal
entity or obligated person''); letter from Robert Doty, AGFS, dated
March 1, 2011 (``Doty Letter II'') (stating that: ``[i]n the
municipal securities market . . . it has long been recognized that
attorneys providing other services are stepping beyond their
recognized roles'').
\801\ See MSRB Letter I.
\802\ See letter from John J. Haas, President, Ranson Financial
Consultants, LLC, dated February 17, 2011 (``Ranson Financial
Consultants Letter'') (``How an attorney can give advice on whether
an entity should be rated or not, and/or to walk and [sic] entity
through the rating process without being a registered Municipal
Advisor is not understandable . . . . The Commission, in principal
[sic], is allowing bond attorney and local attorneys to continue to
act as Municipal Advisors without the requirement to be registered
as one.''); Acacia Financial Group Letter (stating that attorney
advice comparing the structures, terms or associated costs of
issuance of different types of securities or financial instruments
(such as fixed rate bonds or variable rate demand obligations) is
not service that should be included in the definition of traditional
legal services as it is at the heart of the advice that a municipal
advisor provides and is directly financial in nature).
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The majority of commenters did not support the proposed
interpretation of the statutory exclusion, stating that the
interpretation is too limited in scope.\803\ One commenter sought
clarification that the statutory exclusion for attorneys covers all
``legal advice'' and that the ``traditional legal nature'' limitation
applies only to ``services'' provided by attorneys.\804\ Some
commenters noted the difficulty of separating ``services of a
traditional legal nature'' from advice that could be considered
``financial'' in nature.\805\ These commenters also noted that roles of
outside counsel are not neatly compartmentalized, and that municipal
clients benefit from attorneys' ``financial'' advice.\806\ Other
commenters indicated that attorneys should feel free to provide advice
to municipal entities and obligated persons without fear of falling
subject to municipal advisor registration.\807\ Some commenters
questioned whether registration of attorneys was necessary, even if
they provided financial advice. These commenters reasoned that
attorneys already have a fiduciary duty to their clients, in addition
to state ethics laws and well-established disciplinary processes for
those who breach their fiduciary duties.\808\
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\803\ See, e.g., NABL Letter (``[A]ttorneys have an obligation
to give frank advice to their clients and . . . not to limit their
advice to strictly legal issues if their clients otherwise would be
prejudiced . . . . The attorney should be free to discuss the
possible pros and cons of different transaction structures if more
than one is legally authorized, including practical consequences
that are financial in nature . . . . [T]he exclusion for attorneys
should not be afforded only for advice given to clients, but should
apply to all advice that one must be licensed as an attorney to give
or that is given as part of a traditional legal nature, or that is
incidental to such services.''); letter from Wm. Raymond Manning,
President & CEO, Manning Architects, dated February 21, 2011
(``Manning Architects Letter'') (``[B]y requiring attorneys for the
government entity to register if they stray beyond pure legal advice
. . . the SEC will be chilling some of the most effective advice
that a lawyer can provide. Attorneys often challenge the analysis of
experts and other advisors to their clients and if that challenge
strays beyond the purely legal, then those lawyers may be fearful to
fully and ably represent their clients. The Commission should
consider carefully if chilling a lawyer's advice to a client serves
the interests it seeks to protect.''); Sherman & Howard Letter (``We
believe that in so limiting the exemption for attorneys, the
Commission is going beyond what Congress intended, as shown by the
language of the Act, and beyond what Congress has authorized.'').
\804\ See NABL Letter.
\805\ See, e.g., letter from Joe B. Allen, Allen Boone Humphries
Robinson LLP, dated February 21, 2011 (``Allen Boone Humphries
Robinson Letter'') (```[S]ervices that are of a traditional legal
nature' is vague, especially for bond counsel. Bond counsel's
consultation with a client necessarily includes `structure, timing,
terms and other similar matters.''').
\806\ See, e.g., American Municipal Power Letter; Squire Sanders
& Dempsey Letter (``[C]ertain advice and services the Commission may
identify as financial in nature are in fact an integral part of and
inseparable from legal advice and services that attorneys have
traditionally been expected to provide to their clients in
connection with municipal finance transactions'' and attorneys
should be excluded from the application of the proposed rules ``when
the attorney is providing legal advice or services, including
ancillary financial or related advice or services relating to a
municipal finance transaction or municipal financial product, or
providing information concerning developments in the municipal
marketplace.''); letter from Edward G. Henifin, General Manager and
Steven G. de Mik, Director of Finance, Hampton Roads Sanitation
District, dated February 22, 2011 (``Hampton Roads Sanitation
District Letter'').
\807\ See, e.g., NABL Letter; American Municipal Power Letter;
Hampton Roads Sanitation District Letter; Rose Letter; letter from
Susan Combs, Texas Comptroller of Public Accounts, dated February
22, 2011 (``Texas Comptroller of Public Accounts Letter'').
\808\ See, e.g., NABL Letter; State of Indiana Letter; Squire
Sanders & Dempsey Letter.
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Several commenters stated that the attorney exclusion should not
depend on a pre-existing attorney-client
[[Page 67528]]
relationship.\809\ Some commenters generally noted that attorneys are
often expected to provide counsel to all financing team members, and
not only to the attorney's clients that are municipal entities and
obligated persons.\810\ One commenter stated that ``others in the bond
issue clearly rely upon the legal advice of bond counsel, including the
. . . obligated person in a conduit financing. The very role of bond
counsel is to provide advice to the entire group relative to the state
law authority for the issuance of the bonds (the approving legal
opinion) and the federal and state tax status of the interest on the
bonds.'' \811\ Similarly, another commenter noted that bond counsel has
at times been described as representing ``the transaction'' rather than
any particular party to an offering.\812\ Accordingly, the commenter
asked the Commission to clarify if in such instance the bond counsel
would be viewed as having a municipal entity or obligated person as a
client. Finally, commenters also stated that attorneys representing
parties other than municipal entities and obligated persons, such as
underwriter's counsel, are called upon to provide their views or advice
to the entire team, yet the attorney exclusion, as proposed, would not
pertain to these attorneys.\813\
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\809\ See, e.g., State of Indiana Letter (``Not all attorneys
who are integrally involved in a typical municipal finance
transaction have an attorney/client relationship with the municipal
entity issuing the bonds . . . . The responsibilities of these
counsel are relatively standard at the core, but can be varied in
accordance with the agreements of the various parties to the
transaction to produce the most efficient and effective final
product for the municipal entity . . . . All these attorneys need
absolute comfort that their contributions will not be considered
municipal advisory services which are outside the scope of the
exemption simply because they are not engaged by the municipal
entity.''); Squire Sanders & Dempsey Letter (stating that imposing a
federal fiduciary duty upon an attorney with respect to a non-client
municipal entity or obligated person will create potential ethical
dilemmas regarding conflicts of interest rules under state
professional conduct rules that already impose a prior competing
fiduciary duty in favor of the attorney's client); Chapman and
Cutler Letter; Gilmore & Bell Letter; Sherman & Howard Letter; and
Texas Comptroller of Public Accounts Letter.
\810\ See, e.g., Gilmore & Bell Letter; NABL Letter.
\811\ See Gilmore & Bell Letter.
\812\ See MSRB Letter.
\813\ See, e.g., State of Indiana Letter; Squire Sanders &
Dempsey Letter; Sherman & Howard Letter; NABL Letter.
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Some commenters noted that, if an attorney is required to register
as a municipal advisor in order to provide advice to non-clients on the
financing team, the resulting municipal advisory relationship would
create a fiduciary duty for the attorney to the non-client. According
to these commenters, such a fiduciary duty would directly conflict with
the attorney's pre-existing fiduciary duties to its clients, and thus
potentially infringe upon state rules of professional
responsibility.\814\
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\814\ See, e.g., NABL Letter (recommending that the Commission
clarify the attorney exclusion to prevent the imposition of
fiduciary duties to issuers that are inconsistent with the duties of
lawyers under their state professional conduct rules); Sherman &
Howard Letter; Squire Sanders & Dempsey Letter.
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Other commenters indicated that many law firms provide to both
clients and non-clients educational material about municipal bond
financings through newsletters and emails and expressed concern that
such activity would not be covered under the proposed interpretation of
the attorney exclusion.\815\ Moreover, some commenters indicated that
attorneys typically provide legal advice to a client, both before a
formal attorney-client relationship is formed and after the attorney-
client relationship has ended (e.g., upon the closing of a bond
transaction).\816\ One commenter noted that it is often asked to
provide its view or advice on matters relating to prior transactions
for which it served as bond counsel or in another legal capacity.\817\
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\815\ See, e.g., NABL Letter; Squire Sanders & Dempsey Letter;
Sherman & Howard Letter.
\816\ See, e.g., State of Indiana Letter; Squire Sanders &
Dempsey Letter; NABL Letter.
\817\ See Squire Sanders & Dempsey Letter.
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The Commission has carefully considered issues raised by commenters
on the Proposal and is modifying its interpretation of the statutory
attorney exclusion to provide that attorneys are excluded from the
definition of municipal advisor to the extent that the attorney is
offering legal advice or providing services that are of a traditional
legal nature with respect to the issuance of municipal securities or
municipal financial products to a client of such attorney that is a
municipal entity, obligated person, or other participant in the
transaction. The Commission recognizes that legal advice and services
of a traditional legal nature in the area of municipal finance
inherently involves a financial advice component. By contrast, to the
extent an attorney represents himself or herself as a financial advisor
or financial expert regarding the issuance of municipal securities or
municipal financial products, the attorney is not excluded with respect
to such financial activities under Rule 15Ba1-1(d)(2)(iv) as this type
of advice and services would be outside the statutory exclusion.\818\
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\818\ Rule 15Ba1-1(d)(2)(iv). In addition to the modifications
discussed above, the Commission is adopting the attorney exclusion
with minor, non-substantive modifications to provide greater clarity
and consistency with other organizational changes the Commission is
making to the exclusions and exemptions.
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By revising its interpretation of the exclusion in this way and
providing guidance, the Commission intends to clarify that all legal
advice or services of a traditional legal nature involving the issuance
of municipal securities or a municipal financial product are covered
under the attorney exclusion. This approach addresses many comments
received by the Commission noting the negative impacts of requiring
attorneys in municipal finance transactions to limit their advice and
services to those related strictly to legal issues and describing the
difficulty involved in complying with such limitations given the nature
of the legal advice and services attorneys traditionally have provided,
and are expected to provide, in municipal finance transactions.\819\ In
addition, if another participant in the issuance or transaction, who is
not a client of the attorney, receives and acts upon the legal advice
the attorney provides to its client, the attorney will not have to
register as a municipal advisor. In this situation, the attorney is
still only advising its client, even if the advice affects the actions
of other participants in the transaction. This approach addresses
commenters' concerns that bond counsel and other attorneys routinely
share their views with non-client parties in a municipal finance
transaction in the context of working group discussions.\820\ Because
such attorney would not be required to register as a municipal advisor,
he or she would not be subject to an additional fiduciary duty that
could potentially conflict with the attorney's existing fiduciary duty
to his or her client.\821\ By revising its interpretation of the
exclusion to include a client of such attorney that is a municipal
entity, obligated person, or other participant in the transaction, the
Commission intends to be responsive to the comments received that
attorneys representing participants other than a municipal entity or
obligated person should be included in the exemption.\822\
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\819\ See supra notes 803-807 and accompanying text.
\820\ See supra notes 809-813 and accompanying text (discussing
comments on the role of bond counsel in a municipal securities
transaction and the expectation that attorneys share their advice
with the financing team).
\821\ See supra notes 809 and 814 and accompanying text
(discussing comments on potentially conflicting duties if an
attorney is not counsel to the municipal entity or obligated person,
but would be required to register as a municipal advisor to the
extent they provide advice on the transaction).
\822\ See supra note 813 and accompanying text (discussing role
of underwriter's counsel in a municipal securities transaction).
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[[Page 67529]]
If, however, in connection with the issuance of municipal
securities or municipal financial products, an attorney represents
himself or herself as a ``financial advisor'' or ``financial expert,''
the attorney will be required to register as a municipal advisor if the
attorney engages in municipal advisory activities. As provided in the
Proposal, the Commission would consider an attorney to be representing
himself or herself as a ``financial advisor'' or ``financial expert''
if the attorney provides advice that is primarily financial in nature,
such as: (1) The financial feasibility of a project or financing; (2)
advice estimating or comparing the relative cost to maturity of an
issuance of municipal securities depending on various interest rate
assumptions; (3) advice recommending a particular structure as being
financially advantageous under prevailing market conditions; (4) advice
regarding the financial aspects of pursuing a competitive sale versus a
negotiated sale; and (5) other types of financial advice that are not
related to the attorney's provision of legal advice and services of a
traditional legal nature.\823\ In these examples, attorneys would be
providing services that are primarily financial in nature and that are
beyond their traditional legal roles and outside of the statutory
exclusion. The Commission believes that if an attorney represents
himself or herself as a financial advisor or expert and engages in
municipal advisory activities, the attorney is acting outside the scope
of the statutory exclusion (i.e., the attorney is not offering legal
advice or providing services that are of a traditional legal
nature).\824\
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\823\ See Proposal, 76 FR 834.
\824\ See 15 U.S.C. 78o-4(e)(4)(C).
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The Commission recognizes that analysis, discussion, negotiation,
and advice regarding the legal ramifications of the structure, timing,
terms, and other provisions of a financial transaction by an attorney
to a client are essential to the development of a plan of finance. In
turn, these services become, among other things, the basis for a
transaction's basic legal documents, the preparation and delivery of
the official statement or other disclosure document that describes the
material terms and provisions of the transaction, the preparation of
the various closing certificates that embody the terms and provisions
of the transaction, the preparation and delivery of the attorney's
legal opinion with respect to the transaction that is relied upon by
the client and investors in the municipal securities marketplace, and
advice and documentation with respect to post-closing policies and
procedures that are necessary for compliance with federal and state law
during the term of the municipal securities or municipal financial
product. Similarly, attorneys often provide legal advice and related
legal services regarding Federal tax requirements for issues of
municipal securities, such as, for example, legal advice and services
in determining ongoing compliance of an issue of municipal securities
with the Federal tax law requirement to ``rebate'' excess arbitrage
earnings on investments of tax-exempt bond proceeds to the Federal
Government at periodic intervals during the term of the bond issue. The
legal advice and legal services described in this paragraph would be
within the attorney exclusion to the municipal advisor definition.
Thus, attorneys providing this advice or these services would not be
required to register as municipal advisors.
In addition, the Commission recognizes that attorneys seeking to
represent municipal entities and obligated persons are often required
to respond to RFPs and RFQs, and to participate in interviews during
which they are requested to, and do, offer advice regarding the
structure, timing, terms, and other provisions of a proposed offering
of municipal securities or municipal financial products before being
retained as counsel and that these requests may not be limited to legal
questions. As discussed above in Section III.A.1.c.ii, the Commission
does not believe that a response to an RFP or RFQ is advice with
respect to the issuance of municipal securities or municipal financial
products, and the Commission is adopting an exemption from the
definition of municipal advisor for any person providing a response to
an RFP or RFQ, provided such person does not receive separate direct or
indirect compensation for advice provided as part of such RFP or RFQ.
The Commission notes that responses to RFPs and RFQs are provided at
the request of the municipal entity or obligated person. Thus, anyone
responding to an RFP or RFQ in accordance with the exemption, including
an attorney, will not have to register as a municipal advisor.
The Commission also recognizes that attorneys who represent
municipal entities or obligated persons with respect to the issuance of
municipal securities or municipal financial products are often asked to
provide interpretation of the provisions of the legal documents
throughout the term of the municipal securities or municipal financial
products, including before and after the formal attorney-client
relationship with respect to the issuance or municipal financial
product exists.\825\ Although the attorney-client relationship may not
be in existence, if the advice is with respect to an issuance or
transaction in connection with which the municipal entity was or will
be a client of the attorney, the Commission considers such advice to be
``to a client.'' Accordingly, such advice will not require the attorney
to register as a municipal advisor.
---------------------------------------------------------------------------
\825\ See supra notes 816-817 and accompanying text.
---------------------------------------------------------------------------
Finally, as discussed above, the Commission is clarifying that
provision of general information, including the provision of
educational materials to an attorney's clients and non-clients does not
constitute advice, and therefore, will not require the attorney to
register as a municipal advisor.\826\
---------------------------------------------------------------------------
\826\ See supra Section III.A.1.b.i. (discussing the provision
of general information) and note 815 and accompanying text.
---------------------------------------------------------------------------
Engineers Providing Engineering Advice
Section 15B(e)(4)(C) of the Exchange Act excludes engineers
providing engineering advice from the municipal advisor definition. In
the Proposal, the Commission proposed to interpret this exclusion to
mean that the term ``municipal advisor'' shall not include ``[a]ny
engineer, unless the engineer engages in municipal advisory activities
other than providing engineering advice.'' \827\ In the Proposal, the
Commission stated that costing out engineering alternatives would not
subject an engineer to registration because such activity would be
considered ``engineering advice.'' \828\ The Commission, however,
further proposed that this exclusion would not include circumstances in
which the engineer is engaging in municipal advisory activities,
including cash flow modeling or the provision of information and
educational materials relating to municipal financial products or the
issuance of municipal securities, even if those activities are
incidental to the provision of engineering advice.\829\ The Commission
also proposed that the exclusion would not include preparing
feasibility studies concerning municipal financial products or the
issuance of municipal securities that provide analysis beyond the
engineering aspects of the project. Therefore, under the Proposal,
engineers engaging in the types of activities described above
[[Page 67530]]
would have been required to register as a municipal advisor.\830\
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\827\ See proposed Rule 15Ba1-1(d)(2)(v).
\828\ See Proposal, 76 FR 834.
\829\ See id.
\830\ See id.
---------------------------------------------------------------------------
The Commission requested comment on whether it should expand its
proposed interpretation of the statutory exclusion beyond engineers
providing engineering advice.\831\ The Commission also asked how the
term ``engineering advice'' should be interpreted and whether the
engineering exclusion should include circumstances in which the
engineer is preparing feasibility studies concerning municipal
financial products or the issuance of municipal securities that include
analysis beyond the engineering aspects of the project.\832\
---------------------------------------------------------------------------
\831\ See id., at 837.
\832\ See id.
---------------------------------------------------------------------------
The Commission received approximately 32 comment letters regarding
the proposed interpretation of the statutory engineering exclusion.
Some commenters supported the proposed interpretation of the
exclusion.\833\ One commenter stated that the Commission ignored the
statutory exclusion altogether.\834\ Most commenters, however,
suggested that the Commission's proposed interpretation of the
engineering exclusion was too narrow and that activities such as cash
flow analyses and feasibility studies represent an integral part of an
engineer's services.\835\ Some commenters suggested that the terms
``cash flow analysis'' and ``feasibility studies'' have very specific
meanings within the engineering industry.\836\ One commenter
specifically recommended that engineering firms reporting on the
condition of water and sewer systems should be excluded from the
definition of municipal advisor.\837\ Another commenter noted that the
Brooks Act,\838\ which was enacted in 1972, delineates what constitutes
``engineering services.'' \839\
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\833\ See MSRB Letter (``The MSRB supports the language of
proposed Rule 15Ba1-1(d)(2)(v) regarding the exclusion for
engineers, including in particular that such exclusion applies
solely when an engineer is providing engineering advice. Thus, to
the extent that an engineer provides advice with respect to
municipal financial products, the issuance of municipal securities
or other financing structure that is not considered engineering
advice (such as advice on how to structure an issue to cover the
costs of a project), the engineer would be considered a municipal
advisor.'') and Acacia Financial Group Letter.
\834\ See letter from Spencer Bachus, Chairman, United States
House of Representatives, Committee on Financial Services, dated
February 23, 2011 (``Bachus Letter'').
\835\ See, e.g., letters from David King, President, Virginia/
DC/Maryland Chapter, American Public Works Association, dated
February 16, 2011 (``APWA Letter'') (stating that engineering
professional services for infrastructure evaluations, studies, and
design contracts by their very nature involve and require cost
analyses); David A. Raymond, President & CEO, American Council of
Engineering Companies, dated February 18, 2011 (``ACEC Letter'')
(stating that in many cases, analysis of cash flow requirements is
inextricable from the design of an engineering project, and that
engineers often provide guidance regarding alternative phasing of
projects to match available revenues or to maximize the
infrastructure given limited resources); Parsons Brinckerhoff Inc.,
dated February 18, 2011 (``Parsons Brinckerhoff Letter'') (noting
that in the engineering context, cash-flow modeling often involves
(1) a cost-loaded design and construction schedule, or (2) a record-
keeping cash flow analysis that facilitates periodic reporting);
Kutak Rock Letter (stating that the Commission should treat an
engineer's preparation of a project feasibility study as a part of
routine engineering advice); Honeywell Letter (stating that ``the
provision of such [feasibility studies and other activities that
currently do not fall under the engineer exemption] is simply
necessary for the municipality to initially understand the costs
associated with a proposed engineering project and the range of
potential options for financing such project, not to assist it in
specifically evaluating or recommending financing options''); NAESCO
Letter (stating that ``engineering includes a continuum of services
. . . including the provision of general and specific information
about financing options for energy projects, preparation of studies
including information about cash-flows and other financial
projections, and identification of, and introduction to brokers,
dealers, municipal advisors (including financial advisors) and
municipal securities dealers with expertise in financing energy
service projects''); letter from David A. Raymond, President & CEO,
HNTB Holdings Ltd, dated February 22, 2011 (``HNTB Holdings
Letter'') (stating that ``[t]he conception of engineering advice
expressed in the proposing release does not reflect engineering as
it is practiced today, particularly in the context of infrastructure
projects, and excludes many activities that are intrinsic to the
profession of engineering'').
\836\ See, e.g., Parsons Brinkerhoff Letter.
\837\ See letter from Mark Page, Director of Management and
Budget, The City of New York, dated February 22, 2011 (``NYC
Management and Budget Letter''). This commenter also stated that
sewer rate consultants issuing reports relating to the sufficiency
of water and sewer rates to satisfy obligations of a city's water
authority are not providing advice relating to municipal securities
or municipal financial products; and that rate consultants providing
advice regarding rates and revenues should, like engineers providing
engineering advice, be excluded from the definition of ``municipal
advisor.''
\838\ 40 U.S.C. 1102. The Brooks Act is a federal law that sets
forth policies and certain procedures for selection by the federal
government of engineering and architecture firms and related
services.
\839\ See letter from Mark A. Casso, President, Construction
Industry Round Table, dated February 22, 2011 (``Construction
Industry Round Table Letter'').
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A number of commenters highlighted energy services and solar energy
companies, in particular, as a sector of the engineering industry that
would be especially affected by the Commission's proposed
interpretation.\840\ Three commenters suggested that energy service
companies should be able to provide disclosure statements to
municipalities without being considered municipal advisors,\841\ and
one commenter suggested that solar energy companies acting in an
engineering role and providing just information and education related
to cost savings integral to solar engineering should be included in the
exemption.\842\
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\840\ See, e.g., letters from Senator Daniel Coats, Congressmen
Dan Burton, Larry Bucshon, Todd Rokita, and Todd Young, dated May
27, 2011 (``Senator Coats et al. Letter'') (highlighting the
``unnecessarily dire impacts'' that the proposed rule would have on
energy services companies); Senator Landrieu, Senator Coons, and
Chairman Bingaman, United States Senate Committee on Energy and
Natural Resources, dated June 22, 2011 (``Senator Landrieu et al.
Letter'') (stating that ``the Commission's proposal undermines [the
engineering] exemption by suggesting that any [energy services
company] that so much as provides a cash flow analysis or
feasibility study to a municipality would not be providing
`engineering advice' and would therefore be subject to registration
as a `municipal advisor'''); Honeywell Letter; letter from Katherine
Gensler, Director, Regulatory Affairs, and Emily J. Duncan, Policy
Specialist, Solar Energy Industries Association, dated November 9,
2011 (``Solar Energy Industries Association Letter'').
\841\ See NAESCO Letter; Honeywell Letter; Chevron Letter.
\842\ See Solar Energy Industries Association Letter. For
purposes of the engineering exclusion discussion, the Commission
treats energy services and solar energy companies as engineering
companies.
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The Commission has carefully considered the issues raised by
commenters on the Proposal and is adopting its interpretation of the
statutory engineering exclusion, substantially as proposed, to provide
that engineers are excluded from the definition of municipal advisor
``to the extent that the engineer is providing engineering advice,''
\843\ with modifications and clarifications regarding the scope of its
interpretation of the statutory exclusion in response to public
comment.\844\ In general, the Commission believes activities within the
scope of the engineering exclusion may include feasibility studies,
cash flow analyses, and similar activities; provided, however, that the
engineering exclusion does not cover activities in which an engineer
provides advice to a municipal entity or obligated person regarding
municipal financial products or the issuance of municipal securities,
as discussed further herein.
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\843\ See Rule 15Ba1-1(d)(2)(v). The Commission is adopting the
engineering exclusion with minor, non-substantive modifications from
the version proposed to provide greater clarity and consistency with
other organizational changes the Commission is making to the
exclusions and exemptions.
\844\ See supra notes 835-836 and accompanying text (discussing
comments related to cash flow analyses and feasibility studies).
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Activities within the scope of the engineering exclusion include,
among other things, certain activities discussed below. The Commission
believes that this exclusion covers an engineer's provision of certain
information to its client regarding a project schedule and anticipated
funding requirements of the project. The Commission further
[[Page 67531]]
believes that the provision of engineering feasibility studies that
include certain types of projections, such as projections of output
capacity, utility project rates, project market demand, or project
revenues that are based on considerations involving engineering aspects
of a project are within the scope of the engineering exception.
For example,\845\ an engineer who provides funding schedules and
cash flow models that anticipate the need for funding at certain
junctures in a project or engineering feasibility studies based on
analysis of engineering aspects of the project will fall within the
Commission's interpretation of the statutory engineering exclusion from
the municipal advisor definition. An engineering feasibility study, for
example, might include a discussion of how much power might be
generated by the installation of solar panels, and such a discussion
would not constitute a municipal advisory activity. Similarly,
recommendations about how to increase power output based on factors
such as the placement of the panels or the number of panels would also
not constitute a municipal advisory activity. Moreover, an engineer
might provide estimates of water delivery capacity or a road's traffic
capacity without engaging in municipal advisory activity. Engineers who
report on the physical condition of infrastructure, such as roads,
bridges or water and sewer systems, would also not be engaged in
municipal advisor activity.\846\ Absent other facts and circumstances
which indicate that an engineer is providing advice to a municipal
entity or obligated person regarding the issuance of municipal
securities, an engineer's use of assumptions provided by a municipal
entity or obligated person regarding interest rates or debt levels in
preparing an engineering feasibility study or cash flow analysis alone
will not result in municipal advisory activity.
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\845\ See, e.g., supra note 835 and accompanying text.
\846\ See supra note 837. Whether a rate consultant providing
advice regarding rates and revenues would be a ``municipal advisor''
will depend upon the facts and circumstances. For example, if such
consultant provides advice on whether certain rates and revenues
would support debt service on an issue of municipal securities, such
activity would be municipal advisory activity that would subject the
consultant to the registration requirement. Although the Commission
is not adopting an exemption for persons performing such activities,
the Commission notes that like all persons, such entities could
apply for no-action or exemptive relief. As noted above, when
requesting exemptive relief pursuant to Section 15B(a)(4), a person
may follow the procedures for requesting exemptive relief pursuant
to Section 36 of the Exchange Act, as set forth in Rule 0-12 under
the Exchange Act. See 17 CFR 240.0-12.
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With respect to services related to cash flow analysis, a municipal
entity might seek input from an engineering company about whether a
project could be accomplished with estimated available funding,
including the timing of such funding. As noted above, engineers that
provide input about the anticipated funding requirements of a project
would not be engaging in a municipal advisory activity.\847\ Thus, an
engineer could advise a municipal entity about whether a project could
be safely or reliably completed with the available funds and provide
engineering advice about other alternative projects, cost estimates, or
funding schedules without engaging in municipal advisory activity.
Further, the Commission would consider an engineering company that
informs a municipal entity or obligated person of potential tax
savings, discounts, or rebates on supplies to be acting within the
scope of the engineering exclusion.
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\847\ In the Proposal, the Commission gave as an example of
activity that would be engineering advice the costing out of
engineering alternatives. See Proposal, 76 FR 834.
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By contrast, however, activities of engineers are outside the scope
of the engineering exclusion if they include advice to a municipal
entity or obligated person regarding municipal financial products or
the issuance of municipal securities, including advice with respect to
the structure, timing, terms, or other similar matters concerning such
products or issuances. For example, an engineer that is engaged by a
municipal entity or obligated person to prepare revenue projections to
support the structure of an issuance of municipal securities would be
providing advice outside the scope of the engineering exclusion and
would be engaging in municipal advisory activity. Further, while the
inclusion of an engineering feasibility study in an official statement
or other offering document for an issuance of municipal securities
alone does not cause an engineer's activities with respect to the
feasibility study to be treated as municipal advisory activity, other
facts and circumstances, such as the inclusion of revenue projections
and debt service coverage calculations in the feasibility study, may
suggest municipal advisory activity.
Engineering companies may also provide advice to their clients
regarding financing of products and services delivered to such clients.
As noted previously, the Commission is clarifying that provision of
general information that does not involve a recommendation regarding
municipal financial products or the issuance of municipal securities
(including general information with respect to financing options) would
not be municipal advisory activity.\848\ Depending on all the facts and
circumstances, however, the provision of information describing
financing alternatives that may meet the needs of a municipal entity or
obligated person may be considered a recommendation with respect to
municipal financial products or the issuance of municipal securities
that would be municipal advisory activity.\849\
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\848\ See supra note 168 and accompanying text. See also supra
Section III.A.1.b.i. (providing guidance on the term ``advice'' and
discussing the provision of general information).
\849\ See supra Section III.A.1.b.i. (providing guidance on the
term ``advice'' and discussing the provision of general
information).
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One commenter stated that another standard service offered by
engineers involves the provision of introductions of municipal entities
to brokers, dealers, municipal advisors, and municipal securities
dealers and that such introductions should be within the engineering
exclusion.\850\ One commenter recommended that the Commission ``refine
its approach'' to register only those solicitors that receive
compensation for introductions to funding sources.\851\
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\850\ See NAESCO Letter.
\851\ See letter from Jennifer Schafer, Coordinator, Federal
Performance Contracting Coalition, dated February 22, 2011
(``Federal Performance Contracting Coalition Letter'').
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The Commission does not believe it is necessary or appropriate to
provide a separate exemption for engineers engaging in introductions.
The Commission notes that introductions provided by engineers would be
subject to the same analysis as any other ``solicitation of a municipal
entity or obligated person.'' \852\ Thus, if an introduction does not
result in direct or indirect compensation to the engineer, the
introduction will not constitute such a solicitation and the engineer
will not be required to register as a municipal advisor.
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\852\ See supra Section III.A.1.b.x. (discussing ``solicitation
of a municipal entity or obligated person'').
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Finally, as discussed previously, the Commission is providing an
exemption for advice given to municipal entities and obligated persons
in circumstances in which the municipal entity or obligated person
separately is represented by an independent registered municipal
advisor.\853\
[[Page 67532]]
Engineers may provide advice beyond engineering advice when such an
independent registered municipal advisor is present without triggering
the requirement to register as a municipal advisor.
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\853\ See supra Section III.A.1.c.iii. (discussing the exemption
when a ``municipal entity or obligated person represented by an
independent municipal advisor'').
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Vendors Generally
Some commenters who commented on other aspects of the Proposal also
provided information with respect to purchases from vendors made by
municipal entities that could potentially involve the issuance of
municipal securities. One commenter stated that most municipalities,
for example, do not purchase a solar installation upfront, but rather
enter into a purchase or lease agreement with the solar company.\854\
Another commenter referenced lease-leaseback arrangements and preferred
provider or performance contract arrangements.\855\
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\854\ See Solar Energy Industries Association Letter.
\855\ See NAESCO Letter.
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The Commission notes that municipal entities and obligated persons
purchase a wide range of products from vendors, including, for example,
computers, office furnishings and supplies, car, truck and school bus
fleets, telephone systems, and a multitude of other products. The
Commission believes that the activities of vendors in advertising,
promoting, and selling their products to municipal entities are
generally outside the scope of municipal advisory activities because
these activities generally do not involve advice with respect to the
issuance of municipal securities or municipal financial products.\856\
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\856\ See supra note 143 and accompanying text (discussing the
term ``municipal advisory activities'').
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The Commission understands, however, that sometimes municipal
entities and obligated persons may finance the purchase of products
from vendors through the use of instruments such as installment
purchase contracts, installment sale contracts, lease-purchase
agreements, or loans. The Commission notes that the provision of advice
and recommendations by vendors (or any other person including, for
example, lease financing companies affiliated with vendors) to
municipal entity or obligated person clients regarding specific
financing options for the purchase of products could, depending on the
facts and circumstances, be a municipal advisory activity. For example,
certain financings, depending on how they are structured, could
constitute the issuance of a security \857\ by a municipal entity and,
therefore, could constitute the issuance of a municipal security.\858\
The provision of advice and recommendations regarding such an issuance
would constitute municipal advisory activity unless an exclusion or
exemption applies.
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\857\ See Reves v. Ernst & Young, Inc., 494 U.S. 56 (1990),
where the U.S. Supreme Court established a multi-factor test to
distinguish securities from instruments that are not securities.
\858\ See 15 U.S.C. 78c(a)(29) (defining ``municipal
securities'').
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Actuaries
Section 15B(e)(4)(C) of the Exchange Act does not include an
exclusion for actuaries from the municipal advisor definition. The
Commission received approximately five comment letters concerning a
possible exemption for actuaries.\859\
---------------------------------------------------------------------------
\859\ See, e.g., Fraser Stryker Letter; State of Indiana Letter;
letter from Maria Sarli, Resource Actuary, and Lynn Cook, Towers
Watson, dated February 22, 2011 (``Towers Watson Letter''); American
Society of Pension Professionals Letter; and American Academy of
Actuaries Letter.
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One commenter stated that if the term ``investment strategies''
extends beyond proceeds of municipal securities to include funds held
in pension plans, actuarial services for pension plans would
potentially require municipal advisor registration.\860\ The same
commenter recommended that the Commission exempt from the municipal
advisor definition enrolled actuaries and members of the five U.S.-
based actuarial organizations that have adopted the actuarial Code of
Professional Conduct (including the American Academy of Actuaries, the
American Society of Pension Professionals and Actuaries, the Casualty
Actuarial Society, the Conference of Consulting Actuaries, and the
Society of Actuaries).\861\ This commenter suggested that such
exemption should apply to actuaries providing actuarial services that
are governed by the Actuarial Standards of Practice and the Code of
Professional Conduct.\862\ Further, another commenter recommended that
actuaries providing actuarial services to public pension plans, 403(b)
plans, and 457(b) plans generally should also be exempt.\863\
Additionally, one commenter recommended that the Commission clarify
whether actuaries who perform actuarial and/or consulting services for
certain other governmental benefit plans and trusts, such as retiree
medical plans, voluntary employee benefit associations and related
trusts (``VEBAs''), and other post-employment benefits (``OPEB'') plans
and trusts would be municipal advisors.\864\ Finally, another commenter
stated that actuarial studies should not be considered to be
``municipal advisory activities.'' \865\
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\860\ See American Academy of Actuaries Letter.
\861\ See id.
\862\ See id.
\863\ See Towers Watson Letter.
\864\ See Fraser Stryker Letter.
\865\ See State of Indiana Letter.
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For the reasons discussed below, the Commission does not believe
that it is necessary or appropriate to exempt actuaries from the
municipal advisor registration regime as suggested by commenters.
However, as discussed in other sections of the release, the Commission
is making several changes to the final rule text and its
interpretations that would also address some of the concerns raised by
commenters. As discussed above in Section III.A.1.b.viii, the
Commission is exempting from the definition of municipal advisor
persons that provide advice with respect to investment strategies that
are not plans or programs for the investment of the proceeds of
municipal securities or the recommendation of and brokerage of
municipal escrow investments. Thus, persons who provide advice with
respect to a plan, such as a public employee benefit plan (including
403(b) plans and 457(b) plans, to the extent the plans do not contain
proceeds of municipal securities) will not be required to register as
municipal advisors. To the extent that a plan contains proceeds of
municipal securities, the Commission understands that an actuary's
service does not generally involve advice with respect to the
investment of such proceeds. As such, an actuary's services with
respect to such plan generally would not constitute municipal advisory
activities and would not require the actuary to register as a municipal
advisor.
In addition, the provision of actuarial studies that are used as
the basis for a municipal entity to engage in a financing will not be
considered a municipal advisory activity if the actuarial study only
uses client-provided investment return assumptions and does not make
any recommendations about how such municipal entity might address an
unfunded liability, including a discussion of the advisability of an
issuance of municipal securities or a municipal financial product.
Further, in order for the provision of actuarial studies that form the
basis for disclosure with respect to an issuance of municipal
securities to not constitute a municipal advisory activity, it must not
include a discussion of the advisability of an issuance of municipal
securities or a municipal financial product. Such
[[Page 67533]]
actuarial studies only provide calculations using data from the client
and do not involve the provision of any advice. An actuary may be
deemed to be engaged in a municipal advisory activity if the facts and
circumstances indicate that the actuary tailored its actuarial study to
support an issuance of municipal securities or to support entering into
a municipal financial product.
viii. Banks
In the Proposal, the Commission discussed a commenter's suggestion
that the Commission exempt from the definition of ``municipal advisor''
banks providing ``traditional banking services'' and banks and trust
companies that provide ``investment advisory services.''\866\ The
Commission noted that Congress included in the statutory definition of
municipal advisor a limited number of exclusions, and such exclusions
did not include banks in any capacity.\867\ In addition, as discussed
more fully above,\868\ the Commission proposed to interpret the term
``investment strategies'' to include ``plans, programs, or pools of
assets that invest in funds held by or on behalf of a municipal
entity.'' \869\ In connection with its proposed interpretation of
``investment strategies,'' the Commission stated that, because every
bank account of a municipal entity is comprised of funds ``held by or
on behalf of a municipal entity,'' money managers that provide advice
to municipal entities regarding their bank accounts could be municipal
advisors.\870\
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\866\ See letter from Carolyn Walsh, Vice President and Senior
Counsel, Center for Securities, Trust and Investments, American
Bankers Association, and Deputy General Counsel, ABA Securities
Association, dated October 13, 2010. See also Proposal, 76 FR 834,
notes 143-144 and accompanying text. As support, this commenter
stated that banks are currently well-regulated and banks that offer
trustee services are subject to rigorous and frequent examination,
as well as extensive regulation by the various federal or state
banking regulators.
The commenter also listed the following activities as examples
of the types of activities in which bank and trust companies engage:
providing direct loans, checking accounts, and CDs; responding to
RFPs regarding investment products offered by the bank, such as
interest bearing deposits, money market mutual funds, or other
exempt securities; investing in securities issued by municipalities
and providing credit, or through their affiliates, underwriting
services to municipalities (such as when the municipality wants to
buy a fire truck or build a school); providing fiduciary services to
municipal entities (such as by managing investment accounts for
local towns or acting as trustee with respect to bond proceeds,
escrow accounts, governmental pension plans and other similar
capacities). See Proposal, 76 FR 834, n.143.
\867\ See id., at 835.
\868\ See supra Section III.A.1.b.viii.
\869\ See Proposal, 76 FR 830.
\870\ See id.
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The Commission requested comment on whether it should exempt banks
providing advice to a municipal entity or obligated person concerning
transactions that involve a ``deposit'' (as defined in Section 3(l) of
the Federal Deposit Insurance Act \871\) at an ``insured depository
institution'' (as defined in Section 3(c)(2) of the Federal Deposit
Insurance Act \872\). The Commission stated that, if adopted, banks
would be exempted from the definition of municipal advisor to the
extent they provide advice to a municipal entity or obligated person
with respect to such banking products as insured checking and savings
accounts and certificates of deposit. However, banks would not be
exempted if they engage in other municipal advisory activities.\873\
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\871\ 12 U.S.C. 1813(l).
\872\ 12 U.S.C. 1813(c)(2). See Proposal, 76 FR 835.
The Commission also requested on comment on whether to exclude
banks performing certain other specific activities, including, for
example: banks responding to RFPs from municipal entities regarding
other investment products offered by the banking entity, such as
money market mutual funds or other exempt securities; banks that
provide to a municipal entity a listing of the options available
from the bank for the short-term investment of excess cash (for
example, interest-bearing bank accounts and overnight or other
periodic investment sweeps) and negotiate the terms of an investment
with the municipal entity; banks that provide to a municipal entity
the terms upon which the bank would purchase for the bank's own
account (to be held to maturity) securities issued by the municipal
entity, such as bond anticipation notes, tax anticipation notes, or
revenue anticipation notes; banks that direct or execute purchases
and sales of securities or other instruments with respect to funds
in a trust account or other fiduciary account in accordance with
predetermined investment criteria or guidelines, including on a
discretionary basis; banks and trust companies that provide other
fiduciary services to municipal entities, such as acting as trustees
with respect to governmental pension plans and other similar
capacities; and banks and trust companies to the extent they are
providing advice that otherwise would subject them to registration
under the Investment Advisers Act, but for the operation of a
prohibition to or exemption from registration. See Proposal, 76 FR
837.
\873\ See id., at 835.
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In response to request for comment, the Commission received over
300 letters from commenters, many of them commercial banks and banking
associations. The commenters stated that, because the Commission was
proposing to interpret the term ``investment strategies'' to encompass
any funds ``held'' by a municipal entity, regardless of whether such
funds are related to the issuance of municipal securities or investment
of bond proceeds, the definition would potentially cover what
commenters termed ``traditional banking products and services.'' \874\
According to the commenters, such services include deposit accounts,
cash management products, and loans to municipalities, all of which are
already subject to supervision by federal bank regulators.\875\ As a
result, these commenters stated that banks providing such products and
services would have to register as municipal advisors, adding ``a new
layer of regulation on bank products for no meaningful public
purpose.'' \876\ One commenter noted that ``the OCC and the other
federal banking agencies have an existing regulatory framework and
oversight over traditional banking products and services, which include
bank deposit transactions * * * The OCC also already evaluates the
ability of bank management to monitor and control traditional banking
products and services, including the administration of deposit
accounts, through regular and extensive on-site examinations.'' \877\
Other commenters recommended that municipal advisor registration should
[[Page 67534]]
instead only apply to currently unregulated entities.\878\
---------------------------------------------------------------------------
\874\ See, e.g., American Bankers Association Letter I (the
SEC's proposed interpretation would regulate ``already-regulated
traditional banking products, such as deposit, cash management and
lending activities, and trust or custody products with or on behalf
of municipalities''); Union Bank Letter; Form Letter A (of the
approximately 300 comment letters that addressed the topic of
commercial bank regulation, 170 were submitted in Form Letter A
format) (the SEC's proposed interpretation would cover ``traditional
bank products and services, such as deposit accounts, cash
management products, and loans to municipalities''). See also Form
Letter D (36 comment letters were submitted in this form) (the SEC's
proposed interpretation ``would label as ``municipal advisors''
banks and many bank employees providing essential and traditional
bank services to their local municipalities, including day-to-day
deposit, cash management, custody, trustee, and lending services--a
result we do not believe furthers any legitimate policy goal . .
.'').
\875\ See, e.g., American Bankers Association Letter I; Union
Bank Letter; Form Letter A.
\876\ See, e.g., Form Letter A. See also Form Letter D (36
comment letters were submitted in this format) (stating that ``the
rule would result in . . . additional, redundant layers of multiple
rules by the SEC and Municipal Securities Rulemaking Board (MSRB)
for the very same products and services for which we are already
comprehensively supervised by the prudential banking regulators'');
BOK Financial Corp. Letter (stating that ``[e]xpanding the . . .
registration requirement to providers of traditional banking
services is unnecessary because it provides no additional protection
to municipalities or investors in municipal securities beyond
existing regulation and oversight''); American Bankers Association
Letter I (stating that ``[d]eposit accounts, cash management
products, loans, and trust and custody products are but four broad
types of [municipal financial products]'' and that ``[a]ll are
extensively regulated, and the institutions providing them are
supervised and regularly examined by the federal bank regulators'').
\877\ See OCC Letter.
\878\ See, e.g., SIFMA Letter I; American Bankers Association
Letter I (stating that ``as drafted, the proposal goes far beyond
legislative intent or public policy need by purporting to regulate
already-regulated traditional banking products, such as deposit,
cash management and lending activities, and trust and custody
products with or on behalf of municipalities''); Union Bank Letter
(stating that Congress intended to regulate a heretofore unregulated
group that advises municipal entities, and not banks that are
already regulated).
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Many commenters focused, in particular, on the potential effects of
the proposed rules on ``community banks.'' \879\ Many other commenters
claimed that the additional regulatory burden of registering as a
municipal advisor would raise costs, which would either discourage
community banks from offering their full array of products and services
to municipalities \880\ or lead community banks to pass on added costs
and expenses to their municipal entity customers.\881\
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\879\ Entities referring to themselves as ``community banks''
include, for example First Bank of Owasso; ACB Bank, Cherokee; First
National Bank of Bastrop, Texas; and The First National Bank of
Suffield. See letter from Dominic Sokolosky, President, First Bank
of Owasso, dated February 14, 2011; letter from Kari Roberts,
President/CCO, ACB Bank, Cherokee, dated February 15, 2011; letter
from Reid Sharp, President/CEO, First National Bank of Bastrop,
Texas, Bastrop, Texas, dated February 16, 2011; letter from George
W. Hermann, President/CEO, The First National Bank of Suffield,
dated February 17, 2011.
The OCC defines ``community banks'' generally as ``banks with
less than $1 billion in total assets and may include limited-purpose
chartered institutions, such as trust banks and community
development banks.'' See Comptroller's Handbook, Community Bank
Supervision (2010) available at http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/cbs.pdf at 1.
\880\ See, e.g., Form Letter A.
\881\ See, e.g., Hancock Holding Co. Letter. However, none of
the commenters provided any data on the dollar cost that would be
imposed by the proposed rules.
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Commenters stated that ``traditional banking products and
services'' are not the intended focus of the municipal advisor
registration provision of the Dodd-Frank Act and that banks that
provide these services should not be subject to this provision.\882\
For example, one commenter noted that products such as deposit accounts
and cash management products do not warrant municipal advisor
registration, because ``[t]hese types of products merely are extension
[sic] of more traditional deposit products, such as savings accounts,
checking accounts and CDs, and do not constitute `advice' under any
reasonably accepted definition of the term.'' \883\
---------------------------------------------------------------------------
\882\ See, e.g., Form Letter A, Form Letter D, American Bankers
Association Letter I, Independent Community Bankers of America
Letter, and OCC Letter.
\883\ See Independent Community Bankers of America Letter. As
examples of short-term investment of cash, this commenter listed
``interest-bearing bank accounts and overnight or other periodic
investment sweeps.'' See id.
See also letter from Charles V. Motil, Capital One Financial
Corporation, dated February 22, 2011 (stating that ``a bank teller
would be caught under the [municipal advisor] definition when
helping an employee of the municipal entity deposit money into the
entity's checking account if the teller, seeing that the account
carries a high balance, recommends a savings account or certificate
of deposit that would give the entity a higher rate of return'').
---------------------------------------------------------------------------
Other commenters listed specific banking products and services
that, in their view, should not be encompassed within municipal advisor
registration. For example, one commenter stated that, ``[a]t a minimum,
the Commission should clarify that banks providing municipal entity
customers advice regarding traditional banking products including
deposit accounts, savings accounts, certificates of deposit, bankers
acceptances, bank loans and letters of credit, and certain loan
participations do not need to register as municipal advisors.'' \884\
This commenter also stated that the Commission should clarify that
``banks providing the terms for the purchase of municipal securities
for the bank's own account shall be excluded from registration as
`municipal advisors''' and explained that ``banks are authorized to
purchase municipal securities for their own account subject to
extensive regulation and oversight.'' \885\ Another commenter also
argued that banks extending credit, ``whether through loans, letters of
credit or otherwise,'' should be excluded from the definition of
municipal advisor.\886\
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\884\ See OCC Letter.
\885\ See id. See also Independent Community Bankers of America
Letter (stating that the Commission should exclude from the
definition of ``municipal advisor'' banks that provide ``to a
municipal entity the terms upon which the bank would purchase for
[its] own account securities . . . issued by the municipal entity,''
and arguing that ``[s]uch activities do not involve the safeguarding
of public funds'').
\886\ See Independent Community Bankers of America Letter.
---------------------------------------------------------------------------
Meanwhile, another commenter recommended that the Commission adopt
an exclusion for providing advice concerning (or soliciting)
transactions that involve a ``deposit'' at an ``insured depository
institution,'' as defined in Section 3(c)(2) of the Federal Deposit
Insurance Act, including advice with respect to: (1) Insured checking
and savings accounts and certificates of deposit; (2) directing or
executing purchases and sales of securities or other instruments in a
trust, fiduciary, or investment management account in accordance with
predetermined investment criteria or guidelines, including on a
discretionary basis; (3) providing other services to municipal
entities, such as acting as trustees with respect to governmental
pension plans and other similar capacities; (4) providing advice
concerning (or soliciting) transactions that are subject to an
exemption under Regulation R under the Exchange Act, or transactions
otherwise excluded from the definition of broker-dealer activities
under the Exchange Act, including bank broker-dealer exceptions
relating to third-party networking arrangements, trust and fiduciary
activities, deposit ``sweep'' activities, custody and safekeeping
activities and certain securities lending transactions; (5) and serving
as trustee to a pooled investment vehicle.\887\ Another commenter
recommended that the municipal advisor definition only cover the
services of advisors with respect to the investment of proceeds of
municipal securities and exclude the deposit and cash management
services traditionally provided by ``community banks.'' \888\ Another
commenter suggested that ``investment strategies'' not include products
and services in the categories of deposit accounts insured by the FDIC
(up to $250,000) or bank activities that the Commission has exempted
from the definitions of ``broker'' under Section 3(a)(4)(B) of the
Exchange Act.\889\
---------------------------------------------------------------------------
\887\ See SIFMA Letter I.
\888\ See First Bank of Owasso Letter.
\889\ See First Tennessee Bank National Association Letter.
---------------------------------------------------------------------------
The Commission is exempting from the definition of municipal
advisor persons that provide advice with respect to ``investment
strategies that are not plans or programs for the investment of the
proceeds of municipal securities or the recommendation of and brokerage
of municipal escrow investments.'' \890\ Accordingly, the performance
of many of the bank activities and services about which commenters were
concerned would not require banks to register as municipal advisors. In
addition, as discussed further below, the Commission is exempting from
registration banks that perform certain activities.
---------------------------------------------------------------------------
\890\ See Rule 15Ba1-1(d)(3)(vii). See also supra Section
III.A.1.b.viii.
---------------------------------------------------------------------------
Specifically, the Commission is exempting from the definition of
municipal advisor ``[a]ny bank, 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
[[Page 67535]]
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 \891\ or similar capacity.'' \892\ The Commission believes that
advice by banks to municipal entities and obligated persons with
respect to these products and services would not subject municipal
entities and obligated persons to the kinds of risks that the municipal
advisor registration regime is intended to mitigate.
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\891\ For purposes of this rule, an indenture trustee acts as an
order-taker at the direction of the municipal entity that issued the
municipal securities, within the investment parameters set forth in
the indenture, ordinance, resolution, or similar instrument, and,
therefore, acts in a constrained capacity, because the indenture
trustee is responsible for making sure that any investments it
undertakes fall within the investment parameters of the indenture.
\892\ Rule 15Ba1-1(d)(3)(iii).
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The Commission notes that the products and services included in the
exemption, such as deposit accounts and certain other short-term cash
investments like sweep accounts, and extensions of credit by a bank
(whether by direct loan or otherwise),\893\ are transactions in which
there should be no confusion as to the role of the bank or its
employees. Similarly, the Commission notes that banks that purchase
securities from municipal entities or obligated persons for their own
account (without providing advice to the municipal entities or
obligated persons with respect to other issues or municipal products)
are not engaging in municipal advisory activities. Instead, they are
acting as principals in purchase transactions.\894\ In the case of
investments made by an indenture trustee, the bank acts at the
direction of the municipal entity or obligated person.
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\893\ The Commission notes that the examples of extensions of
credit set forth in Rule 15Ba1-1(d)(3)(iii) are not intended to be
exhaustive, and that the exemption would also apply to banks
providing advice to a municipal entity or obligated person with
respect to other extensions of credit by a bank such as a banker's
acceptance or a participation in a loan which the bank or an
affiliate of the bank (other than a broker or dealer) funds,
participates in, or owns.
\894\ Specifically, banks providing municipal entities or
obligated persons with the terms under which they would purchase
securities for their own account are not engaging in municipal
advisory activities.
The Commission notes that, in this context, such banks may,
however, depending on the facts and circumstances, be subject to
regulation as ``municipal securities dealers.'' See Sections
3(a)(30) and 15B of the Exchange Act and the rules and regulations
thereunder.
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Accordingly, Rule 15Ba1-1(d)(3)(iii) provides an exemption from the
definition of municipal advisor for banks that provide advice with
respect to certain enumerated products and services that the Commission
believes do not pose the types of risks that the Dodd-Frank Act was
designed to address. Moreover, the Commission notes that the narrower
focus of the ``investment strategies'' definition on investments of
proceeds of municipal securities and municipal escrow investments
discussed above is intended to be responsive to comments about the
impact of the municipal advisor registration requirement on the
provision of products and services offered by banks. The Commission
believes that, together, these exemptions to the definition of
``municipal advisor'' generally will cover banks with respect to advice
that they provide regarding the types of products and services that
commenters referred to as ``traditional banking products and
services.'' \895\ For example, commenters identified deposit accounts,
which municipal entities typically use for short-term investments of
revenues, as one type of traditional banking product. Under the final
rules, banks that provide advice regarding deposit accounts generally
will be explicitly exempt from the definition of municipal advisor for
this type of account. Similarly, banks will be explicitly exempt with
respect to other identified products and services such as letters of
credit and sweep accounts. Additionally, although the final rules would
not explicitly exempt certain products and services such as custody
accounts and trust services (unless the bank is serving in the capacity
of an indenture trustee or a similar capacity), a bank providing advice
with respect to such products or services would not be required to
register as a municipal advisor, as a result of the narrower approach
with respect to investment strategies, unless such accounts contain
proceeds of municipal securities or municipal escrow investments.
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\895\ See, e.g., supra notes 874 and 875, and accompanying text.
See also supra note 884 and accompanying text (discussing the OCC
Letter).
---------------------------------------------------------------------------
By contrast, however, the Commission is not exempting from
registration banks that engage in municipal advisory activities,
including without limitation banks that provide advice to municipal
entities or obligated persons with respect to the issuance of municipal
securities, or banks that provide advice with respect to municipal
derivatives, unless the bank qualifies for another exclusion or
exemption, such as under the limited circumstances described above with
respect to the exemption for certain swap dealers.\896\ As discussed
above in the context of the definition of municipal derivatives and the
exemption for certain swap dealers, with the Dodd-Frank Act, Congress
established heightened protection with respect to swaps and security-
based swaps,\897\ and the Commission therefore does not believe that a
blanket exemption for banks with respect to such activities would be
appropriate. The Commission believes it is important to emphasize that
the bank exemption does not apply to advice on municipal derivatives,
which is a significant problem area identified in the financial crisis
in which municipal entities suffered significant losses,\898\ and
further, the bank exemption does not apply to advice on the issuance of
municipal securities, which is a core focus of the protections to
municipal entities in the municipal advisor registration provision and
is an area in which a blanket exemption to banks would result in a
potential inappropriate competitive advantage to banks over other
financial advisors.\899\
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\896\ See supra Section III.A.1.b.v. (discussing the definition
of municipal derivatives) and Section III.A.1.c.vi. (discussing an
exemption for certain swap dealers). See also supra note 275
(discussing generally the protections afforded to special entities
under the Dodd-Frank Act with respect to swap and security-based
swap transactions).
\897\ See id.
\898\ See supra note 3 and accompanying text.
\899\ See infra Section VIII.D.6.b. (discussing alternatives to
the exemptions from the definition of municipal advisor).
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The Commission believes that the exemption it is providing for
banks will help ensure that parties engaging in key municipal advisory
activities are registered, while permitting banks to continue to
provide products and services to municipal entities and obligated
persons that do not pose the types of risks that the Dodd-Frank Act was
designed to address. Therefore, for these reasons and the reasons
described above, the Commission finds that it is consistent with the
public interest, the protection of investors, and the purposes of
Section 15B of the Exchange Act, to use its authority pursuant to
Exchange Act Section 15B(a)(4) to exempt banks engaging in certain
municipal advisory activities from the definition of municipal advisor
pursuant to the limitations described above. Accordingly, such banks
are not required to register as municipal advisors.
[[Page 67536]]
Separately Identifiable Departments or Divisions
Sections 3(a)(30) and 15B(b)(2)(H) of the Exchange Act provide for
the MSRB to define a separately identifiable department or division of
a bank (``SID'') for purposes of whether a bank is a municipal
securities dealer and must register as such.\900\ In the Proposal, the
Commission specifically requested comment on whether the Commission
should permit SIDs (providing a bank's municipal advisory activities)
to register as a municipal advisor, rather than the bank itself.\901\
The Commission requested comment on suggested rule text relating to
SIDs, based on MSRB Rule G-1 relating to SIDs engaged in municipal
securities dealer activities,\902\ and asked: whether such a rule would
provide appropriate conditions for determining whether and when a SID
engaged in municipal advisory activities may register as a municipal
advisor; whether there were reasons the language based on MSRB Rule G-1
should not be used for SIDs engaging in municipal advisory activities;
and whether the language should be modified or clarified in any way, or
if there was alternative language the Commission should consider.\903\
The Commission notes that the concept of separate treatment for SIDs
exists in the current regulatory regimes for both municipal securities
dealers and investment advisers, which both permit the SID to be the
regulated entity.\904\
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\900\ Exchange Act Section 3(a)(30)(B) provides that the term
``municipal securities dealer'' does not include banks, unless the
bank is engaged in the business of buying and selling municipal
securities for its own account other than in a fiduciary capacity,
provided, however that if the bank is engaged in such activities
through a separately identifiable department or division, the
department or division, and not the bank itself, shall be deemed to
be the municipal securities dealer. Exchange Act Section
15B(b)(2)(H) provides for the MSRB to ``define the term `separately
identifiable department or division', as that term is used in
[Exchange Act Section 3(a)(30)], in accordance with specified and
appropriate standards to assure that a bank is not deemed to be
engaged in the business of buying and selling municipal securities
through a separately identifiable department or division unless such
department or division is organized and administered so as to permit
independent examination and enforcement of applicable provisions of
[the Exchange Act], the rules and regulations thereunder and the
rules of the [MSRB].''
\901\ See Proposal, 76 FR 838.
\902\ See id.
\903\ See Proposal, 76 FR 838.
\904\ See supra note 900 and infra note 909, respectively.
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Although as discussed above many commenters recommended that the
Commission create a blanket exemption for banks,\905\ some commenters
specifically recommended that, to the extent a bank provides products
or services that would not be excluded, the Commission should allow a
bank to register a SID if its municipal advisory services or actions
are performed through such a SID.\906\ A few commenters \907\
additionally stated that permitting registration of SIDs would be
consistent with the registration scheme for municipal securities
dealers \908\ and investment advisers.\909\
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\905\ See supra notes 874-878 and accompanying text.
\906\ See, e.g., Kutak Rock Letter (stating in response to the
Commission's request for comment with respect to SIDs that ``a bank
creating a SID should be exempted in all its other activities from
registration as an advisor); SIFMA Letter 1 (encouraging the
Commission to permit SIDs to register instead of the entire banking
entity); Union Bank Letter (recommending that the Commission permit
registration of SIDs on a voluntary basis, because given the
dispersion of public finance activities throughout a bank, a bank
may not be able to consolidate the activities in a single department
or division as is contemplated in the analogous language for
municipal dealer SIDs); ABA Letter (supporting the concept of
permitting banks to register, when required to register at all,
SIDs).
\907\ See Financial Services Roundtable Letter (requesting that,
if banks are required to register as municipal advisors, they should
only be required to register those department actually providing
municipal advisory services, consistent with the exclusion from the
definition of ``municipal securities dealer'' for banks under
Section 3(a)(30)(B) of the Exchange Act); First Tennessee Bank
National Association Letter (stating that registration as a SID
would be consistent with the registration scheme for bank municipal
securities dealers and bank investment advisers to investment
companies); and letter from Kurt R. Bauer, President/CEO, Wisconsin
Bankers Association, dated February 21, 2011 (noting the discrepancy
between the municipal advisor registration regime for municipal
securities dealers that are banks, in that the Dodd-Frank Act did
not provide for registration of SIDs).
\908\ See supra note 900.
\909\ See Section 202(a)(11)(A).
The Commission notes that the Investment Advisers Act excepts
from the definition of ``investment adviser'' ``a bank, or any bank
holding company as defined in the Bank Holding Company Act of 1956,
which is not an investment company,'' but provides that the
exception does not apply to ``any bank or bank holding company to
the extent that such bank or bank holding company serves or acts as
an investment adviser to a registered investment company.'' The
Investment Advisers Act also provides that ``if in the case of a
bank, such services or actions are performed through a separately
identifiable department or division, the department or division, and
not the bank itself, shall be deemed to be the investment adviser''
See Section 202(a)(11) of the Investment Advisers Act.
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The Commission has carefully considered issues raised by commenters
on its proposal and is adopting Rule 15Ba1-1(d)(4) to permit a SID that
meets the requirements of the rule to register as a municipal advisor
instead of the bank. The Commission agrees with commenters that it is
appropriate to treat banks performing municipal advisory activities
through a SID in a manner consistent with their treatment under the
investment adviser and municipal securities dealer registration
regimes.\910\ Thus, to the extent a bank provides advice with respect
to a municipal derivative or engages in any other non-exempted
municipal advisory activity, if such advice is provided through a SID
that meets the requirements of Rule 15Ba1-1(d)(4), the SID, rather than
the bank itself, shall be deemed to be the municipal advisor.\911\ The
Commission believes that permitting SIDs to register is in the public
interest, because it will ensure that municipal entities and obligated
persons receive the regulatory protection intended by the statute,
while addressing commenters' general concerns about duplicative
regulation for banks and the impact of imposing the municipal advisor
registration regime on banks in general.\912\
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\910\ One commenter stated that, ``given the dispersion of
municipal advisory activities throughout the bank, banks may not be
able to consolidate the activities in a single department or
division as is contemplated in the analogous language for municipal
dealer SIDs'' and, as a result, does ``not think the referenced
language is workable.'' This commenter also stated that the
Commission should not dictate the structure of a bank's municipal
business. See American Bankers Association Letter I.
The Commission notes that it is not requiring banks to
consolidate their municipal advisory activities into a SID. Rather,
to the extent that a bank does not otherwise qualify for an
exclusion or exemption (such as the exemption for banks with respect
to certain activities described above), the bank may choose to
consolidate its municipal advisory activities into a SID. In such
case, only the SID, and not the bank itself, would be required to
register as a municipal advisor. Also, as discussed further below,
Rule 15Ba1-1(d)(4) would not preclude a finding that a bank has a
SID if the bank's municipal advisory activities are conducted in
more than one geographic organizational or operational unit, so long
as all such units are identifiable and otherwise meet the
requirements of the rule with respect to each such unit.
\911\ See Rule 15Ba1-1(d)(4).
\912\ See, e.g., notes 874-889 and accompanying text.
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Specifically, as adopted, Rule 15Ba1-1(d)(4) provides that ``[i]f a
bank engages in municipal advisory activities through a separately
identifiable department or division that meets the requirements of
[Rule 15Ba1-1(d)(4)], the determination of whether those municipal
advisory activities cause any person to be a municipal advisor may be
made separately for such department or division. In such event, that
department or division, rather than the bank itself, shall be deemed to
be the municipal advisor.'' For purposes of Rule 15Ba1-1(d)(4), a SID
of a bank is defined as ``that unit of the bank which conducts all of
the municipal advisory activities of the bank'' provided that certain
specific requirements are met. In the Proposal, the Commission
suggested defining SID as such term is defined in Section 3(a)(30) of
the Exchange Act. To
[[Page 67537]]
provide additional clarity, however, the Commission is eliminating the
specific reference to Section 3(a)(30) of the Exchange Act in the
definition of SID that it is adopting because, while based on that
definition, Section 3(a)(30) relates specifically to activities of
municipal securities dealers, as opposed to municipal advisory
activities. The Commission is also clarifying, consistent with the
definition for SIDs suggested in the Proposal, that the fact that
directors and senior officers of the bank may from time to time set
broad policy guidelines affecting the bank as a whole and which are not
directly related to the day-to-day conduct of the bank's municipal
advisory activities, shall not disqualify such unit or require that
such directors or officers be considered as part of such unit. Further,
the fact that the bank's municipal advisory activities are conducted in
more than one geographic organizational or operational unit of the bank
shall not preclude a finding that the bank has a separately
identifiable department or division for purposes of Rule 15Ba1-1(d)(4),
provided, however, that all such units are identifiable and that the
requirements of Rule 15Ba1-1(d)(4) are met with respect to each such
unit. All such geographic, organizational or operational units of the
bank shall be considered in the aggregate as the separately
identifiable department or division of the bank for purposes of this
paragraph Rule 15Ba1-1(d)(4).\913\ With the exception of the reference
to Section 3(a)(30) and the removal from the rule text of the
Commission's guidance with respect to the activities of directors and
senior officers and multiple geographic locations, the other applicable
requirements are substantively identical to those suggested in the
proposal and based on the rules applicable to municipal securities
dealer SIDs.\914\
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\913\ The Commission notes that it is not including this
clarification in Rule 15Ba1-1(d)(4) itself as suggested in the
Proposal. See supra note 902.
\914\ See Rule 15Ba1-1(d)(4)(i)(A)-(B). See also supra note 902
and accompanying text. The other differences between the definition
suggested in the Proposal and the adopted definition are technical
and organizational in nature.
---------------------------------------------------------------------------
2. Rule 15Ba1-2
a. Application for Municipal Advisor Registration
Section 15B(a)(1)(B) of the Exchange Act provides that it shall be
unlawful for a municipal advisor to provide advice to or on behalf of a
municipal entity or obligated person with respect to municipal
financial products or the issuance of municipal securities, or to
undertake a solicitation of a municipal entity or obligated person,
unless the municipal advisor is registered in accordance with the
relevant provisions of the statute. A ``municipal advisor'' is defined
in Section 15B(e)(4) of the Exchange Act to mean, with certain
exceptions, ``a person'' that ``provides advice to or on behalf of a
municipal entity or obligated person . . . . or undertakes a
solicitation of a municipal entity.'' \915\ In the Proposal, the
Commission indicated that the type of information it should gather from
firms versus individuals for registration purposes may be
different.\916\ As such, the Commission proposed two different
registration forms: Form MA for ``municipal advisory firms'' and Form
MA-I for ``natural person municipal advisors.'' \917\
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\915\ See supra Section III.A.1.a. (discussing the definition of
the term ``municipal advisor'').
\916\ Id.
\917\ Id. A ``municipal advisory firm,'' as defined in the
Glossary of Terms for the forms and used hereinafter, is ``any
organized entity that is a municipal advisor, including sole
proprietors.'' A ``natural person municipal advisor,'' as was
defined in the Glossary, as proposed, and used hereinafter, is ``any
natural person that is a municipal advisor, including sole
proprietors,'' with the further clarification that ``[a] sole
proprietor that is a municipal advisor is also a municipal advisory
firm.'' See also infra notes 918 and 919.
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In connection with these forms, the Commission also proposed Rule
15Ba1-2(a) and 15Ba1-2(b) for the registration of municipal advisory
firms and natural person municipal advisors, respectively. Rule 15Ba1-
2(a), as proposed, required a ``person, other than a natural person,
including a sole proprietor'' \918\ applying for registration with the
Commission as a municipal advisor to complete Form MA in accordance
with the instructions to the form and to file the form electronically
with the Commission. Rule 15Ba1-2(b), as proposed, required a ``natural
person (including a sole proprietor)'' \919\ applying for registration
with the Commission as a municipal advisor to complete Form MA-I in
accordance with the instructions to the form and to file the form
electronically with the Commission. This proposed requirement applied
to, among others, each individual employee of a firm who meets the
definition of municipal advisor. The two proposed provisions read
together required a sole proprietor to complete both Form MA and Form
MA-I.
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\918\ This language in proposed paragraph 15Ba1-2(a) is
equivalent to the simpler term, ``municipal advisory firm'' used in
the forms and herein, see supra note 917. The formulation of the
rule language was intended to preclude any misinterpretation of the
word ``firm'' as excluding sole proprietors.
\919\ The category to which proposed paragraph 15Ba1-2(b)
applied is identical to the ``natural person municipal advisor''
defined above. See supra note 917. The formulation of the rule
language was intended to preclude any misinterpretation that would
exclude sole proprietors.
---------------------------------------------------------------------------
The Commission requested comments on proposed Rule 15Ba1-2(a) and
Form MA. The Commission received no comments directly on proposed Rule
15Ba1-2(a) and is adopting this provision substantively \920\ as
proposed.\921\
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\920\ The adopted rule, however, is phrased differently. Rule
15Ba1-2(a), as adopted, provides: ``A person applying for
registration with the Commission as a municipal advisor pursuant to
section 15B of the Act (15 U.S.C. 78o-4) must complete Form MA (17
CFR 249.1300) in accordance with the instructions in the Form and
file the Form electronically with the Commission.''
The adopted rule no longer includes the phrase ``person, other
than a natural person, including a sole proprietor'' to describe the
person subject to registration on Form MA. As discussed below, under
the adopted rules, natural persons that engage in municipal advisory
activities solely on behalf of a firm with which they are associated
(generally, as employees) are exempted from registration. Thus, such
persons do not need to be excluded from Rule 15Ba1-2(a), which
applies to municipal advisors ``applying for registration.'' In
addition, sole proprietors do not need to be identified specifically
among the persons who are required to complete Form MA.
\921\ As discussed in the Proposal at 76 FR 838, Rule 15Ba1-2(a)
requires firms that are currently registered on Form MA-T to
register anew on Form MA.
---------------------------------------------------------------------------
The Commission also requested comments on proposed Rule 15Ba1-2(b)
and Form MA-I. Specifically, the Commission solicited comments on the
effects of a separate registration requirement for natural persons and
firms and the relative advantages and disadvantages for firms,
municipal advisor employees, municipal entities, obligated persons,
investors, and regulators, of requiring separate registration for
natural person municipal advisors.\922\ The Commission also asked, if
the Commission were to only require registration of municipal advisory
firms, would inclusion of information regarding the firm's employees on
the firm's Form MA cause confusion for municipal entities, obligated
persons, and investors.\923\ Finally, the Commission also asked what,
if any, legal ramifications may result for firms, and/or for natural
persons, based on a registration regime that allows natural person
municipal advisors that are employees of a municipal advisory firm to
be registered by their firms as opposed to separate registration.\924\
---------------------------------------------------------------------------
\922\ See Proposal, 76 FR 851.
\923\ Id.
\924\ Id.
---------------------------------------------------------------------------
The Commission received several comment letters regarding the
proposed requirement for individual registration of natural person
municipal advisors on
[[Page 67538]]
Form MA-I.\925\ One commenter asserted that the Commission should not
require individuals to register separately on Form MA-I.\926\ This
commenter stated such requirement would not only impose significant
burden and costs on municipal advisory firms and their individual
associated persons but also would ``force the SEC to devote substantial
resources to processing many individual applications for registration''
in addition to processing municipal advisory firms' registrations on
Form MA.\927\ This commenter noted that the Commission expected
approximately 21,800--if not more--individuals to register as municipal
advisors on Form MA-I \928\ and that ``[t]he sheer number of
registrations would place significant strain on the SEC's budget and
personnel, especially if it plans to review all applications for
municipal advisors that are filed under the permanent registration
program.'' \929\ The commenter questioned ``whether the incremental
regulatory benefit (which [the commenter] does not believe would be
significant) stemming from the public availability of the information
that would be produced by a system of individual registration would
justify this massive resource commitment by both applicants and the
SEC.'' \930\ Another commenter also suggested that the Commission
eliminate individual registration of registrants' employees.\931\
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\925\ See, e.g., Deloitte Letter; JPMorgan Chase & Co. Letter;
MSRB Letter I; and SIFMA Letter I.
\926\ SIFMA Letter I. The commenter also argued that the
separate registration requirement would be ``excessively burdensome
and costly.'' Although this description was made primarily in the
context of the commenter's belief that the information requested by
Form MA-I regarding individuals ``largely duplicates Form MA's
disclosures regarding a municipal advisor's associated persons,''
the Commission believes that the commenter also intended it as a
reason to eliminate individual registration regardless of the extent
of the information required on the form. Regarding the commenter's
concern about duplication, see infra notes 1171-1173 and
accompanying discussion.
\927\ See SIFMA Letter I.
\928\ Id. The commenter added that ``[t]his would be in addition
to the 800 municipal advisory firms that have already registered
with the SEC on Form MA-T and would be required to re-register on
Form MA, and at least 200 additional firms that are also expected to
register.'' For the basis of the referenced Commission's estimate,
see Proposal, 76 FR 865.
\929\ See SIFMA Letter I.
\930\ Id.
\931\ See JPMorgan Chase & Co. Letter. This commenter also
advocated the ``simplification of Form MA'' and more broadly
criticized the scope of the proposed rules.
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Two commenters argued that the statute does not require individual
registration of natural person municipal advisors.\932\ One of these
commenters asserted that the statute appears to intend that
registration of municipal advisors be limited to entities (including
partnerships, unincorporated organizations, and sole proprietors).\933\
This commenter also stated that such entities would provide the
critical information about individuals (including associated persons of
the municipal advisor entity) during the registration process.\934\
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\932\ See SIFMA Letter I (asserting that ``the registration of
individuals in the manner proposed by the SEC is not called for in
any respect by Section 975'') and MSRB Letter I.
\933\ See MSRB Letter I.
\934\ Id. The commenter further maintained that forms relating
to individuals at municipal advisor firms should be viewed as
officially submitted by the municipal advisor entity. (To clarify,
however, the commenter was questioning why individuals within a firm
that is itself acting as a registered municipal advisor should be
viewed as municipal advisors rather than as associated persons of a
municipal advisor.)
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Another commenter believed that ``dual reporting'' on Forms MA and
MA-I ``could lead to confusion'' and that ``there could be inadvertent
inconsistencies in the information.'' \935\ In particular, the
commenter noted that, under the Proposal, natural persons would be
required to maintain and comply with recordkeeping and inspection
requirements, which, in the commenter's view, would be ``a significant
burden'' without ``any meaningful benefit.'' The commenter suggested
that the Commission eliminate registration for natural persons
altogether, or at least require natural persons to register as
``registered representatives,'' without recordkeeping and inspection
requirements.\936\ Similarly, another commenter believed that, rather
than introducing a new Form MA-I to provide for registration of natural
persons, FINRA's Form U4 should be adapted to allow for registration of
individuals.\937\
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\935\ Deloitte Letter. This letter, like SIFMA Letter I, see
supra note 926, tied the argument against separate registration for
individuals to its belief that ``separate registration for natural
persons is largely redundant.''
\936\ See id.
\937\ See Financial Services Roundtable Letter. See also infra
note 992 and accompanying text for information concerning Form U4
and further discussion.
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The Commission has carefully considered the issues raised by
commenters on the Proposal. In response to these comments, the
Commission is modifying its approach in the final rules and is not
adopting Rule 15Ba1-2(b) and Form MA-I as proposed. Specifically, the
Commission is exempting certain natural persons from the requirement to
register as municipal advisors \938\ and is modifying Rule 15Ba1-2(b)
and Form MA-I accordingly. Rule 15Ba1-3, as adopted, exempts from
municipal advisor registration natural persons who are associated
persons of a registered municipal advisor and who engage in municipal
advisory activities solely on behalf of a registered municipal
advisor.\939\ In practical terms, this exemption means that employees
of municipal advisory firms who do not engage in municipal advisory
activities independently of their firms (e.g., by engaging in municipal
advisory activities on the side as a sole proprietor) will not be
required to register as municipal advisors.
---------------------------------------------------------------------------
\938\ See Rule 15Ba1-3, as adopted, which provides: ``A natural
person municipal advisor shall be exempt from section 15B(a)(1)(B)
of the Act (15 U.S.C. 78o-4(a)(1)(B)) if he or she: (a) [I]s an
associated person of an advisor that is registered with the
Commission pursuant to section 15B(a)(2) of the Act (15 U.S.C. 78o-
4(a)(2)) and the rules and regulations thereunder; and (b) [e]ngages
in municipal advisory activities solely on behalf of a registered
municipal advisor.''
\939\ This exemption does not include sole proprietors, who must
register as a municipal advisor on Form MA and also file a Form MA-
I.
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While the Commission is not requiring municipal advisor
registration for these natural persons, the Commission is requiring
municipal advisory firms to provide the Commission with information
relating to these exempted natural persons. In this regard, Rule 15Ba1-
2(b), as adopted, requires the municipal advisor to complete and file
with the Commission Form MA-I for each of its natural persons who are
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf.\940\ While Form MA-I, as adopted, is not a
form for individual registration of natural persons, adopted Form MA-I
requires municipal advisory firms to provide similar information
regarding its associated natural persons as proposed Form MA-I required
(with some modifications, as discussed below).
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\940\ See Rule 15Ba1-2(b), as adopted, which provides: ``(1) A
person applying for registration or registered with the Commission
as a municipal advisor pursuant to section 15B of the Act (15 U.S.C.
78o-4) must complete Form MA-I (17 CFR 249.1310) with respect to
each natural person who is a person associated with the municipal
advisor (as defined in section 15B(e)(7) of the Act (15 U.S.C. 78o-
4(e)(7))) and engaged in municipal advisory activities on its behalf
in accordance with the instructions in the Form and file the Form
electronically with the Commission. (2) A natural person applying
for registration with the Commission as a municipal advisor pursuant
to section 15B of the Act (15 U.S.C. 78o-4), in addition to
completing and filing Form MA pursuant to paragraph (a), must
complete Form MA-I (17 CFR 249.1310) in accordance with the
instructions in the Form and file the Form electronically with the
Commission.''
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The Commission believes that the information obtained from Form MA-
I is necessary and appropriate to assist
[[Page 67539]]
the Commission in assuring compliance with Section 15B of the Exchange
Act and the rules thereunder. The Commission believes that exempting
certain natural persons from registration and requiring municipal
advisors to complete and file a Form MA-I for certain exempted natural
persons retains the benefits of individual registration discussed in
the Proposal while also addressing the concerns raised by commenters.
Specifically, the final rules and forms mitigate commenters' concerns
about imposing registration obligations upon the large number of
individuals without negating the important disclosures and other
benefits that the Commission believes would be obtained through Form
MA-I.\941\ For example, as discussed in the Proposal, the information
provided by Form MA-I would help the Commission (i) manage its
regulatory and examination programs by assisting the Commission in
identifying municipal advisors and understanding their business
structures; (ii) prepare for its inspection and examination of
municipal advisors; and (iii) oversee the municipal securities market
and investigate possible wrongdoing.\942\ This approach would also
provide municipal entities, obligated persons, investors, and other
regulators with information that would inform them as to the relevant
municipal advisory experience and history of each natural person for
whom the municipal advisor completed and filed a Form MA-I.\943\
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\941\ See, e.g., SIFMA Letter I.
\942\ See Proposal, 76 FR 850.
\943\ See id., at 851.
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This approach also would help to streamline the manner of gathering
pertinent information, reduce confusion in the disclosure process, and
reduce inconsistencies in the information reported because the
municipal advisory firm will be required to complete and file Form MA
and Form MA-I for each of the associated natural persons engaged in
municipal advisory activities on its behalf.\944\ Indeed, commenters
observed that a registered municipal advisory firm should provide
critical information about its employees who engage in municipal
advisory activities, rather than require the individual's separate
registration.\945\ Accordingly, as adopted, Rule 15Ba1-2(b), Rule
15Ba1-3, and Form MA-I will serve this purpose. Finally, the Commission
also believes that eliminating the requirement for individual municipal
advisors to separately register addresses commenters' concerns
regarding regulatory efficiency, as it will allow the Commission to
direct resources that would have otherwise been required to review many
thousands of these individuals' applications to other regulatory
matters.
---------------------------------------------------------------------------
\944\ This approach does not address the argument of commenters
that Form MA-I is redundant of Form MA. That issue is addressed in
the discussion below regarding the information requested in Form MA-
I. See infra notes 1171-1173 and accompanying text.
\945\ See, e.g., MSRB Letter I.
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As stated above, one commenter argued against individual
registration, claiming that, under the Proposal, natural persons would
be required to maintain and comply with recordkeeping and inspection
requirements, which, in the commenter's view, would be ``a significant
burden'' without ``any meaningful benefit.'' \946\ The Commission
notes, however, that the recordkeeping obligations imposed by the
Proposal always applied only to municipal advisory firms.\947\
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\946\ See id.
\947\ As proposed, the text of Rule 240.15Ba1-7(a) provided:
``Every person, other than a natural person, including sole
proprietors, registered or required to be registered under Section
15B of the Securities Exchange Act . . . shall make and keep true,
accurate, and current the following books and records relating to
its municipal advisory activities . . . . '' (emphasis added). See
Proposal, 76 FR 883. The highlighted language is retained in the
recordkeeping rule, as adopted, which has been renumbered as Rule
240.15Ba1-8. See infra Section III.C.
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The Commission recognizes that the rule, as adopted, places on
municipal advisory firms an obligation to file a Form MA-I for each
individual employee that acts as a municipal advisor on its behalf. The
Commission notes that, in the context of broker-dealer regulation, Form
U4, which is required of individual employees and asks for much the
same information as Form MA-I, is generally filed by the employees'
firms.\948\ Indeed, commenters appeared to favor a regime in which
firms submit information regarding their employees rather than one in
which each employee submits information separately.\949\
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\948\ The Commission notes, moreover, that Form U4 is used for
registration. Under the rules as adopted Form MA-I is not a
registration form. It is a form to obtain information about persons
who engage in municipal advisory activities on behalf of the firm.
\949\ See, e.g., MSRB Letter I and citation at supra note 934.
See also Deloitte Letter, stating: ``Alternatively, if the SEC does
not eliminate separate registration for natural persons, the
Commission should require such persons to register as registered
representatives of municipal advisors, as is done in the broker-
dealer context, rather than as municipal advisors.'' Although the
commenter is suggesting an alternative kind of registration for
natural persons, and does not specifically state that the
applications for registration of such persons would be filed by
their firms, the analogy to the broker-dealer context suggests that
the proposed alternative would operate in a similar manner, where
firms file an individual's Form U4.
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The Commission notes further that, as described below,\950\ the
information that firms will need to obtain to complete Form MA-I is
primarily the individual's full legal and other names, social security
number, and employment and residential history, other business
activities in which the employee is engaged, and his or her
disciplinary history. The Commission notes that, in any case, a firm
generally must obtain information regarding any relevant criminal,
regulatory, or civil judicial history concerning any of its associated
persons \951\ in order to accurately complete Form MA for purposes of
its own registration.\952\ In addition, to help ensure adequate
regulatory oversight, aid the prosecution of wrongdoing, and benefit
municipal entities and investors, the final Form MA-I collects
substantially the same information as required under the proposed
form.\953\ Moreover, although under the adopted rules employees of
municipal advisory firms are not required to register independently,
they are otherwise not exempt from any other provision relating to
municipal advisors.
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\950\ See infra Section III.A.2.c., ``Information Requested in
Form MA-I.''
\951\ See infra note 1054 for the meaning of ``associated
persons'' in this context.
\952\ See infra Section III.A.2.b., under ``Item 9: Disclosure
Information and Related DRPs.'' Thus, for purposes of completing an
employee's Form MA-I, a firm will additionally need to obtain the
information required by the form concerning investigations of the
employee; customer complaints, arbitration, and civil litigation
relating to municipal advisor-related or investment-related matters
involving the employee; terminations of the employee; and
outstanding judgments or liens against the employee. This
information is substantially the same as required by Form MA-I under
the Proposal, with the modifications discussed below. See infra
Section III.A.2.c., ``Information Requested in Form MA-I.''
\953\ See id.
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The Commission received no comments on the requirement, under the
Proposal, for a sole proprietor to file both Form MA and Form MA-I.
Accordingly, the Commission is retaining this requirement in the rules,
although, in view of the other changes described above, a provision has
been added to set forth explicitly that a natural person applying for
registration must file Form MA-I in addition to Form MA.\954\
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\954\ See Rule 15Ba1-2(b)(2) of the adopted rules, 17 CFR
240.15Ba1-2(b)(2), which provides: ``A natural person applying for
registration with the Commission as a municipal advisor pursuant to
section 15B of the Act (15 U.S.C. 78o-4), in addition to completing
and filing Form MA pursuant to paragraph (a), must complete Form MA-
I (17 CFR 249.1310) in accordance with the instructions in the Form
and file the Form electronically with the Commission.'' The addition
of Rule 15Ba1-2(b)(2), which relates to sole proprietors, was
necessary because Rule 15Ba1-2(b)(1), as adopted, is worded
specifically to require municipal advisors that are firms to file
Form MA-I with respect to associated persons who engage in municipal
advisory activities on their behalves, and would not by definition
apply to sole proprietors.
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[[Page 67540]]
The Commission stated in the Proposal that it was considering
whether Form MA and Form MA-I should be submitted through the
Commission's Electronic Data Gathering, Analysis, and Retrieval System
(``EDGAR'') or otherwise.\955\ The Commission requested comment on
whether the electronic registration system to be established should
have the ability to cross-check other electronic systems, such as IARD
and CRD, and whether requiring the filing of forms on EDGAR would be an
appropriate means to make the requested information available.\956\
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\955\ See Proposal, 76 FR 839.
\956\ See id.
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Two commenters favored the use of FINRA's electronic registration
system for CRD and IARD or some similar system for the registration of
municipal advisors.\957\ One commenter stated that this system would
``allow regulators to easily find filings for firms and individuals, as
well as cross reference between the CRD and IARD systems.'' \958\ The
commenters believed that use of FINRA's system would allay concerns
that EDGAR would subject registration information to ``unnecessary
public scrutiny'' \959\ and ``compromise the confidentiality of
operating performance data for privately held Municipal Advisors.''
\960\
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\957\ See NASAA Letter and letter from Gary Kimball, President,
Specialized Public Finance, Inc., dated February 22, 2011
(``Specialized Public Finance Letter'').
\958\ See NASAA Letter.
\959\ See Specialized Public Finance Letter. In this regard, the
commenter mentioned specifically social security numbers.
\960\ Id.
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After carefully considering the comments, the Commission has
determined to require the forms to be submitted through EDGAR.\961\
Although EDGAR is known primarily as the vehicle through which public
companies file their annual and quarterly reports and other
disclosures, the Commission has adapted EDGAR for other information
gathering purposes.\962\ Further, collecting information regarding
municipal advisors through EDGAR should enable the Commission to
efficiently retrieve and analyze data in a cost-effective manner to
carry out its oversight of municipal advisors and their municipal
advisory activities. The Commission notes that, while IARD, which is an
electronic filing system that facilitates investment adviser
registration, is funded through user fees,\963\ there is no comparable
provision in Section 975 of the Dodd-Frank Act authorizing the
Commission to charge municipal advisors (or to authorize another entity
to collect) registration fees. Accordingly, the Commission has
determined to leverage its existing technology to serve as a mechanism
by which municipal advisors can register with the Commission. The
Commission further notes that EDGAR is a widely utilized resource that
is already familiar to investors and other interested parties seeking
information about public companies, and believes that municipal
entities, investors, other regulators, and members of the public
seeking information about municipal advisors should not have difficulty
learning how to use the system.
---------------------------------------------------------------------------
\961\ As discussed in the Proposal, because the registration
forms will be required to be submitted through EDGAR, the electronic
filing requirements of Regulation S-T will apply. See generally 17
CFR 232 (governing the electronic submission of documents filed with
the Commission). The Commission will provide, in the municipal
securities area of its Web site, full instructions on how applicants
for municipal advisor registration that are not currently EDGAR
filers can acquire authorized codes to access the system. These
instructions have now also been added to the General Instructions
for the Form MA series. General information about EDGAR is available
at http://www.sec.gov/info/edgar.shtml, where the EDGAR Filer Manual
can also be accessed. The Commission recommends that applicants read
this filer manual before they begin using the system.
\962\ Most recently, for example, the Commission determined to
adapt EDGAR to accept Form 13H filings required under the ``Large
Trader Reporting'' regime established by new Rule 13h-1 under
Section 13(h) of the Exchange Act. See Securities Exchange Act
Release No. 64976 (July 27, 2011), 76 FR 46960 (August 3, 2011).
\963\ See Section 204(c) of the Advisers Act, which permits the
Commission to charge fees associated with filings and the
maintenance of a filing system.
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Regarding the comment that the use of FINRA's CRD and IARD systems
would be preferable because it would allow regulators to cross
reference the information in Forms MA and MA-I with information in
those other systems, the Commission notes that, as discussed further
below, Form MA requires a municipal advisor that has been assigned a
number either under the CRD system or the IARD system (a ``CRD
Number'') to provide that number in completing the form.\964\ In
addition, Form MA asks an applicant specifically whether it is
registered with the Commission in various other capacities (e.g.,
municipal securities dealer, government securities broker-dealer, or
other category that the applicant must specify) and, if so, to provide
the relevant file numbers.\965\ In a similar fashion, an applicant is
required to supply file numbers for any registrations it has with
another federal agency or state or other U.S. jurisdiction.\966\ Form
MA-I requires the municipal advisory firm filing the form to provide
the relevant individual's CRD Number, if registered on the CRD or IARD
system; list any other names by which the individual is known or has
been known; and provide the name, registration number, and the firm's
EDGAR CIK (Central Index Key) number.\967\ These identifying numbers
should assist municipal entities, regulators, and the public to access
any other publicly available information about the municipal advisor.
Although EDGAR will not automatically provide an electronic link to the
information on the CRD and IARD systems, these systems are nevertheless
readily accessible to regulators, municipal entities, and to the
public.
---------------------------------------------------------------------------
\964\ See infra Section III.A.2.b., ``Information Requested in
Form MA,'' discussion of Item 1, ``Identifying Information.'' See
also infra note 1007.
\965\ See infra Section III.A.2.b.
\966\ Id.
\967\ See infra Section III.A.2.c., ``Information Requested in
Form MA-I,'' discussion of Items 1 and 2, ``Identifying Information
and Other Names.''
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With respect to commenters' concerns regarding privacy, the
Commission notes that, while information required in Form MA and Form
MA-I generally will not be confidential, some information, such as
social security numbers, will be kept confidential (subject to the
provisions of applicable law).\968\ The EDGAR system will block
[[Page 67541]]
the relevant information in these forms in the versions that will be
made public.
---------------------------------------------------------------------------
\968\ The Proposal specified that social security numbers would
not be made public. See Proposal, 76 FR 867, 868, and 869. The
forms, as adopted, specify additional instances in which responses
will be kept confidential subject to the provisions of applicable
law. See, e.g., Item 8 of Schedule A of Form MA (advising applicants
that social security numbers, foreign identity numbers, and dates of
birth will not be publicly disseminated) and Item 3 of Form MA-I, as
adopted (advising that private residential addresses disclosed in
completing the residential history section of the form will not be
included in publicly available versions). The Commission has
determined that it is appropriate to block this information from
public view, as well. To make this clear, in the forms, as adopted,
in each place where an applicant is asked for a social security
number, foreign identity number, private residential address, or a
date of birth, guidance has been added stating that the information
will not be included in publicly available versions of the form. In
addition, at various other places in the forms that ask for an
address, the filer is asked to indicate whether the address provided
in response is a private residence and is advised that, if so, the
address will not be included in publicly available versions of the
form. One of the DRPs in Form MA-I, which asked whether the docket
or case number of a particular case is the municipal advisor's
social security number, bank card number, or personal identification
number, has been deleted as unnecessary.
---------------------------------------------------------------------------
One commenter argued that information relating to operating
performance of privately held municipal advisors should be kept
confidential.\969\ The commenter did not specify which particular
questions in the forms it considered problematic. The Commission
believes, however, that the public interest in making the information
available--to allow municipal entities to better evaluate candidates
for service in municipal advisory roles and to provide investors in
municipal securities with clearer knowledge of who may be influencing
the use and outcome of their investments--outweighs this type of
confidentiality concern.\970\
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\969\ See supra note 960.
\970\ Form ADV, upon which Form MA was substantially modeled
(see text accompanying infra note 975), requires a similar level of
disclosure. The Commission would make this information publicly
available regardless of the electronic registration system that is
used. See also infra notes 1046 and 1048 and accompanying text.
---------------------------------------------------------------------------
The Commission received no comments on the requirement in proposed
Rules 15Ba1-2(a) and (b) that Forms MA and MA-I, respectively, must be
filed electronically, and is adopting this requirement as proposed. The
Commission also received no comments on paragraph (c) of proposed Rule
15Ba1-2, which provided that the forms would be considered filed with
the Commission ``upon acceptance by the [applicable electronic
system].'' However, the Commission is adopting the rule with
modifications.
As proposed, Rule 15Ba1-2 provides that Forms MA and MA-I ``shall
be considered filed with the Commission upon acceptance by the
[applicable electronic system].'' As adopted, the rule instead provides
that the forms are considered filed upon ``submission of a completed
Form MA, together with all additional required documents, including all
required filings of Form MA-I (17 CFR 249.1310) . . .'' The Commission
is modifying the rule to state that the form is considered filed upon
``submission'' to EDGAR rather than upon ``acceptance'' to align the
rule with the terminology used by the EDGAR system. Further, the
Commission is modifying the rule to provide that Form MA will be
considered filed upon submission of a ``completed Form MA, together
with all additional required documents,'' to clarify that, if a Form MA
is not considered complete, the Commission's statutory forty-five day
review period will not commence.\971\ Moreover, because a municipal
advisor applying for registration under the final rules is responsible
for submitting Form MA-I for each associated person engaging in
municipal advisory activities on its behalf, the Commission believes it
appropriate to stipulate that the firm's application for registration
will be considered filed only if the firm has submitted all requisite
Form MA-Is.
---------------------------------------------------------------------------
\971\ If a Form MA is complete and all additional required
documents are attached, the form is considered filed and the forty-
five day period for the Commission to act upon the application
(i.e., either approve or institute proceedings to determine whether
it should be denied) begins.
---------------------------------------------------------------------------
When an applicant attempts to transmit its Form MA electronically,
EDGAR performs the initial automated checks to determine whether
questions that require responses have been answered and to detect, in
certain instances, defective responses. For example, if an applicant
indicates that it has three Web sites but provides, contrary to
instructions, only two corresponding Web site addresses, EDGAR will
detect the deficiency.\972\ In such instance, EDGAR will not permit the
applicant's submission. However, if a form passes EDGAR's automated
checks, EDGAR will display a message indicating that the submission was
successfully transmitted and will provide an ``accession number,''
which permits the applicant to enter the system to check the status of
its application. At this point, the applicant is also advised that its
application is not ``accepted,'' which is an EDGAR term for not
``approved,'' and EDGAR will display the status of the application as
``In Progress.''
---------------------------------------------------------------------------
\972\ See infra note 1003 for more examples.
---------------------------------------------------------------------------
Once an application passes EDGAR's initial automated check and is
successfully transmitted, the Commission staff will check the
application for the types of deficiencies that may not be detected
through automation, and if the Form MA is considered incomplete, the
applicant will receive by email an EDGAR-generated notice of
suspension. The notice will inform the applicant that the transmission
has been suspended and the reason for the suspension. The notice will
also instruct the applicant to make corrections and re-transmit the
application to the Commission in its entirety.
The Commission notes that, within forty-five days of the date a
complete Form MA is considered filed, the Commission shall by order
grant registration or institute proceedings to determine whether
registration should be denied. The Commission also notes that the
statutory review period for a filed Form MA may be longer if the
applicant consents to a longer time period. If the Commission
determines to grant registration, an EDGAR-generated email will be sent
to inform the applicant that the filing has been ``accepted'' and the
Commission will issue a formal order of approval separately.
The Proposed paragraph (d) of Rule 15Ba1-2 provided that Forms MA
and MA-I constitute ``reports'' within the meaning of Sections 15B(c),
17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c), 78q(a), 78r(a), 78ff(a)) and
other applicable provisions of the Exchange Act.\973\ The Commission
received no comments on paragraph (d) and is adopting this provision as
proposed. As a consequence, it is unlawful for a municipal advisor to
willfully make or cause to be made, a false or misleading statement of
a material fact or omit to state a material fact in Form MA or Form MA-
I.
---------------------------------------------------------------------------
\973\ See Rule 15Ba1-2(d).
---------------------------------------------------------------------------
b. Information Requested in Form MA
Municipal advisors that are municipal advisory firms (including
sole proprietors) must submit Form MA to register with the Commission.
The Commission received several comments, as discussed further below,
on the information it proposed to require from applicants in completing
Form MA.\974\ After carefully considering the comments, the Commission
is adopting Form MA substantially as proposed, with some modifications,
as discussed below.
---------------------------------------------------------------------------
\974\ See infra notes 979-987.
---------------------------------------------------------------------------
Form MA is modeled primarily on Form ADV (Part 1),\975\ which is
used for the registration of investment advisers with the Commission,
with appropriate changes made to reflect the differences in the
activities of municipal advisors and the markets that they serve. The
information that applicants are required to provide on the form is
described in detail below. As discussed in the Proposal, the items in
Form MA were drafted broadly to apply to the different types of
municipal advisors that may register with the Commission.\976\
---------------------------------------------------------------------------
\975\ See 17 CFR 279.1. See also Proposal, 76 FR 840.
\976\ See Proposal, 76 FR 840.
---------------------------------------------------------------------------
Form MA asks for information about the municipal advisor and
persons associated with the advisor. The Commission believes it
necessary to obtain the requested information to manage the
Commission's regulatory and examination programs and to make such
information available to the MSRB
[[Page 67542]]
to better inform its regulation of municipal advisors. The information
will assist the Commission in identifying municipal advisors, their
owners, and their business models, and in determining whether a
municipal advisor might present sufficient concerns as to warrant the
Commission's further attention in order to protect the municipal
advisor's clients. In addition, the information will assist the
Commission in understanding the kinds of activities in which the
applicant participates. The information will also be useful to the
Commission in tailoring any requests for additional information that
the Commission may send to a municipal advisor. Furthermore, the
required information will assist the Commission in the preparation of
the Commission's inspection and examination of municipal advisors and
the MSRB in determining what regulations for municipal advisors may be
necessary or appropriate and how such regulations might be best
implemented.\977\
---------------------------------------------------------------------------
\977\ See id., at 841.
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Moreover, the Commission believes that the information sought will
enable municipal entities and potential obligated persons to better
assess the experience and background of municipal advisors in deciding
whether to engage the services of, or do business with, any particular
municipal advisor. Similarly, information about the persons serving as
municipal advisors can be important to investors in deciding whether to
purchase specific municipal securities. In determining what information
should be disclosed, the Commission also considered the broader public
interest in the availability of information about municipal advisors to
the public.\978\
---------------------------------------------------------------------------
\978\ See id.
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The Commission received several comments regarding the extent and
kind of information sought on Form MA, as a general matter, and the
impact that the requirement to provide this information will have on
municipal advisors.\979\ While one commenter generally approved of the
content of the questions, most of the commenters on this subject
believed that the scope of information sought was too broad, that the
form should ask different questions for different kinds of municipal
advisors, or that providing the answers would be too burdensome.
---------------------------------------------------------------------------
\979\ See, e.g., Acacia Financial Group Letter; Financial
Services Roundtable Letter; JP Morgan Chase Letter; Managed Funds
Association Letter; MSRB Letter I; NAESCO Letter; SIFMA Letter I;
Specialized Public Finance Letter.
---------------------------------------------------------------------------
Specifically, one commenter stated its belief that the information
requested was ``generally appropriate'' and that it would assist the
Commission in its examination and enforcement activities as well as
assist its rulemaking activities.\980\ Another commenter stated that it
does not object in principle to requiring municipal advisors to make
disclosures similar to the disclosures required of registered
investment advisers, but urged that the Commission ``tailor carefully''
any disclosure document to ``ensure that the information to be
disclosed relates only to the municipal advisor activities of the
provider, rather than broadly requiring companies to disclose
information unrelated to municipal advisory activities.'' \981\ Another
commenter suggested that the forms be tailored for various categories
of advisors, instead of a ``one-size-fits-all'' approach.\982\
According to another commenter, ``the disclosures required for
investment advisers on Form ADV, on which proposed Form MA is based,
are, in many cases, not relevant to municipal advisors.'' \983\ The
commenter maintained that many of the other questions drawn from Form
ADV are ``not likely to obtain useful responses from municipal
advisors'' and that the Commission ``has not articulated a convincing
purpose for much of the information.'' \984\
---------------------------------------------------------------------------
\980\ See MSRB Letter I. The MSRB also expressed the hope that
the Commission would receive ``significant meaningful feedback from
small municipal advisors regarding the potential burdens the Rule
Proposal would impose, and give due weight to such feedback in light
of the Congressional intent regarding regulatory burden on small
municipal advisors.'' At the same time, the MSRB believed that the
information gleaned from the forms will ``help the MSRB to better
gauge the parameters of what should be considered a small municipal
advisor and to structure its rules to effectuate the intent of
Section 15B(b)(2)(L)(iv) [of the Exchange Act],'' which requires
that the MSRB ``not impose a regulatory burden on small municipal
advisors that is not necessary or appropriate in the public interest
and for the protection of investors, municipal entities, and
obligated persons, provided that there is robust protection of
investors against fraud.''
\981\ See NAESCO Letter.
\982\ See Acacia Financial Group Letter.
\983\ See SIFMA Letter I.
\984\ See id. The commenter cited in particular in this regard
the proposed disclosure requirements in Form MA relating to a
municipal advisor's clients; compensation arrangements; other
business activities; financial industry affiliations; proprietary
and sales interests in its municipal advisory clients' transactions;
and investment or brokerage discretion. The Commission believes that
information in each of these areas can shed light on the possible
conflicts of interest that a municipal advisor may have when
providing advice. See also infra notes 1065, 1087, and 1119 and
accompanying text, regarding this commenter's comments relating
specifically to disclosures about affiliates and other associated
persons.
---------------------------------------------------------------------------
Some commenters additionally believed that supplying the
information requested on the proposed forms would be too burdensome on
certain firms and individuals, but varied on the specifics.\985\ On the
one hand, some commenters believed, as one commenter expressed, that
``the scope of the proposed information to be collected'' in Form MA
``is exhaustive and could place a burden on small municipal advisors.''
\986\ On the other hand, one commenter believed that large
organizations would incur ``significant time, burden, and expense in
identifying personnel involved in activities that would subject them to
registration.'' \987\
---------------------------------------------------------------------------
\985\ See, e.g., Acacia Financial Group Letter, SIFMA Letter I.
\986\ See Acacia Financial Group Letter.
\987\ See SIFMA Letter I.
---------------------------------------------------------------------------
In considering these comments, the Commission carefully analyzed
each aspect of Form MA as set forth in the Proposal, consulting with
and drawing on the experience and expertise of Commission's enforcement
and examination staffs. As already stated, the Commission had paid
conscious and due attention in developing Form MA to the differences
between the activities of investment advisers and those of municipal
advisors. The Commission has analyzed proposed Form MA in the light of
the comments received, specifically with an eye to making any possible
further adjustments to reflect the field of municipal advisory
activities and to remove any proposed elements of Form MA that are not
appropriate to the regulation of municipal advisors or valuable for
such regulation in consideration of the burdens of completing the form.
The Commission continues to believe that the information requested
will be valuable in establishing and maintaining effective oversight of
municipal advisors. The various purposes to which the Commission
intends to put the information to use, as well as its value for
municipal entities and investors, have been broadly described above.
The decision to model Form MA on Form ADV was based, in part, on the
Commission's belief that the level of information sought in Form ADV is
important, appropriate, and not unduly burdensome for participants
engaged in providing investment advice, bearing in mind the goal of
protection of investors and the public interest. The Commission
believes that the regulation of municipal advisors warrants obtaining a
similar level of information as pertinent to municipal advisors.\988\
[[Page 67543]]
The Commission notes that the MSRB, the statutorily mandated rulemaking
body for the municipal securities market, believes that the information
obtained generally will contribute to the Commission's and its own
regulatory activities.\989\
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\988\ For example, knowledge of the kind of clients that a
municipal advisor serves may be useful to a municipal entity in
determining whether that advisor has the background and expertise
necessary to provide advice regarding the issuance that the entity
is contemplating. Similarly, information regarding the advisor's
compensation arrangements generally may help a municipal entity
evaluate the advisor's proposed compensation arrangements for the
issuance under consideration. Such information can also be valuable
to regulators in uncovering irregularities when questions are raised
regarding a municipal advisor's motives and/or business conduct with
respect to a particular transaction. The information that a
municipal advisor provides regarding its other business activities,
its financial industry affiliations, the proprietary and sales
interests it may have in its municipal advisory clients'
transactions, and the investment or brokerage discretion that it is
granted in carrying out its services may help municipal entities,
investors in municipal securities, and regulators assess whether
conflicts of interest may affect the advice that the firm provides
or may have influenced its advice in a transaction under
investigation. The Commission believes that obtaining such
information is consistent with the intent of the Dodd-Frank Act in
establishing a regulatory framework for municipal advisory
activities.
\989\ See MSRB Letter I. The MSRB also commented that the
Commission ``should give due weight to feedback from small municipal
advisors regarding the potential burdens in light of the
Congressional intent regarding regulatory burden on small municipal
advisors.'' See id. The Commission addresses the burden for smaller
municipal advisory firms in the Final Regulatory Flexibility
Analysis below. See infra Section IX.
---------------------------------------------------------------------------
Some commenters believed that the information sought by Form MA
with respect to many municipal advisors is information already
available to the Commission through other registrations and that the
proposed disclosures would therefore be redundant.\990\ One commenter
argued that ``adding new layers of regulation in this area will not
serve to enhance the protection of municipal entities or investors.''
\991\ Another commenter contended that it would be ``more efficient for
the SEC to leverage existing registration forms, which have years of
interpretive guidance behind them, than to create a new form seeking
much of the same information as required by Forms BD and U4.'' \992\ To
address this issue, some suggested that the Commission allow persons
that are already registered with the Commission--such as broker-
dealers, investment advisers, and municipal securities dealers--to
check an additional box on their primary registration forms already
filed with the Commission or to provide them with a short-form
registration process.\993\ Short of this, commenters urged that, if
such persons must complete Form MA, they should be allowed to
incorporate by reference on Form MA any information that is included on
another registration form and be required to provide on Form MA only
such additional information as deemed essential regarding municipal
advisory activities.\994\
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\990\ See, e.g., JP Morgan Chase Letter; SIFMA Letter I; and
Specialized Public Finance Letter. See also Financial Services
Roundtable Letter (maintaining that, for registered broker-dealers,
``Form MA is largely duplicative of Form BD''); and Managed Funds
Association Letter (maintaining that proposed Form MA, ``but for
items specifically relating to municipal advisory activities,'' is
``substantially similar to Form ADV'').
\991\ See JP Morgan Chase Letter. This view was expressed
particularly with respect to traditional banking products and
services. See also supra Section III.A.1.c.viii., regarding banks.
\992\ See Financial Services Roundtable Letter. Form U4 is the
Uniform Application for Securities Industry Registration or
Transfer, available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p015112.pdf.
\993\ See SIFMA Letter I. See also Managed Funds Association
Letter, Financial Services Roundtable Letter.
Also, one commenter suggested that, instead of registering a
second time as a municipal advisor, an investment adviser should be
permitted to amend its Form ADV to reflect the fact that it engages
in municipal advisory activities. This commenter also suggested
permitting state-registered investment advisers to register as
municipal advisors by amending their Forms ADV. See ABA Letter.
\994\ See SIFMA Letter I, ABA Letter.
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The Commission notes that Form MA, both as proposed and adopted,
allow for incorporation by reference of certain information that
already has been submitted on certain other forms by the applicant, any
of its associated persons, or another entity pursuant to the
requirements of other regulatory regimes. Specifically, each of the
Disclosure Reporting Pages (``DRPs'') of Form MA permits incorporation
by reference to DRPs that are already on file with regulators.\995\ The
DRPs are generally where the most significant amount of information is
requested on Form MA and on which applicants will likely need to expend
the most time and effort.
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\995\ As explained below, Item 9 of Form MA requires an
applicant to provide certain information concerning any criminal,
regulatory, and civil judicial actions relating to the applicant or
any of its associated persons. For each action reported in Item 9,
the applicant is required to complete a DRP by providing for further
details, such as the court where the charges were filed and when, a
description of the charge and the circumstances relating to it (in
the case of criminal actions); the authority that initiated the
action and a description of the allegations and the product-type (in
the case of regulatory actions); or the initiator of the court
action, the relief sought, and the product type (in the case of
civil judicial actions). The information sought in the DRPs of Form
MA is similar to information sought in DRPs that must be filed, as
applicable, with Forms BD, ADV, and U4.
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Form MA, as adopted, more prominently highlights the option to
incorporate information by reference. Part A of each DRP asks for basic
information regarding the person(s) or entity(ies) concerning whom the
DRP must be filed. Immediately thereafter, in Part B, the form asks if
there is another DRP or other disclosure already on file in the IARD,
CRD, or EDGAR system containing the information required by the DRP. If
the answer is ``Yes,'' the form asks the applicant to identify where
the disclosures may be found. In addition, for the benefit of
regulators, municipal entities, and other interested parties, the DRPs
ask for information that will enable such parties to locate the
referenced document easily, by requiring the applicant to provide the
name of the registrant on the referenced document, the relevant
registration number, and other identifying information. Thus, for all
persons for whom disclosures of criminal, regulatory, and civil
judicial actions must be made, Form MA already allows for incorporation
by reference. The Commission believes that the accommodation of
incorporation by reference for these disclosures will eliminate a
significant amount of redundancy to which the commenters refer.
The Commission believes that commenters' suggestion to allow
applicants already registered with the Commission under other
regulatory regimes to check an additional box on their primary
registration forms \996\ would not achieve the aim of the municipal
advisor registration regime. Specifically, the Commission believes that
persons seeking to compile, compare, and analyze data pertaining to
registered municipal advisors, as well as regulators overseeing
compliance with rules and regulations applicable to registered
municipal advisors, should generally be able to easily access within
one system relevant information about municipal advisors.
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\996\ See supra note 993.
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The Commission notes that the vast majority of applicants
registering under the permanent registration regime would be new
Commission registrants.\997\ As such, the majority of all information
pertaining to municipal advisors will be centralized in EDGAR. On the
other hand, the Commission acknowledges that, because disclosures
required by Form MA DRPs and Form MA-I DRPs may be incorporated by
reference from other forms, some
[[Page 67544]]
information will reside outside EDGAR. However, the Commission notes
that, under the temporary registration regime, only about 15% of
applicants on Form MA-T indicated a history of criminal, regulatory, or
civil judicial action that would require the submission of DRPs under
the permanent registration regime. Moreover, not all 15% of municipal
advisors indicating such a history would have DRPs on file elsewhere,
as many may not be broker-dealers or investment advisers and thus would
not be required to file Form BD or Form ADV. Accordingly, the
Commission believes that fewer than 15% of municipal advisors should
have DRP information stored outside EDGAR, with the majority of
information collected under the permanent municipal advisor regime
centralized in EDGAR. The Commission also notes that, if applicants
that are already registered with the Commission under other regulatory
regimes can register as municipal advisors by only checking an
additional box on their primary registration form, a municipal entity
or investor seeking information about a municipal advisor may not
realize that the information they seek is available on a Form BD or
ADV, rather than a Form MA or MA-I.
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\997\ According to MA-T data as of December 31, 2012, there were
approximately 1,110 Form MA-T registrants. Of these Form MA-T
registrants, 226 were also registered with the Commission as broker-
dealers; 39 were also registered with the Commission as investment
advisers; and 65 were registered with the Commission as both broker-
dealers and investment advisers. Therefore, the vast majority of
Form MA-T registrants were new Commission registrants.
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Description of the Form: Introduction
As previously noted, in addition to considering the comments, the
Commission analyzed the entire proposed Form MA and its appended
schedules and disclosure pages to make any necessary adjustments. The
discussion below describes Form MA, as adopted, and notes the
substantive changes to the proposed form. At the outset, the Commission
notes that it is making some revisions to clarify questions asked in
Form MA. Other revisions are intended to elicit additional information.
The Commission believes that the additional required data should make
the information provided by registrants more useful to examiners,
investigators, and other regulatory authorities and/or to municipal
entities and investors.\998\
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\998\ Although some commenters believed, generally, that the
forms, as proposed, required too much information, the Commission
believes that the modifications it has made to the forms that ask
for additional information will elicit information that can be of
significant use to regulators and municipal entities. The discussion
below includes the reasons why, in each significant case, the
Commission has made the revision. See, e.g., infra notes 1028-1030.
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As noted below, the Commission made some revisions to the form to
eliminate unnecessary disclosure requirements. Other changes involve a
reorganization of the requested information. In general, the Commission
intends to improve the picture that municipal entities, investors, and
regulators will be able to obtain from Form MAs, whether regarding
municipal advisors, in particular, or regarding municipal advisory
activities, as a whole. For example, while the proposed DRPs required
information generally regarding the disposition of criminal charges or
resolution of regulatory or civil proceedings, in the DRPs, as adopted,
the questions are more specific and require certain additional
details.\999\
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\999\ See further the discussion below regarding Item 9 of Form
MA.
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Format of Form MA
Form MA, as proposed, required the applicant to provide information
describing itself and its business through a series of fill-in-the-
blank, multiple choice, and the check-the-box questions.\1000\ In the
form, as adopted, these questions have been adapted to an electronic,
web-based format,\1001\ with minor revisions to the text as necessary
or appropriate for online completion.\1002\ As stated above, EDGAR is
designed to detect certain failures to respond to mandatory questions
and, to detect, in certain instances, defective responses.\1003\
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\1000\ No comments were received on the format of the form.
\1001\ For example, where the paper form asked a Yes or No
question and, if the answer is Yes, other questions must be
answered, in the electronic form those additional questions will
appear only if the applicant selected Yes. In the paper form, in
some instances when the applicant answers Yes, the form instructs
the applicant to supply additional information in Schedule D of the
form. In the electronic form, a pop-up screen appears that
immediately enables the applicant to complete the additional
information. Filers will be able to obtain a paper version of the
form at any time through the electronic system, which should help
them anticipate in advance the information they will need to gather
to complete on the online form. In addition, filers will be able to
print out a hard copy version of the form with their responses
included in their appropriate places on the form.
\1002\ Certain documents, such as a signed and notarized Form
MA-NR (required of certain non-residents as discussed below) or
copies of court orders required as part of a DRP will need to be
converted into a portable document file (PDF) meeting the
specifications set forth in the EDGAR Filer Manual, supra note 961,
and attached to the electronic submission.
\1003\ Some examples: If an applicant provides an EDGAR CIK
number, the name of the company will be pre-populated in the
electronic form with the name assigned to that CIK number and the
applicant will not be permitted to list a different name. When an
applicant indicates that it is registered under another Commission
regulatory regime but supplies a registration number for that
regulatory regime that cannot be valid because it is not in the
correct numbering format, the system will prevent the applicant from
filing the form. If an applicant answers affirmatively to a question
that asks whether it only engages in solicitation and does not
advise clients, it will not be possible to indicate in response to
another question that it advises clients and does not solicit. If an
applicant indicates that it has three Web sites but provides the
addresses of only two, the system will not permit submission of the
form. If an applicant discloses that it or an associated person has
been involved in a criminal, regulatory, or civil judicial action,
the system will prevent the applicant from filing the form if the
appropriate DRP is not completed. If the principal address of a firm
in Form MA or the residence of an individual reported in Form MA-I
is in a foreign country (which the system can detect because states
and countries are indicated by selecting the appropriate name in a
drop-down box), the system will not permit submission of the form
unless, at the appropriate step in the form, a Form MA-NR is
attached.
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Form MA also contains several supplemental schedules that must be
completed, where applicable, each of which is discussed further below:
Schedule A asks for information about the municipal advisor's direct
owners and executive officers; Schedule B asks for information about
the municipal advisor's indirect owners; Schedule C is used to amend
information on either Schedule A or Schedule B; and Schedule D asks for
additional information when an applicant answers in the affirmative
regarding certain questions in the form and also provides space for any
explanations that a filer may wish to add to its application. Form MA
also contains DRPs, which require further details about events and
proceedings involving the municipal advisor and/or the municipal
advisor's associated persons that the applicant was required to report
in Item 9 of the main body of the form, and are discussed in the
context of Item 9 below.
Form MA, as proposed, first required a municipal advisor to
indicate whether it is submitting the form for initial registration as
a municipal advisor or submitting an annual update or an amendment
(other than an annual update) to a registration as a municipal
advisor.\1004\ In the electronic form, as adopted, Form MA asks the
applicant to indicate, upon entry, whether it is filing an initial
form, an annual update, or amendment. Once an initial form is
submitted, when a filer subsequently enters the system and selects the
choice of annual update or amendment, the most recently submitted
version of the form will appear, pre-populated with the responses as
completed at that time. Thus, the filer will need only to amend the
outdated information.
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\1004\ Amendments to Form MA are discussed further below. See
infra Section III.A.5.
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Item 1: Identifying Information
The Commission proposed Item 1 of Form MA to require essential
identifying information regarding the applicant. For the reasons
discussed
[[Page 67545]]
below and in the Proposal,\1005\ the Commission is adopting Item 1
substantially as proposed but with the minor modifications discussed
below.
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\1005\ See Proposal, 76 FR 841.
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As proposed and adopted, Items 1-A and B of Form MA require a
municipal advisor to indicate the full legal name of the municipal
advisor and, if different, the name under which it primarily conducts
its municipal advisor-related business.\1006\ As adopted, Item 1-A also
asks for the municipal advisor's CRD Number, if it has one.\1007\ Item
1-C of Form MA as proposed and adopted requires a municipal advisor
also to provide its Employer Identification Number (or ``EIN,'' a
number used with respect to Internal Revenue Service matters) or, if
the applicant (such as a sole proprietor) does not have an EIN, a
social security number.\1008\
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\1006\ As proposed and adopted, Item 1-B requires any additional
names under which the applicant conducts municipal advisor-related
business and the jurisdictions in which they are used to be listed
in Schedule D.
\1007\ Obtaining a municipal advisor's CRD Number, if it has
one, enables regulators, municipal entities, and investors in a most
basic way to research the background of a registrant. See, e.g.,
supra text accompanying note 964.
\1008\ As discussed in the Proposal, the Commission is asking
for the social security number of sole proprietors to permit the
electronic filing system to distinguish between persons who share
the same name. This information is necessary in connection with the
Commission's enforcement and examination functions pursuant to
Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See
Proposal, 76 FR 840, note 176. See also supra note 968.
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In Item 1-D, as proposed and adopted, if the municipal advisor is
also registered with the Commission as an investment adviser, broker,
dealer, or municipal securities dealer, or if it has previously
registered with the Commission as a municipal advisor on Form MA-T,
such municipal advisor is required to provide its related SEC file
number or numbers. Further, if the municipal advisor is a broker-dealer
or an investment adviser and has a CRD Number assigned to it either
under the CRD system or the IARD system, it is required to provide its
CRD Number.
As proposed and adopted, Item 1-D also requires an applicant to
indicate whether it is a state-registered investment adviser. In such
case, as adopted, Item 1-D additionally requires the applicant to
identify the state (or states) with which it is registered,\1009\ and
adds to this category other U.S. jurisdictions where the applicant is
registered.\1010\
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\1009\ Requiring the place(s) of registration directly on Form
MA can be helpful to regulators, municipal entities, and investors
while imposing little burden upon the applicant. The omission of
this disclosure requirement in the proposed version of the form was
unintentional.
\1010\ The revision to include other U.S. jurisdictions in
addition to states has been made throughout the forms.
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Item 1-D, as adopted, additionally requires a municipal advisor to
indicate if it is an ``exempt reporting adviser'' with respect to
investment adviser registration and, if so, to provide the SEC file
number and CRD Number. The category of exempt reporting advisers,
discussed in Section III.A.1.c.v. herein, was created by Commission
rule after Form MA was proposed. Because exempt reporting advisers are
not exempt from municipal advisor registration, if applicable, the
Commission believes that the information that such advisers must report
to the Commission, and the identifying numbers necessary to ease access
to such information, is no less important to regulators of the
municipal market, municipal entities, and investors than the equivalent
information available regarding municipal advisors who are registered
investment advisers.\1011\
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\1011\ As proposed and adopted, an applicant is further asked in
Item 1-D whether it is a government securities broker-dealer, and,
if so, to provide the SEC file number and bank identifier; whether
it has any other SEC registration, and, if so, to specify which
registration and the file number; and whether it is registered with
another federal or state regulator, and, if so, to specify the
regulator's name and the applicant's registration number. As
adopted, Item 1-D asks whether the applicant has any additional
registrations that were not already reported, and, if so, to list
the regulator and the applicant's registration number in Schedule D.
The addition of this last question clarifies that if there are
additional registrations, the applicant must list all of them.
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The information provided in response to Item 1-D will allow the
Commission to more effectively cross-reference those entities applying
for registration as municipal advisors to those who are registered as
brokers, dealers, municipal securities dealers, investment advisers, or
otherwise registered \1012\ with the Commission. As discussed in the
Proposal, the ability to cross-reference will allow the Commission to
assemble more complete information concerning a municipal advisor to
inform the Commission's decision to approve or institute proceedings to
deny an application for registration as a municipal advisor. The
ability to cross-reference will also permit the Commission or any
designee \1013\ to plan for, and carry out, efficient and effective
examinations of registered municipal advisors. By obtaining all of an
applicant's regulatory file numbers, the Commission will be able to
cross-reference disciplinary information in the CRD or IARD systems
with the information on Form MA. This ability would provide the
Commission with a more complete understanding of a municipal advisor's
structure and business.
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\1012\ For example, as the Commission noted in the Proposal,
pursuant to Section 764 of the Dodd-Frank Act, security-based swap
dealers will be required to register with the Commission. See
Section 764(a) of the Dodd-Frank Act and 15 U.S.C. 78o-8(a). See
Proposal, 76 FR 841, note 178.
\1013\ See 15 U.S.C. 78o-4(c)(7)(A)(iii) (providing that
examinations of municipal advisors shall be conducted by the
Commission or its designee).
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Item 1-E asks for the address of applicant's principal office and
place of business \1014\ and the telephone and fax numbers at that
location. As proposed, Item 1-E of Form MA required an applicant to
list on Schedule D any additional names under which it conducts
municipal advisor-related business and the offices at which such
business is conducted. In consideration of comments, generally, that
the form is too burdensome,\1015\ in Item 1-E, as adopted, the
Commission has determined to require information pertaining only to the
five largest offices.
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\1014\ Rule 15Ba1-1(l) defines principal office and place of
business to mean: ``the executive office of the municipal advisor
from which the officers, partners, or managers of the municipal
advisor direct, control, and coordinate the activities of the
municipal advisor.'' See also Glossary. In addition, the municipal
advisor must supply its mailing address, if it is different from its
principal office and place of business.
\1015\ See, e.g., supra note 979 and accompanying text and text
following note 987.
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Item 1-F of Form MA, as proposed, asked whether the applicant has
one or more Web sites, and, if so, to list them in Schedule D of the
form. As adopted, Item-F continues to require an applicant to list all
its Web sites, but also requires the address of its principal Web site
on the main part of the form and any additional Web site addresses on
Schedule D.\1016\
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\1016\ The Commission believes that identification of the
applicant's principal Web site out of possibly many will increase
the benefit of the information to regulators, municipal entities,
and investors without adding any unreasonable burden on the
applicant.
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Item 1-G of Form MA, as proposed, required applicants to supply the
name, address, email address, and telephone and fax numbers of its
Chief Compliance Officer, if it has such an officer, and to list any
other title(s) the officer holds. Item 1-H, as proposed, asked for the
title of, and similar contact information for, any other person whom
the municipal advisor has authorized to receive information and respond
to questions about the registration (the ``contact person''). Items 1-G
and 1-H are being adopted, as proposed, with a clarification to advise
applicants that they must provide the name and contact
[[Page 67546]]
information for only one person (i.e., either a Chief Compliance
Officer or another contact person). The intent of the Proposal was for
the applicant to provide one or the other, and the form, as adopted,
makes this clearer. The added note also advises, however, that
information for both may be provided if the applicant so chooses. As
discussed in the Proposal, the Commission is requesting the identifying
and contact information in Item 1-G and/or 1-H to assist the Commission
and the staff in evaluating applications for registration and
overseeing registered municipal advisors.\1017\
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\1017\ See also Proposal, 76 FR 841.
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As proposed and adopted, Item 1-I of Form MA requires the applicant
further to state whether it maintains, or intends to maintain, some or
all of its books and records required to be kept under MSRB or
Commission rules somewhere other than at its principal office and place
of business and, if so, to provide (on Schedule D) information about
the other location(s).
Item 1-J of Form MA, as proposed and adopted, requires an applicant
to answer whether it is registered with any foreign financial
regulatory authority,\1018\ and, if so, to provide the name (on
Schedule D) of each such authority and the country. Item 1-J is being
adopted as proposed, with the additional requirement to provide the
applicant's registration number under the foreign authority.\1019\
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\1018\ An added instruction in Item 1-J, as adopted, makes clear
that an applicant should answer ``No'' to this question even if it
is affiliated with a business that is registered with a foreign
financial regulatory authority.
\1019\ Schedule D relating to Item 1-J, as adopted, clarifies
that both the name of the country and the name of the authority must
be provided in English, which may not have been evident in the
proposed version. In general, throughout the forms, as adopted, when
the name of a foreign country and/or authority is required, the
filer is instructed that answers must be provided in English.
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Item 1-K, as proposed and adopted, requires an applicant to
disclose whether it is affiliated with any other business entity, and,
if so, to disclose on Schedule D the name and registration number of
each such affiliate.\1020\ As discussed in the Proposal, this
information will help inform the Commission as to the structure of the
municipal advisor's business, which will help staff prepare for
examinations of the municipal advisor.\1021\
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\1020\ The text of Item 1-K has been revised to make explicit
that ``business entity'' refers to any domestic or foreign entity.
Similarly, the related questions in Schedule D, which, as proposed,
asked only for ``any federal or state registration'' has been
revised to include foreign registrations, as well. These revisions
have been made in accordance with the description of this disclosure
item in the Proposal, which included foreign affiliates among the
required disclosures. See Proposal, 76 FR 842.
\1021\ See id.
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Item 2: Form of Organization
The Commission proposed Item 2 of Form MA to require information
about a municipal advisor's form of organization. The Commission
received no comments regarding Item 2 and is adopting this item
substantially as proposed. Item 2 requires a municipal advisor to
specify whether it is organized as a corporation, partnership, sole
proprietorship, limited liability company, limited liability
partnership, limited partnership, or other form of organization that
the municipal advisor must specify; the month of its annual fiscal year
end; the date on which it was organized; and the state or other U.S.
jurisdiction \1022\ or foreign jurisdiction where it was organized. As
discussed in the Proposal, this information will assist the Commission
in evaluating the applications for registration and overseeing
registered municipal advisors.\1023\
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\1022\ Proposed Item 2 did not specifically mention U.S.
jurisdictions other than states. The Item, as adopted, makes clear
that such jurisdictions are included. See supra note 1010 and
accompanying text.
\1023\ See Proposal, 76 FR 842.
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Item 2 also requires an applicant to specify whether it is a public
reporting company under Section 12 or 15(d) of the Exchange Act and, if
so, to provide its Commission-assigned EDGAR CIK number. As discussed
in the Proposal, the information that an applicant is a public
reporting company will provide a signal that additional public
information is available about the municipal advisor and/or its control
persons.\1024\
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\1024\ See id.
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Item 3: Successions
The Commission proposed Item 3 of Form MA to require applicants to
disclose whether they are succeeding to the business of a registered
municipal advisor and, if so, the date of succession. Further, Item 3
requires, on Schedule D, the name of, and registration information for,
the firm the applicants are succeeding.\1025\ The Commission received
no comments regarding Item 3 and is adopting this item as proposed. As
discussed in the Proposal, this information will assist the Commission,
among other things, in overseeing registered municipal advisors and in
determining whether there has been a change in control of a municipal
advisor.\1026\
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\1025\ As discussed elsewhere in this release, depending on
whether the succession is a result of a merger or acquisition, or a
reorganization, the succeeding firm will be able to register by
either submitting a new Form MA or amending the Form MA of its
predecessor. See infra note 1318 and accompanying text and infra
Section III.A.7. (discussing Rule 15Ba1-7 regarding registration of
a successor to a municipal advisor).
\1026\ See id. See also Proposal, 76 FR 842.
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Item 4: Information About Applicant's Business
The Commission proposed Item 4 to require certain information about
the applicant's business. The Commission received several comments
relating to Item 4, which are discussed below.\1027\ The Commission is
adopting Item 4 substantially as proposed, with certain modifications
as discussed in the description of the item below.
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\1027\ See infra notes 1040-1046 and accompanying text.
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As proposed and adopted, subparts A to C of Item 4 require an
applicant to provide information regarding the approximate number of
employees it has, approximately how many of those employees engage in
municipal advisory activities, and approximately how many are
registered representatives of a broker-dealer or investment adviser
representatives.
Item 4-D, as proposed and adopted, requires an applicant to state
approximately how many firms, or other persons (that are not employees
or otherwise associated persons of the applicant) solicit municipal
advisory clients on the applicant's behalf. As proposed, an applicant
is required to disclose on Schedule D the names, addresses, and phone
numbers of firms that solicit on its behalf. As adopted, Item 4-D
additionally requires the applicant to disclose on Schedule D the same
information for other persons who are not employed by, or otherwise
associated persons of, the applicant but who solicit on its
behalf.\1028\ In addition, to make the information more useful, the
Commission has determined to require an applicant also to provide the
EDGAR CIK and/or individual CRD Number, if any, of the soliciting firm
or other person.
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\1028\ Upon review of the form as proposed, the Commission
determined that requiring a firm to list the names of all persons
who solicit on its behalf will provide potentially valuable and more
fulsome information, as it may yield the names of persons who are
providing such services without themselves registering.
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Further, Item 4-E, as proposed, required an applicant to state
whether it has any employees that also do business independently on the
applicant's behalf as affiliates of the applicant and, if so, to
disclose in related Section 4-E of Schedule D the names of such
employees.\1029\ In the form, as adopted,
[[Page 67547]]
Section 4-E of Schedule D requires the applicant, in addition, to
provide the address, telephone and fax number, EDGAR CIK (if any) and
individual CRD Number (if any) of each such employee.\1030\
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\1029\ This category of employee includes persons who do not
necessarily engage in municipal advisory activities on behalf of the
firm, and for whom a Form MA-I would thus not be required. Regarding
employees who do also engage in municipal advisory activities on
behalf of the firm, the applicant must in any case obtain the
information requested in Section 4-E, as adopted, to complete a Form
MA-I for each such employee. See also infra note 1030.
\1030\ The Commission believes that these additional details in
Schedule D will further serve the purposes for which Item 4 is
designed and that an applicant firm should be able to provide such
information about employees that do business on its behalf. Item 4-
E, as adopted, asks the applicant to state the number of employees
of this kind. This does not require an applicant to search for any
additional information, because each such employee must be named in
Schedule D. However, it can serve as a helpful cross-check to the
filer as well as to regulators, and is also a useful number for
interested parties who do not need the additional details.
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Item 4-F, as proposed and adopted, requires the applicant also to
approximate the number of clients it served in the context of its
municipal advisory activities in the past fiscal year and to specify by
checking the appropriate box(es) whether its clients include: municipal
entities, non-profit organizations (e.g., 501(c)(3) organizations) who
are obligated persons, corporations or other businesses not listed
previously who are obligated persons, or other types of entities (and
specify which other types of entities); or whether the applicant
engages only in solicitation and does not serve clients in the context
of its municipal advisory activities.
As proposed and adopted, applicants also are required, in Item 4-
G,\1031\ to specify approximately the number of municipal entities or
obligated persons that were solicited by the applicant on behalf of a
third-party during its most recently completed fiscal year, including
any clients that it solicits in addition to serving them in the context
of its municipal advisory activities. However, Item 4-G, as adopted,
requires the applicant to provide the numbers separately for municipal
entities and obligated persons.\1032\
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\1031\ The section of Item 4 that relates to solicitations of
municipal entities and obligated persons has been restructured in
Form MA, as adopted, into two parts. Item 4-G is the first part of
Item 4-G as proposed, which requires the applicant to state the
number of municipal entities and obligated persons that the
applicant solicited on behalf of a third party, as described above.
New Item 4-H is comprised of the questions regarding the types of
persons solicited by the applicant that constituted the rest of Item
4-G as proposed. Hereinafter, subparts 4-H, I, J, and K of the
Proposal will be referred to by their numbers in the adopted form,
i.e., 4-I, J, K, and L, respectively.
\1032\ The Commission believes that the information requested
will be more useful for regulatory purposes, and for gaining an
understanding of municipal advisory activities in general, when
broken down in this manner. Municipal entities and other interested
parties can also benefit from this breakdown in assessing the
specific experience of a municipal advisor.
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Further, as proposed and adopted, applicants must indicate, in Item
4-H,\1033\ whether they solicit public pension funds, 529 Savings
Plans, local or state government investment pools, hospitals, colleges,
or other types of municipal entities or obligated persons (and to
specify which other types). Alternatively, an applicant is able to
indicate that the question is inapplicable, because it serves only
clients and does not engage in solicitation in the context of its
municipal advisory activities.
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\1033\ Item 4-H was a part of Item 4-G as proposed. See supra
note 1031.
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As proposed and adopted, applicants are also required to disclose,
in Item 4-I,\1034\ whether they are compensated for their advice to or
on behalf of municipal entities or obligated persons by hourly charges,
fixed fees (not contingent on the success of solicitations), contingent
fees, subscription fees (for a newsletter or other publications), or
otherwise.\1035\ If the applicant checks ``other,'' the other kind of
arrangement must be described. Item 4-J,\1036\ as proposed and adopted,
asks for similar information about compensation for solicitation
activities. Item 4-K,\1037\ as proposed and adopted, asks whether the
applicant receives compensation, in the context of its municipal
advisory activities, from anyone other than clients, and, if so, to
provide an explanation.
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\1034\ Item 4-I was Item 4-H as proposed. See supra note 1031.
\1035\ An applicant may alternatively state that the question is
inapplicable because the applicant engages only in solicitation.
\1036\ Item 4-J was Item 4-I as proposed. See supra note 1031.
\1037\ Item 4-K was Item 4-J as proposed. See supra note 1031.
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As discussed in the Proposal, disclosure of information relating to
the number of a municipal advisor's employees and compensation
arrangements will provide the Commission with a clearer understanding
of the business structure of registered municipal advisors, including
the size of each advisor, the number of its employees that engage in
municipal advisory activities, and in what capacity these employees
engage in such activities. Information about compensation arrangements
also will identify possible conflicts of interest that the municipal
advisor may have with its clients.\1038\
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\1038\ See Proposal, 76 FR 843.
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The Commission received several comments regarding the five
categories of compensation arrangements.\1039\ One commenter believed
that the Commission should ``refrain from utilizing this limited
information in making a determination as to the existence of conflicts
of interest with respect to compensation'' and that ``a more
comprehensive analysis of compensation arrangements and the rationale
for such fees should be considered prior to making any determination as
to the appropriateness of a particular fee arrangement.'' \1040\
Another commenter believed that, because investment advisers generally
have ``a completely different business model, approach to business and
compensation model,'' as well as ``scale of business,'' than municipal
advisors, Form ADV is ``not a good model in this element of
registration.'' \1041\
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\1039\ See Joy Howard WM Financial Strategies Letter; Public FA
Letter; and Fiscal Advisors and Marketing Letter, Inc., dated
February 21, 2011 (``Fiscal Advisors and Marketing Letter'').
\1040\ See Joy Howard WM Financial Strategies Letter.
\1041\ See Public FA Letter. Another commenter stated that most
municipal advisors ``charge on a project or transaction specific
basis and not on an annual all encompassing service basis'' and thus
believed that Form ADV is not a relevant document that would help in
understanding ``the nature of an `Independent Municipal Advisor,'
its corporate makeup, nor the fee relationship'' and ``does not
afford any basis for analyzing potential conflict of interest.'' See
Fiscal Advisors and Marketing Letter.
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The five choices from among which applicants are asked to select
are not intended to give an exhaustive picture of a municipal advisor's
business model, but the Commission does believe that receiving
responses regarding compensation, at least on the level of specificity
requested in this item, will enable Commission staff to ask more
targeted questions on routine examinations and may highlight
relationships that should be more closely examined. Furthermore, the
Commission notes that in addition to the five choices, an applicant may
also check ``Other'' to describe its compensation arrangements. If
selected, the applicant is required to specify the nature of such
arrangements.
Item 4-L,\1042\ as proposed and adopted, also requires the
municipal advisor to indicate the general types of municipal advisory
activities in which it engages.\1043\ The Commission
[[Page 67548]]
understands that the listed activities are those in which the municipal
advisors engage and are derived from the definition of municipal
advisor in Exchange Act Section 15B(e)(4) \1044\ or closely related to
the activities included within that definition. As discussed in the
Proposal, this information will help the Commission understand the
scope of activities in which a municipal advisor engages and identify
possible conflicts of interest and in preparing for examinations, and
will also provide the Commission with data useful to making regulatory
policy.\1045\
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\1042\ Item 4-L was Item 4-K as proposed. See supra note 1031.
\1043\ The following eleven activities are listed: (1) Advice
concerning the issuance of municipal securities (including, without
limitation, advice concerning the structure, timing, terms and other
similar matters, such as the preparation of feasibility studies, tax
rate studies, appraisals and similar documents, related to an
offering of municipal securities), (2) advice concerning the
investment of the proceeds of municipal securities (including,
without limitation, advice concerning the structure, timing, terms
and other similar matters concerning such investments), (3) advice
concerning municipal escrow investments (including, without
limitation, advice concerning their structure, timing, terms and
other similar matters), (4) advice concerning the investment of
other funds of a municipal entity or obligated person (including,
without limitation, advice concerning the structure, timing, terms
and other similar matters concerning such investments), (5) advice
concerning guaranteed investment contracts (including, without
limitation, advice concerning their structure, timing, terms and
other similar matters), (6) advice concerning the use of municipal
derivatives (including, without limitation, advice concerning their
structure, timing, terms and other similar matters), (7)
solicitation of investment advisory business from a municipal entity
or obligated person (including, without limitation, municipal
pension plans) on behalf of an unaffiliated person or firm (e.g.,
third party marketers, placement agents, solicitors and finders),
(8) solicitation of business other than investment advisory business
from a municipal entity or obligated person on behalf of an
unaffiliated broker, dealer, municipal securities dealer, municipal
advisor or investment adviser (e.g., third party marketers,
placement agents, solicitors and finders), (9) advice or
recommendations concerning the selection of other municipal advisors
or underwriters with respect to municipal financial products or the
issuance of municipal securities, (10) brokerage of municipal escrow
investments, or (11) other. Applicants who check ``other''
activities will be required to provide a narrative description of
such activities.
\1044\ See 15 U.S.C. 78o-4(e)(4).
\1045\ See Proposal, 76 FR 843.
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One commenter believed that, due to competitive concerns, a
municipal advisor should not be required to disclose the names and
contact information of persons that solicit municipal clients on its
behalf.\1046\ The Commission notes that the definition of municipal
advisor under the Exchange Act includes, specifically, persons who
undertake solicitation of municipal entities and obligated persons. The
Commission thus believes that requiring an applicant to provide
information about persons who solicit clients on its behalf will help
it carry out its oversight responsibilities with respect to the full
range of persons who are municipal advisors. For example, as already
stated,\1047\ such information may yield the names of persons who are
engaged in such activities without themselves registering. Moreover, as
stated in the Proposal, the Commission believes that information
requested in Item 4-L is important for discerning possible conflicts of
interest.\1048\ The Commission further notes that the requirement that
a municipal advisor disclose all persons who solicit clients on its
behalf applies equally to all applicants for registration. The
Commission believes that such universal disclosure serves to mitigate
the competitive concerns raised by the commenter.
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\1046\ See SIFMA Letter I.
\1047\ See supra note 1028.
\1048\ See supra note 1038 and accompanying text.
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Item 5: Other Business Activities
The Commission proposed Item 5 to require information about the
applicant's other business activities. The Commission received no
comments regarding Item 5 and is adopting Item 5 substantially as
proposed, with minor modifications as discussed below.
As proposed and adopted, Item 5 requires applicants to indicate
whether they are actively engaged any one of an enumerated list of
businesses.\1049\ In Item 5, as adopted, the applicant is required
additionally to indicate, for each other business in which it is
engaged, whether this is its primary business.\1050\ As proposed and
adopted, Item 5 requires an applicant also to state whether it is
actively engaged in any other business that is not one of those
enumerated above and whether that other business is its primary
business. It also is required to describe the other business on
Schedule D to Form MA. As discussed in the Proposal, this information
will assist the Commission, among other things, in identifying
conflicts of interest for municipal advisors and preparing for
inspections and examinations of municipal advisors. The information
also will assist the Commission and the MSRB in understanding municipal
advisors in the context of their activities for regulatory
purposes.\1051\
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\1049\ Specifically, in Item 5, as adopted, an applicant is
asked whether it is actively engaged in business in, or as, a (1)
broker-dealer, municipal securities dealer or government securities
broker or dealer, (2) registered representative of a broker-dealer,
(3) commodity pool operator (whether registered or exempt from
registration), (4) commodity trading advisor (whether registered or
exempt from registration), (5) futures commission merchant, (6)
major swap participant, (7) major security-based swap participant,
(8) swap dealer, (9) security-based swap dealer, (10) trust company,
(11) real estate broker, dealer, or agent, (12) insurance company,
broker, or agent, (13) banking or thrift institution (including a
separately identifiable department or division of a bank), (14)
investment adviser (including financial planners), (15) attorney or
law firm, (16) accountant or accounting firm, (17) engineer or
engineering firm, or (18) other financial product advisor (and, if
so, to specify the type). Minor differences in this multiple choice
list from the list, as proposed, are that engineer is now included,
in addition to engineering firm (as in Item 6 as proposed and
adopted), and swap dealer and security-based swap dealer are now two
distinct categories.
\1050\ Although this specific question was not included in the
proposed form, the Commission notes that in the next subpart of Item
5, as proposed, if the applicant identifies any other businesses in
which it is engaged that are not included in the list of choices
described above, it is further asked whether this is its primary
business. See infra note 1051.
\1051\ See Proposal, 76 FR 844.
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Item 6: Financial Industry and Other Activities of Associated Persons
\1052\
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\1052\ The title of Item 6, which, as proposed, was ``Financial
Industry Affiliations of Associated Persons,'' has been changed in
Form MA as adopted to better reflect the range of activities that
the item concerns--all of which may be a source of conflict of
interest for the municipal advisor--and to avoid any possible
confusion that could be caused by the use of the term
``affiliations'' in the title.
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The Commission proposed Item 6 to require an applicant to disclose
financial industry affiliations of its associated persons. The
Commission received several comments on Item 6, as discussed
below.\1053\ The Commission has carefully considered these comments and
is adopting Item 6 and the related information it requires on Schedule
D of Form MA largely as proposed. Some modifications have been made,
however, and these are discussed below.
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\1053\ See infra notes 1064-1070.
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Item 6, as proposed and adopted, requires an applicant to provide
information about its associated persons \1054\ that are engaged in
[[Page 67549]]
activities other than those that relate to their association with the
applicant. As discussed in the Proposal, Item 6 lists twenty activities
that an associated person may engage in, some of which are not listed
in Item 5 as other activities in which the applicant itself may be
engaged.\1055\ The collection of this information is designed to gather
more complete information about the associated persons of a municipal
advisor who are actually providing advice or are controlling the firm
and help better inform the Commission's regulatory and examination
programs.\1056\
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\1054\ Section 15B(e)(7) provides that the term ``person
associated with a municipal advisor'' or ``associated person of an
advisor'' means ``(A) any partner, officer, director, or branch
manager of such municipal advisor (or any person occupying a similar
status or performing similar functions); (B) any other employee of
such municipal advisor who is engaged in the management, direction,
supervision, or performance of any activities relating to the
provision of advice to or on behalf of a municipal entity or
obligated person with respect to municipal financial products or the
issuance of municipal securities; and (C) any person directly or
indirectly controlling, controlled by, or under common control with
such municipal advisor.'' 15 U.S.C. 78o-4(e)(7). For purposes of
Form MA, the Glossary defines ``associated person or associated
person of a municipal advisor'' to have the same meaning as in
Exchange Act Section 15B(e)(7) (15 U.S.C. 78o-4(e)(7)), but to
exclude employees that are solely clerical or administrative.
Specifically, the Glossary defines these terms to mean: ``Any
partner, officer, director, or branch manager of a municipal advisor
(or any person occupying a similar status or performing similar
functions); any other employee of such municipal advisor who is
engaged in the management, direction, supervision, or performance of
any municipal advisory activities relating to the provision of
advice to or on behalf of a municipal entity or obligated person
with respect to municipal financial products or the issuance of
municipal securities (other than employees who are performing solely
clerical, administrative, support or other similar functions); and
any person directly or indirectly controlling, controlled by, or
under common control with such municipal advisor.''
\1055\ Specifically, under Item 6, a municipal advisor is
required to disclose whether any of its associated persons is: (1) A
broker-dealer, municipal securities dealer, or government securities
broker or dealer; (2) an investment company (including a mutual
fund), (3) an investment adviser (including a financial planner),
(4) a swap dealer, (5) a security-based swap dealer, (6) a major
swap participant, (7) a major security-based swap participant, (8) a
commodity pool operator (whether registered or exempt from
registration), (9) a commodity trading advisor (whether registered
or exempt from registration), (10) a futures commission merchant,
(11) a banking or thrift institution, (12) a trust company, (13) an
accountant or accounting firm, (14) an attorney or law firm, (15) an
insurance company or agency, (16) a pension consultant, (17) a real
estate broker or dealer, (18) a sponsor or syndicator of limited
partnerships, (19) an engineer or engineering firm, or (20) another
municipal advisor. See supra note 1049. As adopted, Item 6 includes
an instruction that if an associated person is involved in more than
one of these activities, each such activity must be reported.
\1056\ See Proposal, 76 FR 844.
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As proposed, Item 6 of Form MA required an applicant to list, on
related Section 6 of Schedule D of the form, all associated persons,
including foreign affiliates, that are broker-dealers, municipal
securities dealers, or government securities brokers or dealers, or
investment advisers, municipal advisors, registered swap dealers,
banking or thrift institutions, or trust companies. As adopted, the
form requires the applicant also to list in Section 6 of Schedule D all
associated persons that are investment companies (including mutual
funds), major swap participants and major security-based swap
participants, commodity pool operators, commodity trading advisors,
futures commission merchants, accountants or accounting firms,
attorneys or law firms, insurance companies or agencies, pension
consultants, real estate brokers or dealers, sponsors or syndicators of
limited partnerships, or engineers or engineering firms.\1057\
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\1057\ In other words, the form, as adopted, requires the
applicant to list in Section 6 of Schedule D the names of all
associated persons in any of the categories in Item 6. See supra
note 1055 and accompanying text.
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Section 6 of Schedule D, as proposed and adopted, also requires the
applicant to provide the legal and primary business names of each
associated person listed, as well as to indicate the category or
categories listed in Item 6 of the main form of which the associated
person is a member. Finally, Section 6 of Schedule D, as proposed and
adopted, requires the applicant to indicate whether it controls, or is
controlled by, the associated person; whether the two are under common
control; \1058\ and/or whether the associated person is registered with
a foreign financial regulatory authority and, if so, the country and
name in English of that authority.\1059\
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\1058\ See infra note 1080 for the definition of ``control'' as
used in the municipal advisor registration forms.
\1059\ To the extent that Item 6, as adopted, requires
associated persons in additional categories to be listed in Schedule
D, as discussed supra note 1057, the requirements to provide in
Schedule D the legal and primary business names of each associated
person, indicate the category or categories to which the person
belongs, and respond to the questions relating to control now apply
to persons in those additional categories. Similarly, the questions
relating to registration with foreign financial regulatory
authorities, as discussed further below, apply to associated persons
in all the categories listed in Item 6, as adopted.
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As discussed above, the purpose of Item 6 is to elicit more
complete information about who is providing advice or controlling the
applicant. Moreover, as new Rule 15Bc4-1 underscores, all associated
persons of municipal advisors are subject to censure.\1060\ Thus, after
further consideration, the Commission believes that requiring the
applicant municipal advisory firm to identify associated persons that
are involved in any of the above categories--each of which involves
activities that can impact or be impacted by the advice the firm
provides--will better assist the Commission in gaining an understanding
of possible conflicts of interest or wrongful influence in the
municipal advisor's activities. The Commission notes that Form MA
elsewhere already reflects a concern that involvement in a wider range
of areas can lead to conflict of interest, as Item 5 of the form
requires disclosure of whether the applicant firm itself is involved in
any of 17 enumerated categories of that Item and must further indicate
whether it acts as any other type of financial product advisor and
specify the type.\1061\
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\1060\ See infra Section III.A.9.
\1061\ Item 6, as adopted, also asks the applicant to state the
total number of its associated persons that belong to any of the
twenty categories (listed above in note 1055). Because, in Item 6,
as adopted, all such persons must be identified in Schedule D,
tallying the number involves no additional disclosure and will act
as a cross-check to ensure that the information provided is
complete.
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As already noted,\1062\ in conformance with the additions to the
categories of associated persons that must be identified in Item 6,
Section 6 of Schedule D, as adopted, will require disclosure of foreign
registration information with respect to associated persons in twenty
categories. As discussed above, the Commission believes that an
associated person's involvement in any of these categories can impact
or be impacted by the advice the firm provides, and foreign financial
regulatory authorities can be of significant help in tracking such
activity and uncovering possible wrongdoing. An additional change in
Section 6 of Schedule D, as adopted, requires the applicant to provide,
in the case of an associated person registered with a foreign financial
regulatory authority, the relevant registration number. The Commission
believes that, for associated persons that are active in foreign
countries, having the registration number, if any, under foreign
financial regulatory authorities can be particularly helpful in
obtaining information for regulatory and investigative purposes.
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\1062\ See supra note 1059.
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The Commission received several comment letters opposing the extent
of the disclosures required by Item 6 and, on a more general level, all
the disclosures that Form MA requires regarding an applicant's
associated persons.\1063\ One commenter believed that the form requires
``overly extensive disclosure'' regarding affiliates of a municipal
advisor, particularly for a municipal advisor that is a member of a
large affiliated group of institutions.\1064\ These requirements, the
commenter said, would impose ``a vast information-gathering burden on
applicants.'' \1065\ The commenter raised specifically the case of
affiliates that are under common control with a municipal advisor
(``sister affiliates''), whose activities ``may have no connection to
municipal advisory activities, let alone, in the case of financial
institutions with global operations, a nexus or connection to any
[[Page 67550]]
activities in the United States.'' \1066\ The commenter suggested that
disclosures regarding affiliates be limited to affiliates that control
or are controlled by the municipal advisor or ``at a minimum'' to
sister affiliates providing municipal advisory services in the
U.S.\1067\ This commenter also believed that a municipal advisory firm
should not be required to provide information regarding its individual
associated persons (citing the example of employees) on Form MA unless
those persons ``devote a significant amount of time or resources'' to,
or are ``primarily engaged'' in, municipal advisory activities,
particularly if those persons are already registered with a broker-
dealer, investment adviser, municipal securities dealer, commodity
trading advisor or swap dealer.\1068\
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\1063\ See, e.g., Acacia Financial Group Letter; Deloitte
Letter; SIFMA Letter I.
\1064\ SIFMA Letter I.
\1065\ Id.
\1066\ Id.
\1067\ Id. See also infra notes 1119-1120 (related SIFMA
comments regarding disclosure requirements with respect to the
disciplinary history of affiliates and associated persons).
\1068\ See SIFMA Letter I.
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Another commenter believed that requiring disclosures regarding
associated persons performing ``any activities'' relating to advice
could ``impose significant costs'' and ``create a significant burden.''
\1069\ This commenter stated that the Commission should ``establish a
threshold for reporting and updating associated person information in
Form MA''--a certain minimum of hours spent on municipal advisory
activities over a specified time period. The commenter also suggested
that, when personnel from an entity are subcontracted, the entity
itself should not be required to register.\1070\
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\1069\ See Deloitte Letter.
\1070\ See id.
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The Commission notes that, for certain information pertaining to
affiliates, it has determined to limit the required disclosures in Form
MA to information regarding persons that control, or are controlled by,
the municipal advisor (and not persons under common control).\1071\
However, with respect to financial industry and other activities
represented on the list in Item 6, the Commission believes it is
appropriate to extend its information base regarding such activities to
all of a municipal advisor's associated persons (which, by definition,
includes persons under common control with the municipal
advisor).\1072\ For example, the Commission believes that ascertaining
such information may assist the Commission in identifying potential
conflicts of interest.
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\1071\ See also the discussion below regarding Item 8, infra
notes 1079-1088 and accompanying text.
\1072\ See Section 15B(e)(7)(C) of the Exchange Act, which
defines the term ``person associated with a municipal advisor'' or
``associated person of an advisor'' as including ``any person
directly or indirectly controlling, controlled by, or under common
control with such municipal advisor.''
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The ability to discern connections within a large network of
affiliations and other associations that otherwise would not be evident
is particularly important to the Commission for purposes of
enforcement, to enable regulators to detect possible trails of
influence and to widen their potential sources of factual information
relevant to investigations of wrongdoing. The Commission believes that
establishing such an information base is consistent with the Dodd-Frank
Act's amendments to Section 15B of the Act, which explicitly extend the
Commission's regulatory authority (directly and through its oversight
of the MSRB) to associated persons of municipal advisors.\1073\
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\1073\ See, e.g., Section 15B(c)(4) of the Exchange Act
(authority of Commission to censure or place limitations on the
activities or functions of associated persons of municipal
advisors); and Section 15B(b)(2)(A) (authority of MSRB to establish
standards of training, experience, competence, and other
qualifications for associated persons of municipal advisors). See
also Section 15B(a)(2) (application for registration as a municipal
advisor to contain such information and documents concerning
associated persons of municipal advisors as the Commission may
prescribe as necessary or appropriate in the public interest or for
the protection of investors).
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The Commission notes that Item 6 and Section 6 of Schedule D ask
for little more than the names (legal and business) of any associated
persons of the municipal advisor that do business in the specified
fields and, if the associated person is registered with a foreign
financial regulatory authority, the registration number. Otherwise,
Section 6 asks only whether the municipal advisor controls or is
controlled by the associated person or whether the two are under common
control. Such control relationships are directly relevant to
investigations of the municipal advisor.
The Commission believes that, in today's world of organizational
and managerial sophistication and advanced information technology,
including as is pertinent to cross-border affiliations, it should not
be unreasonably difficult for a municipal advisor that finds itself
within a larger family of affiliates, particularly of the size
discussed by commenters, to obtain knowledge of its own place and the
place of others within that family. Given the potential relevance and
importance of such information, as discussed above, to assuring
lawfulness and fairness in the field of municipal advisory services, as
well as in maintaining confidence in the municipal securities markets,
the Commission believes it is appropriate to require municipal advisors
to obtain and provide such information.
With respect to the suggestions that a municipal advisory firm
should not be required to provide information regarding its individual
associated persons unless those persons devote a certain threshold of
time or resources to municipal advisory activities, the Commission
disagrees. In particular, the kind of activity that disclosure relating
to associated persons is intended to bring to light may involve the
kind of significant influence that often is wielded in very short
timeframes of activity, e.g., a short phone call from a partner in the
firm to a key person in a municipal entity ``urging'' the issuance of a
particular offering, or soliciting the municipal entity's investment.
Item 7: Participation or Interest in Municipal Advisory Client or
Solicitee Transactions \1074\
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\1074\ The title of Item 7 has been revised in Form MA, as
adopted, to include ``solicitee'' transactions to better reflect the
information sought in this item. The term ``solicitee'' is defined
in the discussion below and is included in the Glossary of Terms for
the Form MA series as adopted.
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The Commission proposed Item 7 to require information about an
applicant's participation and interest in the transactions of its
municipal advisory clients. The Commission received no comments
referencing Item 7 that are not discussed elsewhere \1075\ and is
adopting Item 7 as proposed.\1076\
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\1075\ As discussed above, the Commission received a general
comment questioning whether useful information could be elicited
from applicants with regard to some required disclosures. See supra
note 984 and accompanying discussion.
\1076\ The Commission notes that, as published in the Proposal,
several of the questions in this item referred explicitly only to
clients of the municipal advisor. It is clear from the context,
however, that these questions were also intended to apply to persons
that the municipal advisor solicits or intends to solicit in the
context of its municipal advisory activities. Item 7, as adopted,
has been modified to explicitly reference such solicitees in
addition to clients in each of these instances.
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As discussed in the Proposal, the purpose of Item 7 is to identify
possible conflicts of interest that the municipal advisor and its
associated persons may have with the municipal advisor's clients and/or
the persons the municipal advisor solicits.\1077\ For example, a
municipal advisor that receives commissions or other payments for sales
of securities to clients may have a conflict of interest with its
clients. This type of practice gives the municipal advisor and its
personnel an incentive to base investment recommendations on the amount
of compensation they will
[[Page 67551]]
receive rather than on the client's best interests.
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\1077\ See Proposal, 76 FR 844.
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Specifically, Item 7 requires an applicant to disclose whether it,
or any of its associated persons, has a proprietary interest in the
securities or other investment or derivative product transactions of
its clients or of persons whom it solicited or intends to solicit
(``solicitees''). These disclosures include whether the applicant buys
securities or other investment or derivative products from, or sells
them to, its clients or solicitees; whether it buys or sells for itself
securities (other than shares of mutual funds) or other investment or
derivative products that it also recommends to such clients or
solicitees; whether it enters into derivative contracts with such
clients or solicitees; or whether it recommends to its clients or
solicitees securities or other investment or derivative products in
which it or any associated person has any proprietary interest (other
than as already disclosed in response to the previous questions).
An applicant is also asked to disclose whether it or its associated
persons recommend purchases of securities or derivative products to
clients or solicitees for which the municipal advisor or its associated
persons serve as underwriter, general or managing partner, or purchaser
representative; recommend purchases or sales of securities or
derivatives to clients or solicitees in which applicant or its
associated person has any other sales interest (other than the receipt
of sales commissions as a broker or registered representative of a
broker-dealer); have certain discretionary authority over transactions
in securities or other investment or derivative products for its
clients or solicitees; and recommend brokers, dealers, or investment
advisers to its clients or solicitees, and, if so, whether those
brokers, dealers, or investment advisers are associated persons of the
municipal advisor. Item 7 also requires the municipal advisor to
disclose whether it or its associated persons give or receive
compensation for municipal advisory client referrals.\1078\
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\1078\ In Item 7, as adopted, the phrase ``in the context of its
municipal activities'' has been deleted in instances where the
intention may not have been clear. For example, Item 7.C, as
proposed, asked: ``Does applicant or any associated person have
discretionary authority to determine the: (1) Securities or other
investment or derivative products to be bought or sold for the
account of a client that it serves or person that it has solicited
or intends to solicit in the context of its municipal advisory
activities.'' The phrase ``in the context of its municipal advisory
activities'' was not intended to limit the question to products
bought or sold in such context, but to limit the kind of
solicitation being referenced. To avoid confusion, it has been
deleted.
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Item 8: Owners, Officers, and Other Control Persons \1079\
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\1079\ The title of this item as proposed was ``Control
Persons.'' It has been changed in Form MA, as adopted, because the
item, among other things, is seeking information about owners to
determine whether such persons are control persons.
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The Commission proposed Item 8 of Form MA to require information
about an applicant's control persons. As discussed below, the
Commission received one comment specifically relating to Item 8. The
Commission carefully considered issues raised by the commenter and is
adopting Item 8 substantially as proposed, with minor modifications
discussed below.
Item 8, as proposed and adopted, asks applicants to identify on
Schedules A and B every person that owns a certain percentage of the
applicant, that directly or indirectly controls the applicant, or that
the applicant directly or indirectly controls.\1080\ An initial
applicant is required to complete Schedules A and B. Schedule C is used
to amend information previously reported on Schedules A and B.
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\1080\ The term ``control'' is defined in the Glossary to mean,
for purposes of the municipal advisor registration forms, ``the
power, directly or indirectly, to direct the management or policies
of a person, whether through ownership of securities, by contract,
or otherwise.'' Further, the Glossary provides that: (a) Each of the
municipal advisor's officers, partners, or directors exercising
executive responsibility (or persons having similar status or
functions) is presumed to control the municipal advisor; (b) a
person is presumed to control a corporation if the person: (i)
Directly or indirectly has the right to vote 25 percent or more of a
class of the corporation's voting securities; or (ii) has the power
to sell or direct the sale of 25 percent or more of a class of the
corporation's voting securities; (c) a person is presumed to control
a partnership if the person has the right to receive upon
dissolution, or has contributed, 25 percent or more of the capital
of the partnership; (d) a person is presumed to control a limited
liability company (``LLC'') if the person: (i) directly or
indirectly has the right to vote 25 percent or more of a class of
the interests of the LLC; (ii) has the right to receive upon
dissolution, or has contributed, 25 percent or more of the capital
of the LLC; or (iii) is an elected manager of the LLC; and (e) a
person is presumed to control a trust if the person is a trustee or
managing agent of the trust. See Glossary.
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Schedule A requires information about the applicant's executive
officers and, for firms, persons that directly own 5% or more of the
applicant.\1081\ Schedule B requests information about persons that
indirectly own 25% or more of the applicant. A clarifying instruction
has been added to Schedule B, as adopted, explaining that, for these
purposes, an ``indirect owner'' includes any owner of 25% or more of
any direct owner listed in Schedule A and any owner of 25% or more of
each such indirect owner going up the chain of ownership. Applicants
are also asked to identify, on Schedule D, any person that controls the
applicant's management or policies if not otherwise identified as an
owner or officer in Schedule A or B. Further information is requested
with respect to control persons that are public reporting companies
under Sections 12 or 15(d) of the Exchange Act.\1082\
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\1081\ As detailed in the form, the 5% criterion varies in its
applicability and does not always mean ownership in the ordinary
sense of the word--depending on whether the applicant is a
corporation, partnership, trust, or limited liability company.
\1082\ Section 8-B of Schedule D to Form MA requires the name
and CIK number of each control person listed on Schedule A, B, C or
Section 8-A of Schedule D.
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For ease of use and clarity, Form MA, as adopted, asks for
information separately on Schedules A-1 and B-1 for owners and control
persons that are business entities and on Schedules A-2 and B-2 for
owners and control persons who are natural persons, as well as (in
Schedule A-2) for executive officers.\1083\ The information sought in
these schedules, however, is the same as in the Proposal, with minor
modifications.\1084\
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\1083\ The guidance provided in the form has been
correspondingly revised to reflect this restructuring. Although
these Schedules, as published in print, display the information
requested in table form, the electronic version of Form MA--which is
the only format in which the form can be completed and submitted--
asks the questions in a series of pop-up boxes and instructions. See
also supra note 1001.
\1084\ In the form, as adopted, in addition to providing
information about other registrations that the control person that
is a firm or organization may have with the Commission, information
about any registration on Form MA-T must also be provided. In
addition, the nature of the control must also be described. If the
control person is a natural person, his or her CIK number, if any,
must be supplied in addition to the other basic information
requested.
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For each business entity listed, the applicant is required to
provide its organization CRD Number, if it has one, or its IRS tax
number, EIN, or, if not a domestic entity, any foreign business number.
For each natural person listed, the applicant is required to provide
the person's individual CRD Number, if any, or the person's social
security number or foreign identity number, as well as date of
birth.\1085\
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\1085\ As noted above, the form, as adopted, makes clear that
social security numbers, foreign identification numbers, and date of
birth will not be publicly disseminated.
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As discussed in the Proposal, the information requested and the
definition of control are consistent with that requested and used by
the Commission in other contexts.\1086\ This
[[Page 67552]]
information will help to inform the Commission's understanding of the
ownership structure of the municipal advisor and who ultimately
controls the municipal advisor. Such information in turn will provide
useful information in preparing for examinations and also in
identifying potential conflicts of interest. The information requested
also will inform the Commission about changes in control of the
municipal advisor.
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\1086\ The requested information and definition of ``control''
are consistent with the information requested of, and definition
used for, investment advisers required to register on Form ADV. See
17 CFR 279.1. See also Proposal, 76 FR 845, note 195 and
accompanying text.
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One commenter, as discussed above with respect to Item 6,\1087\
cited Item 8 and Schedules A, B, C and D as another illustration of the
burden imposed by the reach of Form MA's questions to information about
affiliates. Although Item 8 refers to ``control persons,'' \1088\ the
Commission notes that the disclosure requirements in Item 8 apply only
to ``every person that, directly or indirectly, controls the applicant,
or that the applicant directly or indirectly controls'' and does not
include sister affiliates (although a control relationship in other
contexts is sometimes understood to include two persons under common
control). The very point of registration is that, to be permitted to
register as a municipal advisor, a firm must provide certain basic
information that will enable the Commission to oversee the activities
of, and exercise jurisdictional authority over, those who register. The
Commission notes that Forms BD and ADV require filers to provide
substantially similar information.
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\1087\ SIFMA Letter I, supra note 1065.
\1088\ The definition of ``control'' does not refer to persons
under common control. On the other hand, the definition of
``associated person'' of a municipal advisor does include a person
that is under common control with the municipal advisor.
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Item 9: Disclosure Information and Related DRPs
As discussed in the Proposal, Item 9 requires an applicant to
provide certain information concerning any criminal, regulatory, and
civil judicial actions relating to the applicant or any of its
associated persons \1089\ (collectively referred to hereinafter as
``disciplinary history'').\1090\ If an applicant indicates in Item 9
that there has been a history of such actions involving itself or any
of its associated persons, the applicant must report further
information in the DRPs that comprise Part II of Form MA, which are
described below.\1091\ The Commission received several comments
regarding the disclosures required by Item 9 and its related DRPs,
which are discussed below.\1092\ The Commission is adopting Item 9 with
certain changes. Although, as adopted, Item 9 generally seeks the same
information as in the Proposal, some questions have been more narrowly
tailored and broken down into subparts. These changes and the reasons
for them are detailed below.
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\1089\ See supra note 1054 (discussing the definition of
``person associated with a municipal advisor'' or ``associated
person of a municipal advisor'').
\1090\ However, as discussed further below, the disclosures
regarding criminal actions are limited to the period of the past ten
years.
\1091\ See infra note 1115 and accompanying text.
\1092\ See infra notes 1119-1121 and accompanying text.
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As discussed in the Proposal,\1093\ Section 975(c)(3) of the Dodd-
Frank Act amended Section 15B of the Exchange Act to direct the
Commission, by order, to censure, place limitations on the activities,
functions, or operations of, or suspend for a period not exceeding
twelve months, or revoke the registration of any municipal advisor, if
it finds \1094\ that such municipal advisor has committed or omitted
any act, or is subject to an order or finding, enumerated in
subparagraph (A), (D), (E), (G) or (H) \1095\ of paragraph (4) of
Section 15(b) of the Exchange Act; has been convicted of any offense
specified in Section 15(b)(4)(B) \1096\ of the Exchange Act within ten
years of the commencement of the proceedings under Section 15B(c); or
is enjoined from any action, conduct, or practice specified in Section
15(b)(4)(C) \1097\ of the Exchange Act.\1098\
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\1093\ See Proposal, 76 FR 845.
\1094\ Such findings must be on the record after notice and
opportunity for hearing and include a finding that the particular
disciplinary action is in the public interest. See 15 U.S.C. 78o-
4(c)(2).
\1095\ See 15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H).
\1096\ See 15 U.S.C. 78o(b)(4)(B).
\1097\ See 15 U.S.C. 78o(b)(4)(C).
\1098\ The Commission has the same authority with respect to
municipal securities dealers. See 15 U.S.C. 78o-4(c).
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Generally, Item 9 was designed to elicit information from a
municipal advisor concerning certain of its activities or the
activities of its associated persons that could subject the municipal
advisor to disciplinary action by the Commission under these statutory
provisions. The Commission intends to use this information to determine
whether to approve an application for registration, to decide whether
to institute proceedings to revoke registration, or to place
limitations on an applicant's activities as a municipal advisor. In
addition, the information will also identify potential problem areas on
which to focus examinations.\1099\
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\1099\ See infra Section III.B. (discussing approval or denial
of registration). See also Proposal, 76 FR 846, note 205 and
accompanying text.
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In addition to its value for the Commission's oversight of
municipal advisors, generally, as well as to inform MSRB rulemaking,
the Commission seeks this information because it may indicate that a
municipal advisor is statutorily disqualified from acting as a
municipal advisor.\1100\ Further, this information may be valuable to
municipal entities and obligated persons who engage municipal advisors
and to investors who may purchase securities from offerings in which
municipal advisors have participated, as well as to other regulators.
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\1100\ See infra Section III.B. and Proposal, 76 FR 846, note
206 and accompanying text. See also Section 15B(a)(2) of the
Exchange Act, which directs the Commission to deny registration to
an applicant municipal advisor if, among other things, it finds that
if the applicant was registered, its registration would be subject
to suspension or revocation.
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The information to be disclosed is substantially similar to the
information required to be disclosed in Form BD \1101\ for broker-
dealers and in Form ADV \1102\ for investment advisers.\1103\ In
addition to information sought on Forms BD and ADV with respect to
investment-related activities Form MA also requests parallel
information with respect to municipal advisory activities.
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\1101\ See 17 CFR 249.501.
\1102\ See 17 CFR 279.1.
\1103\ See Proposal, 76 FR 846.
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The requested information is also generally consistent with the
disclosure requirements of the temporary registration form, Form MA-
T.\1104\ However, as discussed in the Proposal, in Form MA-T, the
Commission limited the disciplinary history disclosure requirements to
``associated municipal advisor professionals.'' \1105\ As
[[Page 67553]]
explained in the Proposal, due to the short timeframe between the
passage of the Dodd-Frank Act and the deadline for registration of
municipal advisors on October 1, 2010, the Commission believed it was
appropriate to limit the disclosure requirement to this subgroup of
associated persons, which is limited to persons who are closely
associated with an advisor's municipal advisory activities.\1106\
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\1104\ As discussed in the Proposal, in Form MA-T, the
disclosure required with respect to orders entered against the
municipal advisor by regulatory authorities, and whether any court
has enjoined the municipal advisor or associated person in
connection with investment related activities, are limited to the
past 10 years. See Proposal, 76 FR 846, note 209. On Form MA, the
Commission is not including any time limitation on this disclosure,
as discussed further below.
\1105\ The Commission defined the term ``associated municipal
advisor professional'' in the glossary section of Form MA-T to mean:
(A) any associated person of a municipal advisor primarily engaged
in municipal advisory activities; (B) any associated person of a
municipal advisor who is engaged in the solicitation of municipal
entities or obligated persons; (C) any associated person who is a
supervisor of any persons described in subparagraphs (A) or (B); (D)
any associated person who is a supervisor of any person described in
subparagraph (C) up through and including, the Chief Executive
Officer or similarly situated official designated as responsible for
the day-to-day conduct of the municipal advisor's municipal advisory
activities; and (E) any associated person who is a member of the
executive or management committee of the municipal advisor or a
similarly situated official, if any; and excludes any associated
person whose functions are solely clerical or ministerial. See also
Proposal, 76 FR 846, note 211 and accompanying text.
\1106\ This includes those persons who are primarily engaged in
an advisor's municipal advisory activities, have supervisory
responsibilities over those primarily engaged in municipal advisory
activities, are engaged in day-to-day management of the conduct of
an advisor's municipal advisory activities, or are responsible for
executive management of the advisor. See Temporary Registration Rule
Release, 67 FR 54469. See also Proposal, 76 FR 846, note 212 and
accompanying text.
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In connection with the permanent registration regime, however, the
Commission believes it is appropriate to require in Item 9 that a
municipal advisor disclose the disciplinary history, as applicable, of
all its associated persons, as that term is defined in Exchange Act
Section 15B(e)(7), with the exclusion of employees who perform solely
clerical, administrative, support, or other similar functions.\1107\
The Commission believes that, for purposes of the permanent
registration regime, it is important to collect information about
disciplinary matters for all such associated persons, because, under
the Exchange Act, such matters may form the basis for an action to
suspend or revoke a municipal advisor's registration.\1108\
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\1107\ See supra note 1054.
\1108\ See Section 15B(c)(2) and (c)(4) of the Exchange Act and
Rule 15Bc4-1 thereunder, discussed infra Section III.A.9. of this
release, and Section 15(b)(4) of the Exchange Act. See also
Proposal, 76 FR 847, note 217 and accompanying text.
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Specifically, Item 9 as proposed and adopted requires disclosure of
disciplinary history with respect to any partner, officer, director or
branch manager of a municipal advisor, and any other employee who is
engaged in the management, direction, supervision, or performance of
any municipal advisory activities relating to the provision of advice
to or on behalf of a municipal entity or obligated person with respect
to municipal financial products or the issuance of municipal
securities; and any person that directly or indirectly controls, is
controlled by, or under common control with the municipal advisor. As a
result, Form MA will capture information with respect to employees that
engage in municipal advisory activities, even if that is not their
primary activity. Form MA, in contrast to temporary Form MA-T, also
requires disclosure with respect to controlling persons and other
affiliates of the municipal advisor.
As proposed and adopted, Item 9 asks whether the applicant or any
associated person has, in the last ten years, been convicted of any
felony, or pled guilty or nolo contendere to any charge of a felony in
a domestic, foreign, or military court, or charged with any felony.
Item 9 further asks whether the applicant or any associated person has
been convicted of any misdemeanor or pled guilty or nolo contendere in
a domestic, foreign, or military court to any charge of a misdemeanor
in a case involving municipal advisor-related business,\1109\
investments or an investment-related business, or any fraud, false
statements, or omissions, wrongful taking of property, bribery,
perjury, forgery, counterfeiting, extortion or a conspiracy to commit
any of these offenses, or charged with any misdemeanor of the type
described above.\1110\ With respect to charges alone, an applicant must
respond only with respect to charges that are currently pending.
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\1109\ The term ``municipal advisor-related'' is defined as
``[c]onduct that pertains to municipal advisory activities
(including, but not limited to, acting as, or being an associated
person of, a municipal advisor).'' See Glossary.
\1110\ The disclosures relating to felonies, in Form MA as in
Form BD, concern felonies of any kind, and are not limited to
felonies relating to municipal advisor-related and investment-
related business.
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A clarification has been added in Item 9, as adopted, regarding the
provision that disclosure of an event in the Criminal Action Disclosure
section is not required if the date of the event was more than ten
years ago. The applicant is instructed that, for purposes of
calculating the ten-year period, the date of an event is the date that
the final order, judgment, or decree was entered, or the date that any
rights of appeal from preliminary orders, judgments, or decrees lapsed.
This instruction provides a clear-cut guideline by requiring any past
cases to be resolved with finality before the ten-year period of no
criminal history can begin. The Commission notes that this defining
line has been set forth explicitly in other contexts.\1111\
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\1111\ See, e.g., Item 11 of Form ADV.
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In the Regulatory Action disclosure section of Item 9, Form MA as
proposed and adopted asks for information regarding whether the SEC or
the CFTC has ever: found the municipal advisor or any associated person
to have made a false statement or omission; found the municipal advisor
or any associated person to have been involved in a violation of its
regulations or statutes; found the municipal advisor or any associated
person to have been a cause of a municipal advisor- or investment-
related business having its authorization to do business denied,
suspended, revoked, or restricted; entered an order against the
municipal advisor or any associated person in connection with municipal
advisor- or investment-related activity; or imposed a civil money
penalty on the municipal advisor or any associated person, or ordered
the municipal advisor or any associated person to cease and desist from
any activity. Item 9 of the form also asks for similar information with
respect to other federal regulatory agencies, any state regulatory
agency, or any foreign financial regulatory authority.
Item 9 further asks for information regarding whether any SRO or
commodity exchange ever found the municipal advisor or any associated
person to have made a false statement or omission; found the municipal
advisor or any associated person to have been involved in a violation
of its rules (other than a violation designated as a ``minor rule
violation'' under a plan approved by the SEC); found the municipal
advisor or any associated person to have been the cause of a municipal
advisor- or investment-related business having its authorization to do
business denied, suspended, revoked, or restricted; or disciplined the
municipal advisor or any associated person by expelling or suspending
it from membership, barring or suspending its association with other
members, or otherwise restricting its activities. It also asks whether
the municipal advisor or its associated persons have had authorization
to do business or to act as an attorney, accountant or federal
contractor revoked or suspended.
The Civil Judicial Disclosure section of Item 9, as proposed, asks
whether any domestic or foreign court has ever (a) enjoined the
applicant or any associated person in connection with any municipal
advisor-related or investment-related activity; (b) found that the
applicant or any associated person was involved in a violation of any
municipal advisor- or investment-related activity; or (c) dismissed a
municipal advisor- or investment-related civil action brought against
the applicant or an associated person by a state or foreign financial
regulatory authority. Form MA, as adopted, retains the same questions,
although the latter
[[Page 67554]]
question has been revised to explicitly include actions brought by U.S.
jurisdictions other than states.\1112\
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\1112\ The Commission notes that the question, as proposed,
relates to actions in ``any domestic or foreign court.'' The
Commission believes this phrase implicitly includes courts in U.S.
jurisdictions other than states, but is making this explicit to
clarify its intent. If an action was brought and dismissed in a U.S.
jurisdiction other than a state or a foreign jurisdiction, the
information requested is no less pertinent to regulators and
investors.
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As already indicated, the Criminal Action Disclosure section of
Form MA as proposed and adopted requires disclosure of events that
occurred within the last ten years.\1113\ With respect to Regulatory
and Civil Judicial Actions, the form as proposed and adopted places no
time limit on how far back in time events must be disclosed. The
applicability of these disclosure requirements to any event in the past
is consistent with the disclosure reporting requirements on Form BD,
adopted pursuant to Section 15(b)(1) of the Exchange Act,\1114\ with
one exception. In Form BD, the requirement to disclose any civil
judicial injunctions is limited to the past ten years. In contrast, the
Commission proposed its corresponding question in Form MA regarding
past civil injunctions without limiting the disclosure requirement to
the past ten years. The Commission received no comment on this
disclosure requirement and is adopting it as proposed.
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\1113\ As is the case with respect to brokers and dealers
pursuant to Section 15(b)(4) of the Exchange Act (15 U.S.C.
78o(b)(4)), Section 15B(c)(2) of the Exchange Act (15 U.S.C. 78o-
4(c)(2)), as amended by the Dodd-Frank Act, limits the Commission's
ability to impose sanctions on municipal advisors for convictions of
felonies and misdemeanors to convictions occurring within ten years
preceding the filing of any application for registration.
\1114\ See Proposal, 76 FR 846.
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As mentioned above, Form MA includes three separate kinds of DRPs
to report information, as relevant, relating to criminal, regulatory,
and civil actions involving the municipal advisor or its associated
persons reported in Item 9.\1115\ The Commission is adopting each of
these DRPs as proposed. Some modifications have been made, however, and
these are discussed below.
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\1115\ An applicant is required to complete a separate DRP of
the relevant kind for each event or proceeding in which the
applicant itself or any of its associated persons was involved, but
the same event or proceeding may be reported for more than one
person or entity using one DRP.
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Generally, each DRP requires detailed information about the
reported action, such as the court where the charges were filed and
when, a description of the charge and the circumstances relating to it
(in the case of criminal actions); the authority that initiated the
action and a description of the allegations and the product-type (in
the case of regulatory actions); or the initiator of the court action,
the relief sought, and the product type (in the case of civil judicial
actions). Applicants are also required to indicate the status of the
charge or action, including resolution details as appropriate. As
discussed in the Proposal and consistent with the limitations set forth
in Section 15(b)(4)(B) \1116\ of the Exchange Act,\1117\ however,
information on the Criminal Action DRP is limited to matters within the
last ten years.
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\1116\ 15 U.S.C. 78o(b)(4)(B). See also 15 U.S.C. 78o-4(c)(2).
\1117\ See Proposal, 76 FR 847.
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The Commission believes that it is important to collect the
information required by the DRPs in addition to the basic disclosures
in Item 9 to further the aims described above regarding the information
required in Item 9: to assist it in deciding whether to grant or
institute proceedings to deny an application for registration or to
revoke a registration; to manage the Commission's regulatory and
examination programs; to make such information available to the MSRB;
and to obtain information that can be of value to municipal entities
engaging the services of municipal advisors and to investors who may
purchase securities from offerings in which municipal advisors have
participated, as well as to other regulators.\1118\
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\1118\ See Proposal, 76 FR 847.
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One commenter expressed concerns about the ``vast information-
gathering burden on applicants'' imposed by Item 9.\1119\ The commenter
indicated that its concerns, which focused on the requirement to
collect information regarding sister affiliates of a municipal advisor,
applied ``particularly in the light of the required disciplinary
history disclosures.'' \1120\ This commenter observed that Form ADV,
upon which Form MA is based, does not require disclosure of a sister
affiliate's disciplinary history. Another commenter stated that
``[s]ome entities, such as banks, broker-dealers and investment
advisers, may have many branches, and branch managers, that have
nothing to do with the entity's municipal advisory business'' and urged
that Form MA be amended to require disciplinary history ``only with
respect to branch managers of branches where a municipal advisory
business is conducted.'' \1121\
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\1119\ See SIFMA Letter I. See also supra notes 1065 and 1087.
\1120\ See SIFMA Letter I.
\1121\ See ABA Letter.
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In considering these comments, the Commission notes that Section
15B of the Exchange Act assigns the Commission oversight and
disciplinary responsibilities with respect to all associated persons of
a municipal advisor, a category that includes sister affiliates and
branches. Moreover, as discussed elsewhere in this release,\1122\ the
Commission is clarifying with new Rule 15Bc4-1 that associated persons
of municipal advisors are subject to censure, limitations on their
activities, suspension, or being barred from being associated. As
explained above, with regard to the value of obtaining information
regarding financial industry and related activities of associated
persons, the Commission believes that the ability to discern
connections within a large network of affiliations and other
associations is important for investigations of wrongdoing. The ability
to gain, through disclosure requirements, a base of knowledge that
includes actions of past wrongdoing is all the more important for these
purposes.
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\1122\ See infra Section III.A.9.
---------------------------------------------------------------------------
Regarding the comment concerning the burden of obtaining
information about sister affiliates, the Commission notes that Form
ADV, too, requests certain information regarding an investment
adviser's sister affiliates--specifically, business information--as the
commenter acknowledged. Moreover, as the commenter also acknowledged,
Form ADV requests the disciplinary history of the investment adviser
and all of its ``advisory affiliates'' (emphasis added)--i.e., all
current employees, all officers, partners or directors, and all persons
directly or indirectly controlling or controlled by the investment
adviser. Given that a municipal advisor is in any case required to
gather certain facts about its sister affiliates' business activities,
the Commission believes that it is appropriate to request the added
information about any disciplinary history of these affiliates,
particularly in view of its potential value to regulators for purposes
of investigation and enforcement discussed above.
The DRPs associated with the disclosures in Item 9 are being
adopted substantially as proposed. However, as discussed below, some
additional disclosure requirements and other revisions have been
included in the DRPs, as adopted.\1123\
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\1123\ Many of the same or similar revisions have also been made
to the DRPs of Form MA-I, including those other than the Criminal,
Regulatory, and Civil Judicial Action DRPs of that form, and a
discussion of all of them will not be repeated in the section on
Form MA-I below.
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[[Page 67555]]
Generally in all the DRPs, as proposed, when an amendment was filed
seeking to remove a previously-filed DRP, the applicant was asked for
the reason. Some, but not all of the DRPs, gave the option of checking
a box indicating that the DRP was filed in error. Some, but not all of
the DRPs, additionally asked for an explanation of the circumstances
that gave rise to the error. For the sake of consistency and to provide
regulators, municipal entities, and others with important detail, all
the DRPs, as adopted, have been revised to include these elements.
Also, in the Criminal Action DRP, an additional option is given to
indicate why the DRP was filed an error. The new option is that the
event or proceeding occurred more than ten years ago.\1124\
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\1124\ See supra note 1116 and accompanying text.
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As proposed, if a DRP pertains to an associated person of the
municipal advisor, the DRP asks whether that person is registered with
the Commission. In the DRPs, as adopted, if the associated person is
registered, the registration number must be provided.\1125\ The
Commission believes that, if an applicant for registration with the
Commission has an associated person that is otherwise registered with
the Commission, such information is valuable for cross-referencing and
enforcement and other regulatory purposes and providing it should not
constitute an undue burden.\1126\
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\1125\ In all the DRPs, as adopted, if an applicant indicates
that the DRP concerns one or more associated persons, the form asks
how many. Because the names of all such associated persons must be
identified in the DRP in any case, tallying the number involves no
additional disclosure and will act as a cross-check to ensure that
the information provided is complete.
\1126\ On the other hand, the requirement to name the employer
of an associated person when the activity occurred that led to an
action has been eliminated.
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Each DRP, as proposed, asked if the municipal advisor or associated
person whom the DRP concerned was registered through the IARD or CRD
system or the municipal advisor was previously registered on Form MA-T,
whether the advisor or associated person previously filed a DRP (with
Form ADV, BD, or U4) or the advisor filed disclosure on Form MA-T
regarding the same event. The adopted version of each DRP now asks
whether an accurate and up-to-date DRP containing the information
regarding the applicant or associated person required by the DRP is
already on file in the IARD or CRD system (with a Form ADV, BD, or U4)
or in the SEC's EDGAR system (with a Form MA or Form MA-I), and, if so,
to specify the type of filing and provide specific information
regarding the name of the filer, the CRD Number (where relevant), the
date, and disclosure or accession number of the relevant other
form.\1127\ As discussed above,\1128\ the ability to incorporate by
reference any required information about the disciplinary history of an
applicant or associated person from a DRP that already has been filed
relieves the regulatory burden on applicants who can do so. At the same
time, however, sufficient information about where the information is
filed is necessary for regulators, municipal entities, and investors to
be able to access it with reasonable ease.
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\1127\ The DRPs, as adopted, do not provide the option of
indicating that the information is already on file in a Form MA-T,
as Form MA-T does not require the disclosures required in the DRPs.
\1128\ See supra note 995 and accompanying text.
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As proposed, some of the DRPs, where relevant, asked for the name
of the federal, military, state or foreign court where a case was
formally brought or appealed. In the DRPs, as adopted, an applicant is
presented with a list of types of courts from which to choose and must
specifically check the type of court in which the case was
brought.\1129\ In addition, ``international court'' and ``other'' have
been added to the choices (and, if the latter is checked, the applicant
must specify the type) and the street address and postal code of the
court will now need to be provided in addition to the city or county
and state or country. Requests for information in all the DRPs
regarding courts and other panels have been made consistent to require
the name of the case (in addition to the docket number, as proposed).
The Commission believes that these additions will enable regulators,
municipal entities, and investors to more easily locate information
that may be relevant to them and, if need be, address further
inquiries. The Commission further believes that complete responses to
the questions in the DRPs, as proposed, would have supplied most of
this same information.\1130\
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\1129\ In the electronic form, the applicant must make a
selection and thus cannot avoid answering the question specifically.
\1130\ As proposed, the DRP asked the applicant to describe
details of the event in narrative form, and to, among other things,
``include charge(s)/charge Description(s), and for each charge
provide: (1) Number of counts, (2) felony or misdemeanor, [and the]
(3) plea for each charge'' and ``provide a brief summary of
circumstances leading to the charge(s) as well as the disposition.''
The proposed version separately required the applicant to
``[i]nclude, for each charge, (a) Disposition Type (e.g., convicted,
acquitted, dismissed, pretrial, etc.), (b) Date, (c) Sentence/
Penalty, (d) Duration (if sentence-suspension, probation, etc., (e)
Start Date of Penalty, (f) Penalty/Fine Amount, and (g) Date Paid.''
It also required an applicant to provide ``a brief summary of
circumstances leading to the charge(s) as well as the disposition''
and to include ``the relevant dates when the conduct which was the
subject of the charge(s) occurred.'' The Commission also notes that
the Criminal Action DRP of Form MA-I, both as proposed and adopted,
asks for information about amended or reduced criminal charges.
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For the same reason, similar changes have been introduced into the
DRPs regarding regulatory adjudications and civil judicial actions.
Where the proposed Regulatory Action DRP asked the filer to indicate
whether a regulatory proceeding was initiated by the SEC, another
federal authority, state, SRO, or foreign authority, the forms as
adopted add, as choices, the CFTC, a federal banking agency, the
National Credit Union Administration, or other regulator or authority
that the applicant must specify. In addition, the applicant must now
indicate, as applicable, the name of the administrative proceeding,
commission or agency hearing, or other regulatory proceeding or forum
in which the action was brought and the street address and postal code
of the location where the case was heard. Specific choices added with
respect to who initiated a Civil Judicial Action include the CFTC,
another federal authority (which the applicant must specify), and a
municipal advisory firm.
As proposed, not all the DRPs contained instructions to the
applicant regarding the language to be used in naming or describing the
charges brought in a foreign jurisdiction. As adopted, the forms
consistently require the applicant to provide all the information
requested in English. The Commission believes that this requirement is
appropriate in an application for U.S. registration designed to obtain
information on behalf of U.S. regulators, municipal entities, and
investors.
As proposed, in the Criminal Action DRP, in a case where criminal
charges were brought against a firm or organization over which the
applicant or associated person had control, the applicant was required
to indicate whether the firm or organization was engaged in a municipal
advisor-related business. In the DRP, as adopted, the question has been
revised to ask, in addition, whether the firm or organization was
engaged in an investment-related business.\1131\ Because of the close
relationship between investment-related business and municipal advisory
activities, the Commission believes that it is important for
regulators, municipal entities, and
[[Page 67556]]
investors in municipal securities to have this information.
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\1131\ In the form, as proposed, the applicant would have been
required to indicate only whether the firm or organization was in
municipal advisor-related business.
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The instructions in the Criminal Action DRP on how to report an
event or proceeding have been revised in the form as adopted.\1132\ No
substantive changes have been introduced in the reporting requirements.
The revisions have been made solely for purposes of clarity. The
adopted version of the instructions states: ``Use this DRP to report
all charges, including multiple counts of the same charge, arising out
of the same event and filed in one criminal action. The same DRP may be
used for more than one person with respect to the same event or
proceeding. Separate criminal actions arising out of the same event,
and unrelated criminal actions, must be reported on separate DRPs.''
The Commission believes that the revised instructions, which are
similar to instructions that appear in the DRPs for Forms BD and ADV,
will help assure that the disciplinary information provided in response
can be easily understood.
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\1132\ In the Criminal Action DRP, as proposed, the applicant
was instructed: ``Use a separate DRP for each event of proceeding.
The same event or proceeding may be reported for more than one
person or entity using one DRP . . . Multiple counts of the same
charge arising out of the same event(s) should be reported on the
same DRP. Use this DRP to report all charges arising out of the same
event. Unrelated criminal actions, including separate cases arising
out of the same event, must be reported on separate DRPs. One event
may result in more than one affirmative answer to the [questions
asked earlier in the DRP].''
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An instruction has been added to the Criminal Action DRP advising
applicants that applicable court documents must be attached to, and
filed with, the DRP if not previously submitted.\1133\
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\1133\ This instruction, which was included in the proposed
Criminal Action DRPs for Form MA-I, was not included in the proposed
Criminal Action DRP for Form MA. The Commission notes that Form BD
also requires applicable court documents to be attached to the
Criminal Action DRP in that form.
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In the Criminal Action DRP, as proposed, an applicant was not
required specifically to indicate whether the original criminal charge
was amended or reduced. As adopted, the DRP asks for this information
and for the relevant date. The Commission believes that the clearer
picture of the disciplinary history that will emerge when this
information is supplied should assist regulators, municipal entities,
and investors in assessing the credentials and background of the
municipal advisor and its associated persons.
In the Criminal Action DRP, as proposed, an applicant was not
required to state, if the case was on appeal, to whom it was appealed
and the date of the appeal. As adopted, the DRP now requires these
disclosures.\1134\
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\1134\ The Commission notes that the Regulatory and Civil
Judicial Action DRPs, when proposed, already required similar
information regarding appeals.
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The Criminal Action DRP, as proposed, asked for information
generally about the disposition of the relevant action, in narrative
form, and to include details concerning any sentence or penalty
imposed, its start date, and its duration, and the amount and date of
payment.\1135\ As adopted, the form requires the applicant to choose
from among 16 types of disposition of a case (or to check ``other,''
and specify the other), and to further identify any other type of
disposition. Choices are also provided to describe specifically the
disposition of any appeal.\1136\ The DRP, as adopted, further asks
specifically whether any incarceration was imposed in connection with
the action, and, if so, the duration, the start and end dates, and any
concurrent sentences.\1137\ It also asks, in question-by-question
format, whether any portion of a monetary penalty was reduced or
suspended, whether it has been paid in full, and, if not, how much
remains unpaid. The Commission believes that these revisions will help
ensure that the description of the disposition is complete.
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\1135\ See supra note 1130.
\1136\ These choices are: affirmed; vacated and returned for
further action; or vacated/final. An applicant may also respond
``other,'' in which case the other type of disposition must be
specified.
\1137\ The DRP, as adopted, also asks specifically whether any
sentence or any other penalty is ordered, and, if so, to list each
type, giving the examples of prison, jail, probation, community
service, counseling, education, or other (which must be specified).
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As proposed, the Regulatory Action DRP required the applicant to
check off any of 14 types of ``principal sanctions'' \1138\ in the case
(or to check ``other,'' and specify the other type), and to further
identify any other sanctions. As adopted, the DRP does not
differentiate between principal sanctions and any other kind of
sanction, but adds more types to the list in addition to requiring the
applicant to identify any others. This, too, will help ensure that the
filer provides appropriate detail, thereby enabling interested parties
to better assess the credentials and background of the applicant and
its associated persons.
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\1138\ The DRP, as adopted, clarifies that the question refers
to the sanctions sought.
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Similarly--and for the same reason--the Civil Judicial Action DRP
no longer differentiates between ``principal relief'' sought and other
relief, and provides a longer list of possible sanctions or relief
sought from among which the applicant must select in addition to
identifying any other sanctions or relief sought.
The questions in the Regulatory and Civil Judicial Action DRPs
regarding how a case was resolved, like the questions in the Criminal
Action DRP regarding disposition, have been revised in the DRPs, as
adopted, to be more specific and to offer more choices from among which
an applicant must select, for the same reason as in the Criminal Action
DRP. The Commission believes that these revisions will help ensure that
the description of the disposition is complete. More possible answers
are provided from among which the applicant must choose to describe
specifically the type of resolution that resulted (acceptance, waiver,
and consent, settlement, dismissal, judgment rendered, etc.) and
choices are now given regarding how any appeal was resolved.
Similarly, more choices are presented to describe any sanctions
that were ordered in the relevant Regulatory or Civil Judicial
Action.\1139\ In addition, questions are broken out into separate
sections regarding the details of three specific types of sanctions
and/or conditions of sanctions: (a) Bars, injunctions, and suspensions;
(b) requalifications (by examination, retraining, or other process);
and (c) monetary sanctions.\1140\
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\1139\ For example, the choices in the Regulatory Action DRP, as
proposed, were: monetary/fine; revocation/expulsion/denial; censure;
disgorgement/restitution; cease and desist/injunction; bar;
suspension; and other (which must be specified). The choices added
in the adopted version include: civil and administrative penalties/
fines; expulsion; prohibition; reprimand; rescission;
requalification; revocation; and undertaking.
\1140\ For example, in the Regulatory and Civil Judicial Action
DRPs, as proposed, the applicant was asked broadly to describe, in
narrative form: ``Sanction detail: if suspended, enjoined or barred,
provide duration including start date and capacities affected
(General Securities Principal, Financial Operations Principal,
etc.). If requalification by exam/retraining was a condition of the
sanction, provide length of time given to requalify/retrain, type of
exam required and whether condition has been satisfied. If
disposition resulted in a fine, penalty, restitution, disgorgement
or monetary compensation, provide total amount, portion levied
against the applicant or an associated person, date paid and if any
portion of penalty was waived.''
By contrast, in the DRPs as adopted, similar information is
requested in question-by-question format in each of the separate
sections described above. Questions relating to bars, injunctions,
and suspensions are further subdivided into a separate subsection
for each, and the questions distinguish between temporary and
permanent bars. The applicant is also instructed to report any
additional details if one or more bars, injunctions, or suspensions
were imposed with regard to different activities and the terms
specify different time periods, and a similar instruction is
included with regard to requalifications. Details similar to those
specified in the Criminal Action DRP, as adopted, see supra notes
1135-1137 and accompanying text, are also requested.
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[[Page 67557]]
As proposed, the Regulatory and Civil Judicial Action DRPs asked
the applicant to provide a brief summary of details relating to the
action's status with relevant terms, conditions, and dates. As adopted,
the DRPs specifically ask whether any limitations or restrictions are
in effect while the case is pending or on appeal, as applicable. For
pending cases, the DRPs also ask for the date that notice or other
process was served.\1141\ Here, too, the Commission believes that
specifying these details as required elements will serve to ensure that
the applicant's description is complete.
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\1141\ As previously mentioned, the DRPs, as proposed, already
requested the date of any appeal. See supra text accompanying note
1134.
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The Civil Judicial Action DRP, as proposed, did not ask for the
full name of the defendant or ask whether the applicant is a named
defendant. As adopted, the DRP requires this information, and, if the
applicant is not a named defendant, further requires a description of
how the action involves the defendant. This information should help
interested parties more easily determine the role of the applicant or
associated person in the civil judicial action as part of their
assessment of the applicant.
The DRPs, as adopted, now ask for various minor additional
disclosures reflecting a level of detail generally similar to the
disclosures discussed above, which the Commission believes should serve
to enhance the usefulness of the information to regulators and the
benefit it will have for municipal entities and the investing public
without unreasonably burdening applicants for registration.\1142\
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\1142\ Some examples, when an applicant is asked to check the
type of product involved in a case, more choices are included in the
list of possibilities than in the proposed version. When the
resolution of a case is an order, the applicant is asked whether it
is a final order based on violations of any laws or regulations that
prohibit fraudulent or deceptive conduct. Several changes were made
so that if one or more DRPs asks a follow-up question when a certain
response is given, other DRPs are consistent and ask the same
follow-up question. Thus, each time an applicant selects more than
one resolution of a case as having occurred or if the choice that
the applicant has selected does not adequately summarize the
resolution, the applicant must provide an explanation. Each time an
applicant indicates that a relevant date provided is not exact, an
explanation is required. See also infra note 1147. In addition,
throughout the DRPs, instructions have been revised to offer more
clarity on how to file a DRP or when a separate DRP must be filed
regarding the same event. See also supra note 968.
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Item 10: Small Businesses
As described further in Section IX below, the Commission is
required by the Regulatory Flexibility Act (``RFA'') \1143\ to consider
the effect of its regulations on small entities. The Commission's rules
do not define ``small business'' or ``small organization'' for purposes
of municipal advisors. As discussed in the Proposal, the Small Business
Administration (``SBA'') defines small business for purposes of
entities that provide financial investment and related activities as a
business that had annual receipts of less than $7 million during the
preceding fiscal year and is not affiliated with any person that is not
a small business or small organization.\1144\ The Commission proposed
to use the SBA's definition of small business to define municipal
advisors that are small entities for purposes of the RFA.\1145\ This
definition will remain unchanged in the rules as adopted.
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\1143\ 5 U.S.C. 601 et seq.
\1144\ See 13 CFR 121.201. See also Proposal, 76 FR 848, note
222 and accompanying text.
\1145\ See Proposal, 76 FR 848.
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The Commission proposed Item 10 of Form MA to enable it to
determine how many applicants meet the SBA's definition of ``small
business'' or ``small organization'' as applied to municipal advisors.
Thus, Item 10 requires each applicant to disclose whether it had annual
receipts of less than $7 million during its most recent fiscal year (or
during the time it has been in business, if it has not completed its
first fiscal year in business). Item 10 also requires each applicant to
disclose whether any business or organization with which it is
affiliated had annual receipts of more than $7 million in its most
recent fiscal year (or during the time it has been in business, if it
has not completed its first fiscal year in business).
The Commission received no comments on the information requested by
Item 10 and is adopting this item as proposed.\1146\
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\1146\ Several commenters did raise issues with respect to the
impact that the new registration requirements could have, generally,
on small businesses. See, e.g., supra note 986, and see also supra
note 980. Such concerns are addressed in Section IX below.
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Technical and Other Changes
In addition to the modifications discussed above, a number of non-
substantive, technical and clarifying changes have been made to Form
MA, its schedules and the DRPs as adopted.\1147\ Further, some of the
multi-pronged questions have been broken down into separate parts to
make the form clearer and more user-friendly.\1148\ The Commission has
also made certain additional changes to correct inadvertent omissions
in the form, as proposed.\1149\
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\1147\ For example, new guidance is included on Form MA, as
adopted, that reminds applicants that they must supply supporting
documents where applicable, and that Form MA-NR must be included for
non-residents. Filers are also advised that false statements or
omissions may result in administrative or civil actions, in addition
to the other legal consequences mentioned in the Proposal.
Instructions have been included regarding non-US telephone and fax
numbers. References to U.S. state jurisdictions have been amended to
consistently include other types of U.S. jurisdictions, and the
choices on the forms, accordingly, include such jurisdictions by
name. See also supra note 968.
\1148\ For example, the questions in the DRPs regarding
associated persons are divided into separate sections for firms and
organizations, on the one hand, and natural persons on the other.
Many of the questions now present applicants with a series of
choices that they can check off. Some questions are renumbered, and
some subsections have been given titles where there were none in the
proposed version.
\1149\ For example, the Criminal Action DRP requires that if the
applicant is amending a previously filed DRP pertaining to an
associated person because it was filed in error, the applicant is
required to explain the circumstances. The Proposal inadvertently
omitted a requirement to explain the circumstances when the error
pertained to the applicant itself. The Regulatory and Civil Judicial
Action DRPs as previously proposed and now adopted require an
explanation in both cases.
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Execution Page
Form MA includes an Execution Page that an authorized person of the
municipal advisor filing the form is required to sign electronically
before the form can be submitted.\1150\ The Commission received no
comments regarding the Execution Page, other than on the self-
certification contained therein. For reasons discussed below, the
Commission is removing the self-certification section of the Execution
Page in Form MA but otherwise is adopting the Execution Page
substantially as proposed.\1151\
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\1150\ See Proposal, 76 FR 849. As proposed, the Execution Page
(except for the self-certification section) is similar in purpose to
the Execution Page of Form ADV (see 17 CFR 279.1), but deletes
references to state registration, bonding requirements and other
inapplicable components, and will require a non-resident municipal
advisor to execute a separate form (Form MA-NR) to designate agent
for service of process. See infra Section III.A.6.
\1151\ The description immediately below relates to the
Execution Page as adopted. Discussion of the removal of the self-
certification section follows.
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An authorized person signs the form by typing his or her name and
submitting the form on behalf of the municipal advisor. The authorized
person is required to sign one of two different Execution Pages,
depending on whether the municipal advisor is resident in the United
States or a ``non-resident'' municipal advisor. In either case, by
signing the Execution Page, the authorized person states that he or she
is signing Form MA on behalf, and with the authority, of the municipal
advisor and affirms that the information in Form MA is true and
correct.
[[Page 67558]]
The Execution Page for both resident and non-resident municipal
advisors requires the signatory to certify that the books and records
of the municipal advisor will be preserved and available for inspection
and to authorize any person with custody of the books and records to
make them available to federal representatives. On the Execution Page
for non-resident municipal advisors, the signatory, in signing the
form, also states that the municipal advisor agrees that it will
provide to the Commission, at its own expense, copies of all books and
records that the municipal advisor is required to maintain by law. As
discussed in the Proposal, the Commission believes that, before
granting registration to a domestic or non-resident municipal advisor,
it is appropriate to obtain assurance that such person has taken the
necessary steps to be in the position to provide the Commission with
prompt access to its books and records and to be subject to inspection
and examination by the Commission.\1152\
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\1152\ See Proposal, 76 FR 848.
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On the Execution Page for domestic municipal advisors, the
signatory also states that it appoints certain officials as agents for
service of process in the state where the advisor maintains its
principal office or place of business. Specifically, a domestic
municipal advisor appoints the Secretary of State or other legally
designated officer in the state where it maintains its principal office
and place of business. As discussed in the Proposal, this appointment
allows private parties and the Commission to bring actions against the
municipal advisor by delivering necessary papers to the appointed
agent.\1153\ The agent is able to receive any process, pleadings, or
other papers in any action that arises out of or relates to or concerns
municipal advisory activities of the municipal advisor. The agent also
is able to receive service for investigation and administrative
proceedings.
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\1153\ See id. Appointment of agent for service of process for
non-resident municipal advisors is discussed further below. See
infra Section III.A.6 (discussing Form MA-NR).
---------------------------------------------------------------------------
On the Execution Page for non-resident municipal advisors, the
signatory on behalf of the registrant also states that an opinion of
counsel is attached as an exhibit to Form MA and that the municipal
advisor can, as a matter of law, provide the Commission with access to
the books and records of the municipal advisor, as required by law, and
that the municipal advisor can, as a matter of law, submit to
inspection and examination by the Commission.\1154\ As discussed in the
Proposal, each jurisdiction may have a different legal framework with
respect to its laws (e.g., privacy laws) that may limit or restrict the
Commission's ability to receive information from a municipal
advisor.\1155\ Providing an opinion of counsel that a municipal advisor
can provide access to its books and records and can be subject to
inspection and examination allows the Commission to better evaluate a
municipal advisor's ability to meet the requirements of registration
and ongoing supervision.\1156\ Failure to provide an opinion of counsel
may be a basis for the Commission to deny an application for
registration.\1157\
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\1154\ The opinion of counsel is required by Rule 15Ba1-6, as
adopted. General Instruction 13 (General Instruction 14 as proposed)
now states that the non-resident municipal advisor filing Form MA
must attach the opinion as an exhibit to the Execution Page.
\1155\ The Execution Page for non-resident municipal advisors,
as adopted, however, does not require the opinion of counsel to
state that the municipal advisor is able, as a matter of law, to
submit specifically to ``onsite'' inspection.
\1156\ See Proposal, 76 FR 848.
\1157\ See Section 15B(a)(2), providing that a municipal advisor
applying for registration must file with the Commission an
application for registration in such form and containing such
information and documents concerning such municipal advisor as the
Commission, by rule, may prescribe as necessary or appropriate in
the public interest or for the protection of investors. Thus,
failure to provide an opinion of counsel, as required, is a basis
under the statute for the Commission to conclude that the
requirements of Section 15B(a)(2) are not satisfied.
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As proposed, Form MA required the authorized person of a municipal
advisor completing the Execution Page to certify separately on behalf
of the municipal advisor that it and every natural person associated
with it had met, or within any applicable required timeframes would
meet, such standards of training, experience, and competence, and such
other qualifications, including testing, for a municipal advisor and
natural persons associated with it, required by the Commission, the
MSRB, or any other relevant SRO. Under the Proposal, the authorized
person, on behalf of the municipal advisor also would have been
required to certify that the municipal advisor had conducted an initial
or annual review, as applicable, of the municipal advisor's business,
and had reasonably determined that the municipal advisor: (a) could
carry out the activities described in the items that are checked in
Item 4-K (Applicant's Business Relating to Municipal Securities) of
Form MA; \1158\ (b) could comply with all applicable regulatory
obligations; and (c) had met such regulatory obligations during the
last year (or during such shorter period if the application was an
initial application for registration). For these purposes, such
applicable regulatory obligations were to include obligations under the
federal securities laws and rules promulgated thereunder and applicable
rules promulgated by the MSRB, or any other relevant SRO.
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\1158\ Under the Proposal, factors to be considered in
determining whether a municipal advisor can carry out the described
activities included, but were not limited to, whether the municipal
advisor has, with respect to the described activities, the
appropriate technology systems and equipment; the appropriate
financial resources; adequate staffing with appropriate skill sets,
training, and expertise; and adequate facilities, such as office
space, as appropriate. See Proposal, 76 FR 849.
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Under the Proposal, the authorized person also would have been
required to certify that the municipal advisor had documented this
review process and would maintain all documents relating to the review
in accordance with Rule 15Ba1-7 under the Exchange Act.\1159\ Such
certification would have been required in conjunction with the filing
of an initial application for registration as a municipal advisor and
annually thereafter.\1160\
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\1159\ Proposed Rule 15Ba1-7 also required municipal advisory
firms to make and keep a record of the initial or annual review, as
applicable, conducted by the municipal advisory firm of its business
in connection with its self-certification on Form MA. Because the
Commission is not adopting a self-certification requirement, the
Commission is also not adopting this corresponding books and records
requirement. See infra note 1344.
\1160\ See proposed Rule 15Ba1-4(e). The rule required the
annual self-certification to be filed by municipal advisory firms
within 90 days of the end of the municipal advisor's fiscal year, or
within 90 days of the end of the calendar year for municipal
advisors that are sole proprietors.
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The Commission received one comment letter opposing the proposed
self-certification requirement.\1161\ The commenter provided that self-
certification should not be required and noted that similar
certifications are not
[[Page 67559]]
required with Form BD and Form ADV.\1162\ The commenter also asserted
that requiring a municipal advisory firm to conduct an annual review of
its business and determine that it can carry out its municipal advisory
activities, including requiring the applicant to document the review
process, would be costly, burdensome, and confusing. Further, the
commenter noted that the Commission and the MSRB have yet to propose
standards that are the subject of the certification. Accordingly, the
commenter believed that, without such standards or related guidance, it
is premature for prospective advisors to even comment. The commenter
added that a municipal advisor would be unsure as to how to conduct the
review, which may lead to unnecessary expense and exposure to liability
(since the certification would be ``reports'' and therefore subject the
municipal advisor to criminal liability). The commenter suggested that,
if the Commission's interest is in ensuring competence of a municipal
advisor, a better approach would be to create an MSRB examination
process with qualifications clearly defined by the MSRB.
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\1161\ Further, the Commission received two comment letters
that, although did not object to the proposed self-certification
requirement, related to the Commission's request for comment on an
alternative to self-certification. See infra notes 1164 and 1165.
The Commission also received many letters commenting, in the context
of opposing the Commission's proposal to exclude appointed members
of the governing body of a municipal entity from its interpretation
of ``employee of a municipal entity,'' that the cost to comply with
``reporting, record keeping, and certification requirements'' and
the related continuing education requirements and training, would
take away from the board members' full-time jobs and families, and
that such costs were unjustified. See, e.g., letter from Susan N.
Kelly, Senior Vice President of Policy Analysis and General Counsel,
and Diane Moody, Director, Statistical Analysis, American Public
Power Association, dated February 22, 2011; Nick Costanzo, Vice
President Strategic, Financial, and Management Services, City of El
Paso, Texas, dated February 22, 2011; and letter from Ben Gorzell,
Chief Financial Officer and Michael D. Bernard, City Attorney, City
of San Antonio, dated February 18, 2011.
\1162\ See SIFMA Letter I.
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After careful consideration of the comment received, the Commission
is not requiring self-certification in Form MA, as adopted. As the
commenter notes, Forms BD and ADV, on which Form MA is based, do not
require self-certification. Further, as pointed out by the commenter,
the MSRB has yet to propose standards that are the subject of the
certification. Accordingly, at this time, the Commission does not
believe that self-certification should be required of municipal
advisors.
In response to the Commission's request for comment regarding an
independent third party review and whether the Commission should
mandate a minimum level of review as an alternative to the self-
certification requirements,\1163\ the Commission received two letters.
The two commenters did not object to the self-certification requirement
but did oppose any third-party review or audit.\1164\ Both commenters
assert that such a review would impose unnecessary costs, and that
Commission review would be sufficient. One of these commenters also
opposed any minimum review standards.\1165\ In concurrence with these
commenters, the Commission has determined at this time not to establish
a minimal level of review or require review by an independent third-
party.
---------------------------------------------------------------------------
\1163\ See Proposal, 76 FR 850.
\1164\ See NAIPFA Letter I and Joy Howard WM Financial
Strategies Letter. The Commission also received a third comment
letter opposing, as overly-burdensome, any independent party review
either prior to the filing of an initial application or on an annual
or periodic basis thereafter. See Public FA Letter.
\1165\ See NAIPFA Letter I.
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c. Information Requested in Form MA-I
As discussed above, although Form MA-I was proposed as a
registration form for all natural person municipal advisors, Rule15Ba1-
3, as adopted, exempts a natural person municipal advisor from the
requirement to register, if such person is associated with a registered
municipal advisory firm and engages in municipal advisory activities
solely on behalf of a registered firm.\1166\ Rule 15Ba1-2(b)(1), as
adopted, requires a municipal advisory firm, on behalf of which an
associated natural person engages in municipal advisory activities, to
file Form MA-I with the Commission with respect to each such
individual. Pursuant to Rule 15Ba1-2(b)(2), as adopted, a natural
person who is a sole proprietor must file Form MA-I in addition to
filing an application to register as a municipal advisor on Form MA.
---------------------------------------------------------------------------
\1166\ See supra note 938.
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The Commission received more than 30 comment letters relating to
proposed Form MA-I. About 25 of these letters concerned the impact that
the registration requirement for natural person municipal advisors
would have if applied to volunteer members of public boards, in view of
the fact that registration would require completing a Form MA-I.
Because, under the rules as adopted, volunteer public board members
would generally not be required to register, the Commission believes
the concerns of these commenters have been otherwise addressed.\1167\
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\1167\ See supra Section III.A.1.c.i. See also infra note 1187.
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The remaining comment letters concerned the nature and scope of the
information requested by Form MA-I and are discussed below.\1168\ After
considering the comments, the Commission is adopting Form MA-I
substantially as proposed. However, the Commission is modifying Form
MA-I to require a few additional points of information and is also
eliminating some data requests. In addition, some of the language in
Form MA-I has been modified to reflect the fact that, under the rules,
as adopted, the form is no longer an application for registration and,
except in the case of sole proprietors, will be completed by a firm,
rather than by the individual with respect to whom the form is being
filed.\1169\
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\1168\ In addition, the Commission notes that a number of the
comments received regarding proposed Form MA apply similarly to
proposed Form MA-I. Examples include concerns about the duplicative
nature of seeking information already gathered through other
registration programs; confidentiality issues; and compliance
burdens. These comments have been discussed in the section on Form
MA above and are not further addressed here. See, e.g., supra notes
991-992 and 995-996 and accompanying text and the Commission's
response in the discussion following these comments.
\1169\ For example, the form will now no longer refer to the
individual as ``the applicant'' or ``the registrant.''
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As a general matter, the information requested on Form MA-I, as
proposed and adopted, is similar to information requested on FINRA's
Form U4.\1170\ Some questions on Form U4 have been adapted for purposes
of Form MA-I to relate specifically to municipal advisors. Other
questions have been omitted as not necessary or appropriate in the
municipal advisor context.
---------------------------------------------------------------------------
\1170\ See Form U4, supra note 992. See also Proposal, 76 FR
851, note 237 and accompanying text.
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One commenter argued that information sought by Form MA-I largely
duplicates information relating to associated persons sought by Form
MA.\1171\ The Commission acknowledges that a municipal advisory firm
that registers by filing Form MA must already provide information on
that form concerning the disciplinary history of each of its associated
persons, including employees providing advice on behalf of the firm.
However, there is very little overlap between the information required
by Form MA and that required by Form MA-I that cannot be incorporated
by reference.\1172\ Moreover, Form MA-I elicits additional information
that would not be provided by the firm as part of its Form MA. For
[[Page 67560]]
example, Form MA-I requires the following information about each
relevant natural person that would not be found on his or her firm's
Form MA if engaged in municipal advisory activities on behalf of a firm
or on his or her own Form MA if acting as a sole proprietor: social
security number of the individual; other names of the individual; his
or her residential and employment history; the offices of the firm
where the individual is located and from which he or she is supervised;
the names of any other municipal advisory firms that employ the
individual; and any other businesses in which the individual is
engaged.\1173\
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\1171\ See SIFMA Letter I. The concern over duplication of
information was raised as an argument against separate registration
of individuals on Form MA-I. The rules, as adopted, no longer
require registration for natural person municipal advisors acting
solely as employees of a municipal advisory firm. However, because
Form MA-I is being retained in the rules, as adopted, the Commission
believes it important to address concerns that the information
required by Form MA-I is redundant of information already available
from the firm's Form MA.
\1172\ Regarding incorporation by reference, see supra notes
994-995 and accompanying text. The Commission acknowledges that a
municipal advisory firm must already provide information on Form MA
concerning the disciplinary history of each of its associated
persons--a term that includes employees who are ``engaged in the
management, direction, supervision, or performance of any activities
relating to the provision of advice to or on behalf of a municipal
entity or obligated person with respect to municipal financial
products or the issuance of municipal securities.'' However, to the
extent that the disciplinary history of an individual is reported in
Form MA, it can be incorporated by reference in Form MA-I.
\1173\ As noted above, the Commission believes that, in fact,
there is very little overlap between the information required by
Form MA and that required by Form MA-I. For example, when Form MA
asks for the number of employees of the firm engaged in municipal
advisory activities, such information might be gleaned, technically,
by counting all the Form MA-I submissions filed by the firm, but is
not readily apparent. When Form MA asks for the names of all
associated persons of the firm and requires the firm to indicate
whether each such person is active in certain municipal advisory
related fields, the firm is not required to state whether the
associated person is an employee and it does not capture information
on other businesses in which the person is engaged. The requirement
to list the firm's registration information (which, of course, is
available on the firm's Form MA) on the Form MA-I of the individual
will better serve to identify the individual and locate his or her
firm when only the database of individuals reported on Form MA-I is
being searched, separately from the database in which information
obtained in Forms MA is collected. Similarly, the responses to Form
MA's questions in Item 9, in which a firm must disclose whether any
of its associated persons has had a disciplinary history, do not
shed light on the history of any particular employee unless the
relevant DRPs are consulted. Moreover, the disciplinary history
questions in Item 6 of Form MA-I, other than those concerning
criminal, regulatory, and civil judicial actions, do not appear in
Form MA.
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Therefore, in completing a Form MA-I for each employee, the
Commission believes that a firm will be supplementing, rather than
duplicating, the information provided on Form MA. For this reason, as
proposed and adopted, the rules require a sole proprietor to complete
and file both forms.
Among the comments received by the Commission, specifically with
regard to Form MA-I, as has already been discussed, several commenters
questioned the need for separate registration forms for firms and their
individual employees.\1174\ One commenter believed that separate
registration of individuals on Form MA-I could ``lead to confusion''
and ``inadvertent inconsistencies in the information.'' \1175\ Another
commenter believed that processing the estimated 21,800 forms expected
to be filed would put ``significant strain'' on the Commission.\1176\
In addition to these comments, one commenter suggested that, in lieu of
requiring individuals to register separately with the Commission on
Form MA-I, the Commission could ``work with the MSRB to establish,
through the MSRB, a licensing and registration mechanism for
individuals who are municipal advisors, which would be similar to the
program used to register a broker-dealer's licensed associated persons
with FINRA.'' \1177\ Further, the commenter stated that, if the
Commission believes it is necessary to formally register individuals
(in addition to licensing them), the MSRB could adopt Form U4 and
require it to be filed in connection with granting a license to
individuals who engage in municipal advisory activities on behalf of a
Commission- and MSRB-registered municipal advisory firm.\1178\ The
Commission believes that these comments have been addressed by the
exemption created in the rules, as adopted, for natural persons who
engage in municipal advisory activities solely on behalf of a
registered municipal advisor.\1179\
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\1174\ See Deloitte Letter; JP Morgan Chase Letter; SIFMA Letter
I. Deloitte stated that registration for natural persons should be
eliminated altogether; or that individuals at least be required to
register only as ``registered representatives.'' See also MSRB
Letter I, stating that ``forms relating to individuals at municipal
advisor entities should be viewed as officially submitted by the
municipal advisor entity.''
\1175\ See Deloitte Letter.
\1176\ SIFMA Letter I.
\1177\ Id. SIFMA stated that because the MSRB is already
planning to develop qualification tests for individuals engaged in
municipal advisory activities, ``having only the MSRB, as opposed to
both the SEC and MSRB, involved in the licensing and registration of
individuals would eliminate duplication and reserve the SEC
resources for regulation of municipal advisory firms.''
\1178\ See id. SIFMA added that, because many individual
municipal advisors may also be associated persons of a broker-dealer
or investment adviser, it would better serve the interests of the
public to have a single source of information--on Form U4--about a
licensed individual. It would also be easier for an individual and
his or her employer to ensure that the individual is properly
licensed under all applicable regulatory programs if only a single
form is required to be filed with any applicable regulator. See also
Financial Services Roundtable Letter (advocating use of Form U4 for
individuals).
\1179\ See supra note 938.
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Commenters also expressed concerns regarding the disclosures
required by Form MA-I and the plan to make them publicly
available.\1180\ For example, one commenter believed that some of the
information required in Form MA-I ``could not be disclosed by a law
enforcement agency, such as the individual's detailed criminal
history--which includes arrests that do not result in prosecution or
conviction.'' \1181\ The commenter further believed that ``[g]overnment
disclosure of a compiled criminal history is a criminal offense.''
\1182\
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\1180\ The comments cited in this paragraph appeared in the
context of letters opposing the application of the definition of
municipal advisor to appointed members of public boards, see supra
note 1161, but are treated here separately because of their possible
relevance to any municipal advisor.
\1181\ See letter from Jo Anne Bernal, County Attorney, El Paso
County, Texas.
\1182\ Id.
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The Commission believes that it is consistent with the Exchange Act
to require disclosure of such information in order to permit persons
whom Form MA-I concerns to lawfully engage in municipal advisory
activities.\1183\ Regarding a commenter's concern about government
disclosure of compiled criminal history, the Commission notes that
engaging in municipal advisory activities is voluntary. Persons
engaging in municipal advisory activities are on notice that the
information supplied to the Commission on Form MA and MA-I will not be
kept confidential (except where indicated otherwise). Therefore, if a
person does not wish to disclose his or her criminal history, such
person may choose to not engage in municipal advisory activities. In
addition, the Commission notes that the information requested on Form
MA-I is consistent with comparable provisions in Forms BD and ADV, as
well as Form U4.\1184\
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\1183\ See Section 15B(c)(2) and (4) of the Exchange Act.
\1184\ Except where indicated otherwise, the information
supplied on Forms BD, ADV, and U4 is not kept confidential.
---------------------------------------------------------------------------
One commenter focused on the impact that Form MA-I could have on
bank employees, believing that it would require such information as the
addresses of all offices at which the employee will be physically
located or supervised and noting that it was not uncommon for bank
branch employees such as tellers to work at multiple branch locations
in a geographic region.\1185\ As discussed above, the Commission is
limiting the application of the term investment strategies, providing a
limited exemption for banks, and permitting the registration of
SIDs.\1186\ Due to these changes, few, if any, bank employees of the
type described by the commenter will be engaging in municipal advisory
activities that would require filing of a Form MA-I. For those who are,
the Commission believes that it is as important to obtain this
information as it is with respect to any other natural
[[Page 67561]]
person who is engaged in municipal advisory activities.
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\1185\ Capital One Letter.
\1186\ See supra Sections III.A.1.b.viii.
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The Commission also received comment letters on Form MA-I from many
municipal entities and agencies concerned about the impact of requiring
appointed members of public boards to make the disclosures required by
the form.\1187\ As discussed in Section III.A.1.c.i., the Commission is
exempting all members of the governing body of a municipal entity
(acting in their capacity as such), including appointed members, from
the requirement to register as municipal advisors. Thus, the concerns
of these commenters should be alleviated.
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\1187\ See, e.g., letter from Barry Moline, Executive Director,
Florida Municipal Electric Association, dated February 22, 2011; and
Pennsylvania Public School Employees' Retirement Board Letter.
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Items 1 and 2: Identifying Information and Other Names
Item 1 of Form MA-I is being adopted substantially as proposed,
with minor modifications as discussed below.\1188\ Item 1 requires
certain basic identifying information to be disclosed about any natural
person engaged in municipal advisory activities.\1189\ Although, as
discussed above, certain information about an employee of a firm would
already be available through the firm's Form MA, the individual's Form
MA-I requires more information, including:
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\1188\ No comments were received concerning Item 1.
\1189\ This includes, for example, the individual's full legal
name. It also requires the registration and other identifying
numbers of the individual's firm to be provided directly in the Form
MA-I, to make it easier for regulators, municipal entities and
investors to gather the information they need.
---------------------------------------------------------------------------
the individual's CRD Number, if he or she has one;
the individual's social security number; \1190\
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\1190\ This information will not be made publicly available. As
stated in the Proposal, this information is necessary in connection
with the Commission's enforcement and examination functions pursuant
to Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See
Proposal, 76 FR 851, note 240. See also generally supra note 968.
---------------------------------------------------------------------------
the date of the individual's employment or contract with
the firm;
whether the individual has an independent contractor
relationship with the firm;
the firm's registration status;
all the offices of the firm where the individual may be
physically located and all the offices from which the individual is or
will be supervised; and
whether any of these offices are located in a private
residence.
These elements of Item 1 are being adopted as proposed. With
respect to information about the employee's firm, Item 1, as proposed,
would have required the filer to provide any SEC file and registration
numbers assigned to the firm in any registered capacity and also the
firm's CRD Numbers, if any. To ease the completion of the form, Item 1,
as adopted, requires a filer only to indicate whether the firm is
currently registered as a municipal advisor on a Form MA and, if not,
whether it has filed an application for registration on Form MA. If the
latter, the filing date and the firm's EDGAR CIK number must be
provided.
Item 1, as adopted, additionally requires a filer to provide the
name under which the firm primarily conducts its municipal advisor-
related business, if different from its legal name. It further also
takes into account that an individual may be employed at more than one
municipal advisory firm and requires entry of the relevant information
for each such firm.\1191\ The Commission believes that this additional
information would be useful to the Commission's oversight of the
municipal advisory market, without unreasonably increasing the burdens
upon registrants in completing the form.
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\1191\ The form also asks the filer for the total number of such
firms. This question does not require a filer to research any
further information than indicated above, but it can serve as a
helpful cross-check to the filer as well as to regulators, and is
also a useful number for interested parties who do not need the
additional details.
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As proposed, Item 2 requires a filer to disclose all other names
that the natural person engaged in municipal advisory activities is
using or has been known by since the age of 18, such as nicknames,
aliases, and names before and after marriage. No comments were received
concerning Item 2, and it is being adopted substantially as proposed.
As stated in the Proposal, the Commission believed that the
information sought by Items 1 and 2 would be useful to municipal
entities and obligated persons in exploring the background,
credentials, reliability, and trustworthiness of an individual in the
course of making a decision whether to engage that natural person or
his or her firm as a municipal advisor.\1192\ The same information will
be valuable to regulators in overseeing municipal advisors and
investigating possible instances of wrongdoing.
---------------------------------------------------------------------------
\1192\ See Proposal, 76 FR 851.
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Item 3: Residential History
In Item 3, which is being adopted substantially as proposed,\1193\
Form MA-I requires disclosure of each location where the natural person
engaged in municipal advisory activities has resided for the past five
years, including the time period at each residence.\1194\ Changes in
residence must be reported (via an amendment) as they occur. In
addition, no gaps greater than three months between addresses are
permitted.
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\1193\ No comments were received concerning Item 3, other than
in the general context of concerns that the degree of detail
required by the forms was overly burdensome and, in particular, in
the context of concerns about registration requirements for
appointees to municipal entity boards, which concerns are discussed
elsewhere in this release.
\1194\ Non-substantive, technical, and clarifying changes have
been made to Item 3. See infra note 1237.
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As stated in the Proposal, the Commission believes that the
residential history of a natural person engaged in municipal advisory
activities, like the additional identifying information Form MA-I
seeks, will be useful for municipal entities and other interested
parties in exploring the background, credentials, reliability, and
trustworthiness of the individual and be valuable to regulators in
overseeing municipal advisors and investigating possible instances of
wrongdoing. The information that is required regarding residential
history is similar to the information requested on Form U4.\1195\
---------------------------------------------------------------------------
\1195\ See Proposal, 76 FR 852. As stated in the Proposal, the
Commission does not intend to make the information required by Item
3 publicly available. See id., at 852, note 241. A statement to this
effect has been added to the introduction to Item 3, as adopted.
---------------------------------------------------------------------------
Item 4: Employment History
In Item 4, which is being adopted substantially as proposed,\1196\
Form MA-I requires a listing of the complete employment history of the
natural person engaged in municipal advisory activities for the past
ten years, including full and part-time employment, self-employment,
military service, and homemaking. All statuses during the ten-year
period, such as unemployed, full-time education, extended travel, and
other similar circumstances must be included. In addition, the filer
may not leave a gap longer than three months between entries. As
discussed in the Proposal, the information required is similar to the
information requested on Form U4.\1197\ Such information will help
inform an understanding of an employee's business experience and
provide useful information in preparing for regulatory
examinations.\1198\
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\1196\ No comments were received concerning Item 4, other than
in the general context of concerns that the degree of detail
required by the forms was overly burdensome and, in particular, in
the context of concerns about registration requirements for
appointees to municipal entity boards, which concerns are discussed
elsewhere in this release.
\1197\ The Commission intends to make this information publicly
available.
\1198\ See Proposal, 76 FR 852. Because no separate blanks are
provided for statuses other than employment at a firm or company,
(e.g., military service, homemaking, unemployment, education, or
travel), guidance has been included in Item 4, as adopted,
instructing the filer to enter such statuses in the space provided
for ``Name of Municipal Advisory Firm or Company.'' Regarding non-
substantive, technical, and clarifying changes, generally, see infra
note 1237.
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[[Page 67562]]
Item 5: Other Business
Item 5 of Form MA-I is being adopted substantially as
proposed.\1199\ Item 5 requires information about the individual's
other business activities, if any, in which he or she is currently
engaged, as a proprietor, partner, officer, director, employee,
trustee, agent or otherwise. The form asks for the name of the other
business, its address, whether it is municipal advisor-related and, if
not, the nature of the business in which it is engaged.
---------------------------------------------------------------------------
\1199\ No comments were received concerning Item 5. Only slight
clarifying changes have been made in the wording of this item as
adopted.
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The filer is required to provide the individual's position, title,
or relationship with the other business, the start date of the
relationship, the approximate number of hours per month the individual
devotes to the other business, and a brief description of his or her
duties relating to the other business. As discussed in the Proposal,
the information sought in this section is similar to the information
sought by the equivalent section in Form U4. Such information will help
the Commission understand the other business activities of a natural
person engaged in municipal advisory activities and will help staff
prepare for examinations.\1200\
---------------------------------------------------------------------------
\1200\ See Proposal, 76 FR 853.
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Item 6: Disclosures Relating to Any Criminal Action, Regulatory Action,
Investigation, Civil Judicial Action, Customer Complaint/Arbitration/
Civil Litigation, Termination, Certain Financial Matters, and Judgments
and Liens
Item 6 of Form MA-I, regarding the disciplinary history of the
individual, is being adopted substantially as proposed.\1201\ However,
the Commission has made some modifications to the information sought in
the DRPs, which are discussed below.
---------------------------------------------------------------------------
\1201\ The Commission received no comments specifically relating
to Item 6 in the Proposal.
---------------------------------------------------------------------------
Item 6 of Form MA-I includes three sections that require the same
general types of information regarding an individual's criminal,
regulatory, and civil judicial history, if any, as required regarding
municipal advisory firms in corresponding sections in Form MA,\1202\
although the questions in these sections of Form MA-I differ somewhat
from those in the corresponding sections of Form MA, as will be
discussed below. As in Form MA, certain responses in the criminal,
regulatory, and civil judicial action sections of Form MA-I require
disclosure of complete details of all events or proceedings in DRPs
pertaining to these areas.
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\1202\ See supra Section III.A.2.b.
---------------------------------------------------------------------------
Item 6 of Form MA-I also has five additional disclosure sections
\1203\ relating to an individual, which are also discussed below. Four
of these ask about any investigations, terminations, customer
complaints/arbitration/civil litigation, or judgments/liens relating to
the individual. Each of these four sections has an associated DRP
requiring further detail where applicable. The fifth additional
section, which has no associated DRP, asks for certain financial
disclosures. As discussed in the Proposal, the Commission believes that
additional disclosures in these five areas, which are also required of
individuals associated with broker-dealers and investment advisers on
Form U4, are appropriate to aid municipal entities, obligated persons,
and other members of the public in researching the background of
municipal advisors and to aid regulators in enhancing their oversight
of municipal advisors.\1204\
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\1203\ In the proposed version of Item 6, the question about
investigations appeared at the end of the Regulatory Action section.
In the adopted version, a separate section has been created for this
question (which remains the same) for the sake of clarity, as it
concerns both criminal and regulatory investigations. Form MA-I,
both as proposed and adopted, has a separate DRP that concerns only
investigations reported in this question.
\1204\ See Proposal, 76 FR 853.
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As discussed in the Proposal, the Commission believes that the
additional disclosure items in the DRPs will be helpful to municipal
entities and obligated persons as clients or prospective clients of
municipal advisors.\1205\ The information may also serve as the basis
for granting or instituting proceedings to deny a registration or for
revoking a registration or imposing other sanctions by the Commission
with respect to an individual.\1206\
---------------------------------------------------------------------------
\1205\ See id., at 854.
\1206\ See supra notes 1093-1097 and accompanying text
(discussing grounds for revocation of a municipal advisor's
registration or imposing other sanctions).
---------------------------------------------------------------------------
As a general matter, as was the case with the proposed DRPs of Form
MA, many of the questions in the proposed DRPs of Form MA-I did not ask
for specifics. The Commission believes that, with regard to certain
questions, additional details of the kind requested in the adopted
versions of Form MA's DRPs will help regulators, municipal entities,
and other interested parties more easily research and better assess the
background of the individual that is the subject of the DRP of Form MA-
I.\1207\ Thus, many of the revisions made to the DRPs of Form MA have
also been made to the DRPs of Form MA-I.
---------------------------------------------------------------------------
\1207\ See supra note 1123.
---------------------------------------------------------------------------
Among these are changes in questions relating to: removing a DRP
filed in error; \1208\ incorporation by reference of disclosures
already filed elsewhere; \1209\ names and types of courts, regulatory
authorities and forums and their locations, and parties who initiated
the relevant action; \1210\ how to report an event; \1211\ appeals;
\1212\ disposition of a case and sanctions imposed in criminal cases;
\1213\ sanctions and/or relief sought, type of resolution, and
sanctions ordered in regulatory and civil judicial actions; \1214\ and
other matters.\1215\
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\1208\ See supra text following note 222.
\1209\ See supra notes 1127-1128 and accompanying text.
\1210\ See supra notes 1129-1130 and accompanying and following
text.
\1211\ See supra text accompanying note 1132.
\1212\ See supra note 1134 and accompanying text.
\1213\ See supra notes 1135-1137 and accompanying text.
\1214\ See supra notes 1137-1139 and accompanying text.
\1215\ See supra notes 1140-1142 and accompanying text.
---------------------------------------------------------------------------
The following discussion summarizes Item 6 and its related DRPs as
well as additional revisions made in their adopted versions:
Criminal Action Disclosures
With respect to felonies, Item 6 of Form MA-I--in contrast to the
disclosures required by Item 9-A of Form MA--requires disclosure of:
any past conviction of, or plea of guilty or nolo
contendere to, a felony by the individual, rather than limiting the
disclosure to the past ten years, as in a firm's or solo practitioner's
Form MA;
any charges of felony against the individual in the past,
rather than limiting disclosure to currently pending charges, as in a
firm's or sole proprietor's Form MA; and
any convictions of, or plea of guilty or nolo contendere
to, a felony by an organization based on activities that occurred when
the individual exercised control over the organization--a disclosure
not required in Form MA.
With respect to misdemeanors, while Form MA requires only
disclosures of convictions and pleas concerning an individual looking
back ten years, and requires only disclosures of charges that are
currently pending, Form MA-I requires disclosure of such convictions,
pleas, and charges that occurred at any time in the individual's past.
Misdemeanors, and convictions, pleas,
[[Page 67563]]
and charges of misdemeanor against an organization while the individual
exercised control over the organization are also required to be
disclosed.
These criminal action disclosure requirements regarding individuals
beyond the information required in Form MA, are consistent with the
disclosure requirements on Form U4. In addition, as discussed in the
Proposal, these disclosures provide additional information with respect
to natural persons engaged in municipal advisory activities that will
be useful to the Commission's regulatory and examination programs, and
may be useful to municipal entities and obligated persons who are
clients or prospective clients of the individual or his or her
firm.\1216\
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\1216\ See Proposal, 76 FR 853.
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As proposed and adopted, the Criminal Action DRP of Form MA-I asks
for additional details regarding, among other things: the charges,
number of counts, and the court in which they were brought; status of
the action; details of its disposition and sanctions ordered; and the
date of amended charges, if any. It also provides an option and space
for comment consisting of a brief summary of the circumstances leading
to the charge(s) as well as their current or final disposition.
Certain revisions have been made in the adopted version of the DRP.
For example, in its disclosure requirements concerning the charges, the
DRP, as adopted, asks specifically whether the charge is (a) municipal
advisor-related or (b) investment-related; and, if so, in each case,
(c) what product type it involved.\1217\
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\1217\ The Commission believes that these additional details
contribute to an accurate picture of the individual's disciplinary
history and notes that the same questions are asked in the
equivalent DRP of Form MA, as both proposed and adopted. On the
other hand, specific questions regarding pleas to amended charges
have been removed as unnecessary because the requested information
should be provided in responses to other questions.
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Moreover, as proposed, the DRP required a description, in narrative
form, of details concerning any sentence or penalty imposed, its start
date, and its duration, and the amount and date of payment.\1218\ As
adopted, the DRP asks specifically whether any sentence or any other
penalty is ordered, and requires, if so, a description of whether it
involved prison, jail, probation, community service, counseling,
education, or other. It further asks, in question-by-question format,
for the duration in days, months, and/or years of any incarceration,
the start and end dates, whether any concurrent sentence is to be
served, and, if so, the end date. It also asks, in question-by-question
format, whether any portion of a monetary penalty was reduced or
suspended, whether it has been paid in full, and, if not, how much
remains unpaid. These details should contribute to the clarity of the
picture received by regulators, municipal entities, and investors of
the individual's disciplinary background.
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\1218\ The form provided a blank space for: ``Sentence/Penalty,
Duration (if suspension, probation, etc.), Start Date of Penalty:
(MM/DD/YYYY), End date of Penalty (MM/DD/YYYY); If Monetary penalty/
fine--Amount paid, Date monetary/penalty fine paid: (MM/DD/YYYY), if
not exact, provide explanation.'' It also gave the filer the option
of providing ``a brief summary of circumstances leading to the
charge(s) as well as the current status or final disposition.''
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Finally, the proposed Criminal Action DRP of Form MA-I did not ask
specifically about appeals. In its adopted version, the DRP asks
whether the criminal action was appealed, and, if so, the name and
location of the appeals court, and other details. Choices are also
provided to describe specifically the disposition of any appeal.\1219\
The Commission believes that obtaining this information will better
enable regulators, municipal entities, and other interested parties to
research the complete criminal history of the individual.\1220\
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\1219\ These choices are: affirmed; vacated and returned for
further action; or vacated/final. An applicant may also respond
``other,'' in which case the other type of disposition must be
specified.
\1220\ See also supra note 1134.
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Regulatory Action Disclosures
As proposed and adopted, the questions in Item 6 of Form MA-I
relating to regulatory actions by the Commission or the CFTC, similar
to those in Form U4, require the same disclosures as in proposed Item 9
of Form MA and additional disclosures, including whether the Commission
or the CFTC has ever found the individual to have:
willfully violated, or been unable to comply with, any
provision of the federal securities laws, the Commodity Exchange Act,
and the rules thereunder, and any rule of the MSRB;
willfully aided, abetted, commanded, induced, or procured
the violation by any other person of these laws and rules; and
failed reasonably to supervise another person subject to
his or her supervision with a view to preventing violation of these
laws and rules.
As proposed and adopted, Form MA-I requires the same disclosures as
proposed Form MA with respect to findings and actions relating to the
individual by other federal regulatory agencies, state regulatory
agencies, and foreign financial regulatory authorities. It also
requires additional disclosures, including whether the individual has
ever been subject to a final order of a state securities commission or
similar agency or office; state authority that supervises or examines
banks, savings associations, or credit unions; state insurance
commission; an appropriate federal banking agency; or the National
Credit Union Administration that:
bars the individual from association with an entity
regulated by such commission, agency, authority or office, or from
engaging in the business of securities, insurance, banking, savings
association activities, or credit union activities; or
constitutes a final order based on violations of laws or
regulations that prohibit fraudulent, manipulative, or deceptive
conduct.
In addition to the disclosures required of a municipal advisory
firm regarding its individual associated persons on proposed Form MA,
Form MA-I as proposed and adopted requires disclosure of any finding by
an SRO that the individual:
willfully violated, or is unable to comply with, any
provision of the federal securities laws, the Commodity Exchange Act
and the rules thereunder, or the rules of the MSRB;
willfully aided, abetted, counseled, commanded, induced,
or procured the violation of any of these laws or rules; or
failed reasonably to supervise another person subject to
his or her supervision, with a view to preventing such violations.
Like Form MA, Form MA-I as proposed and adopted also requires
disclosure of whether the individual had an authorization to act as an
attorney, accountant or federal contractor revoked or suspended.
Item 6 of Form MA-I as proposed and adopted also requires
disclosure of whether the individual has been notified in writing that
he or she is currently the subject of a regulatory complaint or
proceeding that could result in any occurrence of the kind that would
trigger any of the disclosure requirements described above relating to
regulatory actions, except the latter occurrence pertaining to
attorneys, accountants, and federal contractors. The form advises that
if the answer is affirmative, the filer must complete a Regulatory
Action DRP.\1221\
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\1221\ Form MA does not include an analogous question and
advisory in its regulatory action section. Item 6, as proposed, also
asked whether the individual has been notified in writing that he or
she is the subject of an investigation that could result in
affirmative answers to questions about criminal and regulatory
actions above in the form. This question has been separated into a
separate section in the form, as adopted, titled ``Investigation
Disclosures.'' See infra note 1223 and accompanying text.
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[[Page 67564]]
The DRP for regulatory action disclosure in Form MA-I, as proposed
and adopted, requires the filer to provide further details, including:
the allegations, which regulatory authority initiated the action, the
kind of product involved, and the sanctions sought; the status of the
action; the disposition or resolution of the action, the sanctions
ordered, and their duration; the registration capacities of the
individual that were affected; whether requalification was a condition
of any sanction reported, and whether it was by exam, retraining, or
other process; the length of time given to requalify; and whether the
requalification condition was satisfied. Disclosures required in the
Regulatory Action DRP, as proposed, also include details of any
monetary sanction imposed, including amount; portion levied against the
individual; any amount waived; payment plan; whether such plan was
current; date paid; and whether the sanction was a civil or
administrative penalty or fine, a monetary penalty other than a fine,
disgorgement, or restitution. Revisions made in the Regulatory Action
DRP, as adopted, include the following:
In the DRP, as proposed, a filer was asked to identify
every type of product involved in the action. As adopted, the DRP
requires the filer to distinguish between principal product types and
other products.
As proposed, the DRP asked about any bars and suspensions
of the individual from his or her registration capacities. As adopted,
the DRP also requires information specific to any injunction that was
imposed as a regulatory sanction.
In addition to the questions about requalification and
exams, as described above, the DRP as adopted asks for a description in
narrative form of any examination, re-training, or other process that
was required as a condition for the person to re-qualify.
The Commission believes that these additional details will provide
regulators, municipal entities, and investors with a more accurate
picture of disciplinary history of the individual.\1222\
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\1222\ Other revisions in the adopted version of the Regulatory
Action DRP: The form now asks for date of service of process in
pending actions; and additional details when one or more injunctions
specify different time periods; and more choices to describe
sanctions sought, how the action was resolved, and sanctions
ordered.
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Disclosure of Investigations \1223\
---------------------------------------------------------------------------
\1223\ See supra note 1203.
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Item 6 of Form MA-I, as proposed and adopted, asks whether the
individual has been notified in writing that he or she is currently the
subject of any investigation that could result in a positive answer to
any of the questions in either the criminal and regulatory sections of
Item 6 described, except the question pertaining to attorneys,
accountants, and federal contractors. If the answer is positive, an
Investigation DRP must be filed.
The Investigation DRP requires details of any such investigation,
including the date the investigation was initiated and whether it was
initiated by an SRO, a foreign financial regulatory authority (giving
the specific jurisdiction), the Commission, other federal agency, or
``other.'' The Investigation DRP requires that the full name of the
authority that initiated the investigation be specified. Space is
provided for the filer to briefly describe the nature of the
investigation, if known; whether it was pending or resolved; and
details of any resolution. Space for optional comment is also provided
to present a brief summary of the circumstances leading to the
investigation and its current status or final disposition and/or
findings.
The Investigation DRP also asks for similar details regarding a
criminal investigation by a federal, military, state, foreign or
international authority or court. Although Item 6 requires a DRP for
criminal investigations, the DRP, as proposed, did not specifically
reference criminal investigations or authorities.
Civil Judicial Action Disclosure
The disclosures required by Form MA-I with respect to certain
matters relating to an individual's civil judicial history are the same
as disclosures required on Form MA. Thus, a filer is required to
disclose on Form MA-I whether the individual:
was ever enjoined by a domestic or foreign court in
connection with any investment-related or municipal advisor-related
activity;
was ever found by a domestic or foreign court to be
involved in a violation of any investment-related or municipal advisor-
related statute or regulation; or
ever had an investment-related or municipal advisor-
related civil action brought against him or her dismissed, pursuant to
a settlement agreement, by a domestic jurisdiction \1224\ or foreign
financial regulatory authority; or
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\1224\ The phrase ``domestic jurisdiction'' is used in the form,
as adopted, in place of ``state'' in the proposed version. The
question of whether such an occurrence is part of the individual's
history was not intended to be limited to state actions.
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was ever named in any such pending action that could
result in a positive answer to the three previous questions.
As discussed in the Proposal, the Commission believes that it is
appropriate to seek information regarding investment-related activities
as well as municipal advisor-related activities due to the significant
similarities that exist between the two advisory functions. Moreover,
such information could serve as a basis to institute proceedings to
deny registration of a municipal advisor or to impose other sanctions
on the municipal advisor's activities.\1225\
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\1225\ See Proposal, 76 FR 854-855.
---------------------------------------------------------------------------
A DRP is required for affirmative responses to questions under this
item. Specifically, the DRP requires, among other things, information
regarding: by whom the court action was initiated; the name of the
party initiating the proceeding; information about the relief sought;
the date on which the action was filed and notice or process was
served; the types of financial products involved; a description of the
allegations relating to the civil action; the current status, including
whether the action is on appeal and details relating to any such
appeal; sanction details; and if the disposition resulted in a fine,
disgorgement, restitution or monetary compensation, information
relating thereto. The DRP also provides the opportunity for a filer to
provide additional comment, including a summary of the circumstances
leading to the action and current status.
The Civil Judicial Action DRP, as adopted, has been modified to ask
whether the individual is a named defendant in the action for which the
DRP is being completed; \1226\ indicate, if an order was issued,
whether the order is a final order based on violations of any laws or
regulations that prohibit fraudulent or deceptive conduct; and indicate
whether a condition of any sanction was requalification by examination,
retraining, or other process. The Commission believes that these
changes generally will add clarity
[[Page 67565]]
for filers in determining the type of information that must be
provided.\1227\
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\1226\ In addition, this DRP, as proposed and adopted, asked for
the full name(s) of the plaintiff(s) in the action. The adopted
version further asks the filer whether all plaintiffs were fully
identified, to make clear that the information needs to be complete.
\1227\ In addition, the list of sanctions or relief that are
specified as required to be reported has more detail in order to
provide more choices for filers. The list of specific possible
resolutions of the action that the applicant can indicate as
applicable has also been expanded. More information also is sought
regarding details of how the action was resolved, and, if resolved
with sanctions, more details about those sanctions.
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Customer Complaints/Arbitration/Civil Litigation
Form MA does not require a municipal advisory firm to disclose any
customer complaints, arbitration matters, and civil litigation
concerning natural person municipal advisors. Form MA-I, however,
requires disclosure of whether an individual engaged in municipal
advisory activities has ever been:
the subject of a complaint initiated by a customer,
whether written or oral, regarding investment-related or municipal
advisor-related matters, which alleged that he or she was involved in
fraud, false statements, omissions, theft, embezzlement, wrongful
taking of property, bribery, forgery, counterfeiting, extortion, and
dishonest, unfair or unethical practices; or
the subject of an arbitration or civil litigation
initiated by a customer regarding investment-related or municipal
advisor-related matters, which alleged that he or she was involved in
fraud, false statements, omissions, theft, embezzlement, wrongful
taking of property, bribery, forgery, counterfeiting, extortion, and
dishonest, unfair or unethical practices.
In the case of a complaint, the filer must indicate whether the
complaint is still pending or was settled. In the case of arbitration
or civil litigation, the filer must indicate whether the arbitration or
litigation is still pending; resulted in an arbitration award or civil
judgment against the individual in any amount; or was settled.
A DRP is required for affirmative responses to questions under this
item. Specifically, the relevant DRP requires the filer to disclose the
customer's name; the customer's state of residence and other states of
residence; the employing firm of the individual when the activities
occurred that led to the complaint, arbitration, CFTC reparation or
civil litigation; and the allegations and a brief summary of events
related to the allegations, including the dates when they occurred; the
product type; and the alleged compensatory damage amount.
For customer complaints, arbitration, CFTC reparation, or civil
litigation in which the individual is not a named party, the DRP
requires disclosure of whether the complaint is oral or written, or
whether it is an arbitration, CFTC reparation or civil litigation (and
the arbitration or reparation forum, docket or case number, and the
filing date); whether the complaint, arbitration, CFTC reparation or
civil litigation is pending, and if not, the status. The DRP requires
disclosure of the status date and the settlement award amount,
including the individual's contribution amount.
If the matter involves an arbitration or CFTC reparation and the
individual is a named respondent, the DRP requires disclosure of the
entity with which the claim was filed; the docket or case number; the
date process was served; whether the arbitration of CFTC reparation is
pending, and if not pending the form of disposition; the disposition
date; and the amount of the monetary award, settlement or reparation
(including the individual's contribution).
If the matter involves a civil litigation in which the individual
is a defendant, the DRP requires disclosure of the court in which the
case was filed; the location of the court; the docket or case number;
the date the complaint was served on or received by the individual;
whether the litigation is still pending; if not still pending the form
of its disposition; the disposition date; the judgment, restitution or
settlement amount, including the individual's contribution amount;
whether the action is currently on appeal, and if so, the date the
appeal was filed, the court in which the appeal was filed, the location
of the court, and the docket or case number for the appeal. The DRP
also provides for optional additional comment, such as a summary of the
circumstances leading to the complaint.
As discussed in the Proposal, these disclosures, too, mirror
similar disclosures in Form U4, provide additional information about
natural persons engaged in municipal advisory activities that may be
useful to municipal entities or obligated persons as clients or
prospective clients, and help the Commission prepare for and plan
examinations.\1228\
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\1228\ See Proposal, 76 FR 855.
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Several revisions have been made to this DRP, as adopted. In the
questions relating to settlements, awards, and monetary judgments, the
DRP now additionally asks whether any portion of the individual's
settlement, award, or monetary judgment amount was waived, and, if so,
how much; and whether the final amount was paid in full, and, if so,
the date. In the section relating to civil litigation, the DRP now
additionally asks whether the individual appealed, and, if so, to which
court, its location, and other details.\1229\
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\1229\ See generally supra notes 1208-1215.
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Termination Disclosure
Unlike Form MA, Form MA-I requires disclosure regarding the
termination of a natural person's employment. Specifically, consistent
with Form U4, Form MA-I asks whether the individual ever voluntarily
resigned or was discharged or permitted to resign after allegations
were made that accused him or her of:
violating investment-related or municipal advisor-related
statutes, regulations, rules, or industry standards of conduct;
fraud or the wrongful taking of property; or
failure to supervise in connection with investment-related
or municipal advisor-related statutes, regulations, rules or industry
standards of conduct.
An affirmative response to the questions described above requires
additional information on a related DRP. Specifically, the DRP requires
disclosure of the name of the firm, the type of termination (whether
discharged, permitted to resign, or voluntary resignation), the
termination date, the allegations, and the product types. The DRP also
provides for optional additional comment, such as a summary of the
circumstances leading to the termination.
As discussed in the Proposal, this disclosure will provide
information that will be useful to the Commission in planning and
preparing for inspections and examinations. The disclosure also will be
useful to the public generally (including municipal entities and
obligated persons, as clients or prospective clients).\1230\
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\1230\ See Proposal, 76 FR 856.
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Financial Disclosures
Item 6 of Form MA-I, as proposed and as adopted, also requires
financial disclosures regarding individuals that are not required to be
made on Form MA by municipal advisory firms, generally, regarding their
associated persons or by sole proprietors regarding themselves.
Specifically, the form asks the filer whether, within the past ten
years:
the individual has made a compromise with creditors, filed
a bankruptcy petition, or been the subject of an involuntary bankruptcy
petition;
an organization controlled by the individual has made a
compromise with
[[Page 67566]]
creditors, filed a bankruptcy petition, or been the subject of an
involuntary bankruptcy petition based upon events that occurred while
he or she exercised control over it; or
a broker or dealer controlled by the individual has been
the subject of an involuntary bankruptcy petition, had a trustee
appointed, or had a direct payment procedure initiated under the
Securities Investor Protection Act based upon events that occurred
while he or she exercised control over it.
In addition, a filer must disclose whether a bonding company ever
denied, paid out on, or revoked a bond for the individual. There is no
DRP associated with these financial disclosures.
Judgment/Lien Disclosure
Item 6 of Form MA-I also asks whether the individual has any
unsatisfied judgments or liens against him or her. An affirmative
response requires additional disclosure on a DRP. Specifically, the
filer must disclose the amount, holder, and type of the judgment or
lien. The form also requires information about the date the judgment or
lien was filed, the court in which the action was brought, the name and
location of the court, the docket or case number,\1231\ whether the
judgment or lien is outstanding, and if the judgment or lien is not
outstanding, the status date and how the matter was resolved. The DRP
also provides for optional comment, such as a brief summary of the
circumstances leading to the action.\1232\
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\1231\ See supra note 968.
\1232\ Modifications made to the DRPs of Form MA-I as adopted
are discussed below under the sub-heading, ``Other Changes in Form
MA-I, As Adopted.''
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As discussed in the Proposal, the Commission believes that the
information that is required, which is consistent with that required by
Form U4, will be useful for its regulatory purposes, including planning
and preparing for inspections and examinations. The Commission also
believes that the information will be useful to the public generally
(including municipal entities and obligated persons, as clients or
prospective clients).\1233\
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\1233\ See Proposal, 76 FR 856.
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Other Changes in Form MA-I, as Adopted
Additional Modifications to the DRPs
The Commission has made the following modifications to the DRPs in
addition to those discussed above. An instruction has been added at the
beginning of all the DRPs, regarding incorporation by reference, to
clarify that the filer of Form MA-I may incorporate information either
from a DRP that was filed by the firm, or from a DRP filed by another
Commission registrant about the individual. This should help filers
avoid the inconvenience and burden of completing the additional
information.
When a DRP is being filed to remove a previously filed DRP, the
filer in each case is asked whether the reason is because the matter
was resolved in the individual's favor, or because the DRP was filed in
error.\1234\ Moreover, as proposed, several of the DRPs asked for the
name of the employing firm of the individual when the relevant event
occurred only if the firm was a municipal advisory firm.\1235\ The
Commission has concluded, however, that the name of the individual's
employer when the activity occurred can be useful to regulators,
municipal entities, and investors regardless of whether the individual
was employed specifically by a municipal advisory firm, and is not
limiting the requested information to such firms. In the case of a
municipal advisory firm employer, however, the DRPs as adopted ask for
the municipal advisor registration number of the firm.\1236\
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\1234\ This question is adapted from a similar question in the
DRPs to Form MA, and should help clarify the status of the applicant
for users of the information.
\1235\ Included are the Regulatory, Civil Judicial Action,
Termination, and Customer Complaint/Arbitration/Civil Litigation
DRPs.
\1236\ The Commission believes this specific information is
particularly relevant for municipal advisor regulation.
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As proposed, the Regulatory and Civil Action DRPs asked the filer
to identify the principal product types that were the subject of the
activity regarding which the formal action involving the individual was
taken. As adopted, they also ask for any other product types. Finally,
the adopted versions of the Regulatory and Civil Action DRPs ask for
the date on which notice or other process was served if the action
being reported on the DRP is still pending.
An Associated Person Who Ceases To Be Engaged in Municipal Advisory
Activities
Because Form MA-I, as adopted, is not a registration form, when a
natural person associated with a registered municipal advisor ceases to
engage in municipal advisory activities on its behalf, Form MA-W--which
is a form designed for withdrawal of registration--will not be
required. Instead, the change must be reported by the registered
municipal advisor that filed the Form MA-I relating to that person.
This is accomplished by filing an amendment to the Form MA-I, which
must be submitted promptly, like any other amendment.
For this purpose, a filer submitting an amendment to Form MA-I can
indicate that the purpose of the amendment is to report that the
individual to whom the form relates is no longer an associated person
of the municipal advisory firm or no longer engages in municipal
advisory activities on its behalf. When submitting an amendment of this
kind, the filer must complete only the portion of the form asking for
the name of the individual, his or her social security number, and CRD
Number if any (Item 1-A) and the Execution Page of the form (Item 7).
Non-Substantive, Technical, and Clarifying Changes
In addition, a number of non-substantive, technical and clarifying
changes have been made to Form MA-I, as adopted, to make the form
clearer and more user-friendly. These include, where applicable, the
same kinds of changes made to Form MA.\1237\
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\1237\ See supra note 1147. Examples of other revisions of this
nature in Form MA-I include: Guidance advising filers to refer to
the Specific Instructions for Form MA-I; corrections of inaccurate
references; clarifying and editorial changes; and additional
instructions to aid the filer that do not introduce any substantive
changes.
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Item 7: Execution of the Form
If Form MA-I is being filed by a municipal advisory firm with
respect to a natural person engaged in municipal advisory activities on
its behalf, the authorized representative of the firm who signs the
Execution Page of Form MA-I must attest to the truth and correctness of
the information provided in the form. He or she must also attest that
the firm has obtained and retained written consent from the individual
that service of any civil action brought by, or notice of any
proceeding before, the SEC or any self-regulatory organization in
connection with the individual's municipal advisory activities may be
given by registered or certified mail to the individual's address given
in Item 1 of the firm.
If Form MA-I is being filed by a natural person municipal advisor
who is a sole proprietor, by signing the Execution Page of Form MA-I,
the filer must represent that the information and statements made in
the form are true and correct. He or she must also consent that service
of process of any civil action or notice of any proceeding before the
Commission or an SRO
[[Page 67567]]
regarding its municipal advisory activities may be given by registered
or certified mail to the address he or she has supplied in Item 1 of
the form.
As proposed, Form MA-I also required its signatory to certify that
he or she has: (a) Sufficient qualifications, training, experience, and
competence to effectively carry out his or her designated functions;
(b) met, or within any applicable required timeframes will meet, such
standards of training, experience, and competence, and such other
qualifications, including testing, for a municipal advisor, required by
the Commission, the MSRB or any other relevant SRO; and (c) the
necessary understanding of, and ability to comply with, all applicable
regulatory obligations.
The Commission received comment letters on the self-certification
requirement in Form MA-I from many municipal entities and agencies
concerned about the impact of requiring appointed members of public
boards to make such certifications. As discussed in Section
III.A.1.c.i., the Commission is exempting all members of the governing
body of a municipal entity (acting in their capacity as such),
including appointed members, from the requirement to register as
municipal advisors. Thus, the Commission believes that the concerns of
these commenters have been addressed. However, one comment received by
the Commission regarding the self-certification requirement in Form MA-
I, as proposed, called the requirement ``problematic.'' \1238\
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\1238\ See SIFMA Letter I.
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In view of the change in the nature of Form MA-I, as adopted,
including who is required to sign the form, the Commission has decided
to eliminate the self-certification requirement in Item 7. Because,
under the rules, as adopted, individuals who engage in municipal
advisory activities on behalf of a registered firm are exempt from
registration, and, with respect to these individuals, the function of
Form MA-I is only to provide information, the self-certification
requirement is no longer a propos. Moreover, as discussed above, the
Commission has determined to remove the self-certification requirement
with respect to firms in Form MA. Thus, Form MA-I, as adopted, will no
longer require self-certification.
3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated With
Registered Municipal Advisors From Registration\1239\
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\1239\ Rule 15Ba1-3, under the Proposal, contained the
requirements for a municipal advisor to withdraw an existing
registration. This provision is being adopted as Rule 15Ba1-4, which
is discussed below.
---------------------------------------------------------------------------
Rule 15Ba1-3, as adopted, exempts certain natural persons from
registration with the Commission as a municipal advisor if the natural
person is associated with a registered municipal advisor and engages in
municipal advisory activities solely on behalf of a registered
municipal advisor. This exemption is discussed above in Section
III.A.2.a.\1240\
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\1240\ See supra notes 938-939 and accompanying text.
---------------------------------------------------------------------------
4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; Form
MA-W
a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration
Proposed Rule 15Ba1-3 provided that notice of withdrawal from
registration as a municipal advisor must be filed on Form MA-W, in
accordance with the instructions to the form, and set forth other
requirements regarding withdrawal of a municipal advisor from
registration. The Commission received one comment letter regarding this
proposed rule which supported the proposed rule.\1241\ The Commission
is adopting Rule 15Ba1-4 as it was set forth in proposed Rule 15Ba1-3,
with certain minor, technical modifications.\1242\ The rule as adopted,
however, only applies to municipal advisors registered on Form MA,
because the Commission is exempting from registration certain natural
persons who are associated persons of a registered municipal advisor
and who engage in municipal advisory activities solely on behalf of a
registered municipal advisor.\1243\
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\1241\ See MSRB Letter I.
\1242\ See Rule 15Ba1-4, as adopted. The modifications are non-
substantive and are limited to updating citations in the rule text
or changing the article ``such'' to the article ``the.''
\1243\ In the Proposal, the Commission proposed to require
natural person municipal advisors to register on proposed Form MA-I
and accordingly proposed that these natural person municipal
advisors would be required to file a Form MA-W to withdraw from
registration with the Commission as a municipal advisor. See
Proposal, 76 FR 850, 857. As discussed in more detail in Section
III.A.2.a. and Section III.A.3., the Commission is adopting an
exemption from registration for certain natural persons and Form MA-
I will not be an application for registration.
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As with Forms MA and MA-I, Form MA-W must be filed electronically
with the Commission.\1244\ Form MA-W also constitutes a ``report'' for
purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c),
78q(a), 78r(a), 78ff(a)) and other applicable provisions of the
Exchange Act.\1245\
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\1244\ See Rule 15Ba1-4(b).
\1245\ See Rule 15Ba1-4(d). As a consequence, it will also be
unlawful for a municipal advisor to willfully make or cause to be
made, a false or misleading statement of a material fact or omit to
state a material fact in Form MA-W.
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Rule 15Ba1-4 also provides that a notice of withdrawal from
registration becomes effective for all matters on the 60\th\ day after
the filing of the Form MA-W. It may also become effective within a
longer time period to which the municipal advisor consents or which the
Commission by order determines as necessary or appropriate in the
public interest or for the protection of investors, or within a shorter
time if the Commission so determines.\1246\
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\1246\ See Rule 15Ba1-4(c).
---------------------------------------------------------------------------
The rule further provides that if a municipal advisor filed a
notice of withdrawal from registration with the Commission at any time
subsequent to the date of issuance of a Commission order instituting
proceedings pursuant to Section 15B(c) of the Exchange Act \1247\ to
censure, place limitations on the activities, functions or operations
of, or suspend or revoke the registration of the municipal advisor or
if, prior to the effective date of the notice of withdrawal, the
Commission institutes such a proceeding or a proceeding to impose terms
and conditions upon the withdrawal, the notice of withdrawal will not
become effective except at the time and upon the terms and conditions
as deemed by the Commission as necessary or appropriate in the public
interest or for the protection of investors.\1248\
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\1247\ 15 U.S.C. 78o-4(c).
\1248\ See Rule 15Ba1-4(c).
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b. Form MA-W
The Commission received one comment letter regarding Form MA-W,
which was generally supportive of the form.\1249\ As discussed in more
detail above,\1250\ the Commission is exempting certain natural persons
from municipal advisor registration. Accordingly, the Commission is
adopting Form MA-W substantially as proposed, but is modifying it
solely to remove all references to individual registration of natural
persons associated with a municipal advisor and engaged in municipal
advisory activities on its behalf and to Form MA-I as an
[[Page 67568]]
application for registration \1251\ and to add an introductory
direction to refer to the General Instructions for the forms in the MA
series before completing Form MA-W. Form MA-W for municipal advisors is
designed to be generally consistent with the requirements of Form ADV-W
for investment advisers withdrawing from registration. First, Form MA-W
requires a municipal advisor to provide identifying information keyed
to the identifying information on, and the SEC file number of, the
municipal advisor's Form MA. A municipal advisor is required to provide
on Form MA-W the name of a principal or employee of the municipal
advisor who is authorized to receive information and respond to
questions about the Form MA-W. Contact information for a municipal
advisor's outside counsel is insufficient.
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\1249\ See MSRB Letter I.
\1250\ See supra note 1243 and supra Section III.A.2.a. and
Section III.A.3.
\1251\ The Commission has removed references in certain
instructions that contemplated individual registration of certain
natural persons on Form MA-I and that designated Form MA-I as a
registration form. Additionally, on the Execution Page, the
Commission has also removed the certification for natural person
municipal advisors other than sole proprietors.
When a natural person for whom a municipal advisory firm filed a
Form MA-I is no longer an associated person or no longer engages in
municipal advisory activities on behalf of the firm, the firm must
file an amendment to the Form MA-I to indicate this change. See
General Instruction 2.d. of the General Instructions and supra
Section III.A.2.c., under sub-heading ``An Associated Person Who
Ceases to be Engaged in Municipal Advisory Activities.''
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A municipal advisor filing to withdraw its registration is required
to indicate on Form MA-W whether it has received any pre-paid fees for
municipal advisory activities that have not been delivered, including
subscription fees for publications, and, if so, to specify the amount.
In addition, the withdrawing municipal advisor is required to indicate
how much money, if any, it has borrowed from clients and has not
repaid. If the municipal advisor responds affirmatively to either
question, it is required to disclose on Schedule W2 to Form MA-W the
nature and amount of its assets and liabilities and its net worth as of
the last day of the month prior to the filing of the Form MA-W.
A municipal advisor that is filing to withdraw its registration is
required to indicate on Form MA-W whether it has assigned any municipal
advisory contracts to another person that engages in municipal advisory
activities, and if so, the municipal advisor is required to list in
Section 4 of Schedule W1 to Form MA-W each person to whom it has
assigned any such municipal advisory contracts and provide the
requested information.
A municipal advisor filing to withdraw its registration also is
required to indicate whether there are any unsatisfied judgments or
liens against it. If the municipal advisor responds affirmatively that
it owes money or has any judgments or liens against it, it is required
to disclose on Schedule W2 to Form MA-W the nature and amount of its
assets and liabilities and its net worth as of the last day of the
month prior to the filing of the Form MA-W.
As discussed in the Proposal, the Commission believes that
requiring such information from a withdrawing municipal advisor is
appropriate for the protection of investors and those persons who do
business with municipal advisors.\1252\ The filing of Form MA-W and the
information contained in the form will provide notice that the
municipal advisor is no longer registered and, therefore, is not able
to engage in municipal advisory activities without violating federal
securities laws.\1253\ Additionally, the information provided will
alert clients and prospective clients to a municipal advisor's
financial stability if the municipal advisor received fees from clients
for services not yet delivered, borrowed any money from clients that
has not been repaid, or has any unsatisfied judgments or liens at the
time of withdrawal because the municipal advisor would be required to
disclose the nature and amount of its assets and liabilities and net
worth on Schedule W2. This information also will help regulators'
investigative and enforcement efforts. Additionally, as noted in the
Proposal, an investment adviser that withdraws from registration must
supply similar information on its Form ADV-W.\1254\
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\1252\ See Proposal, 76 FR 857.
\1253\ See id.
\1254\ See 17 CFR 279.2. See also Proposal, 76 FR 857.
---------------------------------------------------------------------------
As discussed below, Rule 15Ba1-8(c), as adopted, requires a
municipal advisor withdrawing from registration to preserve its books
and records.\1255\ Therefore, a municipal advisor filing a Form MA-W is
required to list the name and address of each person who has or will
have custody or possession of the municipal advisor's books and records
and the location at which such books and records are or will be kept.
In addition, as discussed above, a withdrawing municipal advisor also
is required to identify on Schedule W1 each person to whom it has
assigned any of its contracts. As discussed in the Proposal, the
Commission believes that such a requirement--which also exists for
investment advisers--is important for the protection of participants in
the municipal securities markets.\1256\
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\1255\ See infra Section III.C.
\1256\ See Proposal, 76 FR 857.
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The signatory to the Form MA-W is required to certify, under
penalty of perjury, that the information and statements made in the
Form MA-W, including any exhibits or other information submitted, are
true. If the form is being filed on behalf of a municipal advisor that
is not a sole proprietor,\1257\ the signature constitutes such
certification by both the municipal advisor and the signatory.
Similarly, the signatory is required to certify that the municipal
advisor's books and records will be preserved and available for
inspection as required by law. The signatory is also required to
authorize any person having custody or possession of these books and
records to make them available to authorized regulatory
representatives.
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\1257\ As discussed in the Proposal, in the case of a municipal
advisor that is not a sole proprietor, the signatory's certification
includes a statement that he or she has signed on behalf of and with
the authority of the municipal advisor firm withdrawing the
registration. See id., at 857, note 254.
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The certification includes a statement that all information
previously submitted on the municipal advisor's most recent Form MA
(and Form MA-I for sole proprietors) is accurate and complete as of the
date the Form MA-W was signed. It also includes an understanding by the
signatory that if any information contained in items on the Form MA-W
is different from the information contained on the most recent Form MA
(and MA-I for sole proprietors), the information on the Form MA-W will
replace the corresponding entry on the municipal advisor's Form MA
(and/or MA-I for sole proprietors). As discussed in the Proposal, the
Commission believes that the certification requirement should serve as
an effective means to assure that the information supplied in Form MA-W
is correct.\1258\
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\1258\ See id., at 858.
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5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I
Proposed Rule 15Ba1-4 set forth requirements regarding when
amendments to Form MA and Form MA-I are required and how such
amendments must be filed. The Commission received one comment letter
regarding this proposed rule which supported the proposed rule.\1259\
The Commission is adopting Rule 15Ba1-5 substantially as proposed in
Rule 15Ba1-4, but is modifying the rule
[[Page 67569]]
primarily to be consistent with the exemption of certain natural
persons from municipal advisor registration that the Commission is
adopting in Rule 15Ba1-3. Specifically, the Commission's modifications
to Rule 15Ba1-5 are limited to removing or revising rule text to
reflect that natural persons who are associated with a municipal
advisor and engaged in municipal advisory activities on its behalf are
not required to register as municipal advisors on Form MA and that Form
MA-I is not an application for registration and to update citations in
the rule text. Therefore, the requirement in Rule 15Ba1-5 to amend
promptly Form MA and Form MA-I applies exclusively to registered
municipal advisors since they will be responsible for amendments to
their own Form MA and amendments to Form MA-I for each natural person
who is a person associated with the municipal advisor and engaged in
municipal advisory activities on its behalf.\1260\
---------------------------------------------------------------------------
\1259\ See MSRB Letter I.
\1260\ See Rule 15Ba1-5(a) and (b).
---------------------------------------------------------------------------
Rule 15Ba1-5(a) requires that a registered municipal advisor must
promptly amend the information in its Form MA: (1) At least annually,
within 90 days of the end of the municipal advisor's fiscal year, or of
the end of the calendar year for a sole proprietor; \1261\ and (2) more
frequently than annually if required by the General Instructions.\1262\
---------------------------------------------------------------------------
\1261\ See Rule 15Ba1-5(a)(1).
\1262\ See Rule 15Ba1-5(a)(2). See also infra Section III.A.8.
(discussing the General Instructions and Glossary).
---------------------------------------------------------------------------
In addition to the annual update amendment to Form MA, General
Instruction 8 specifies that a municipal advisory firm must amend its
Form MA promptly whenever a material event has occurred that changes
the information provided in the form. General Instruction 8 further
states that, for purposes of Form MA, a material event will be deemed
to have occurred if information provided in response to Item 1
(Identifying Information), Item 2 (Form of Organization), or Item 9
(Disclosure Information) becomes inaccurate in any way; or if
information provided in response to Item 3 (Successions), Item 7
(Participation or Interest of Applicant, or of Associated Persons of
Applicant in Municipal Advisory Client or Solicitee Transactions), or
Item 8 (Owners, Officers and Other Control Persons) becomes materially
inaccurate.\1263\
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\1263\ See General Instruction 8 in the Instructions for the
Form MA Series. General Instruction 8 further notes that a municipal
advisor submitting an amendment between annual updates is not
required to update the responses to Item 4 (Information About
Applicant's Business), Item 5 (Other Business Activities), Item 6
(Financial Industry and Other Related Affiliations of Associated
Persons), or Item 10 (Small Businesses), even if the responses to
those items have become inaccurate.
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In addition, General Instruction 8 provides that a non-resident
municipal advisory firm must promptly file an amendment to Form MA to
attach an updated opinion of counsel after any changes in the legal or
regulatory framework or the firm's physical facilities that would
impact its ability, as a matter of law, to provide the Commission with
access to its books and records or to inspect and examine the municipal
advisory firm.\1264\ As the Commission stated in the Proposal,\1265\ an
amendment in such case should include a revised opinion of counsel
describing how, as a matter of law, the municipal advisor will continue
to meet its obligations to provide the Commission with the required
access to the municipal advisor's books and records and to be subject
to the Commission's onsite \1266\ inspection and examination under the
new regulatory regime. If a registered non-resident municipal advisory
firm becomes unable to comply with this requirement, then this may be a
basis for the Commission to institute proceedings to revoke the
municipal advisor's registration.
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\1264\ See General Instruction 8 in the Instructions for the
Form MA Series. See also infra note 1308 and accompanying text. For
a discussion of Rule 15Ba1-6 (Consent to Service of Process to be
Filed by Non-Resident Municipal Advisors) and Form MA-NR
(Designation of U.S. Agent for Service of Process for Non-
Residents), see Section III.A.6.
\1265\ See Proposal, 76 FR 858.
\1266\ As adopted, General Instruction 8 does not require the
opinion of counsel to state that the municipal advisor is able, as a
matter of law, to be subject specifically to ``onsite'' inspection
and examination.
---------------------------------------------------------------------------
Regarding amendments to Form MA-I, Rule 15Ba1-5(b) provides that a
registered municipal advisor must promptly amend the information
contained in Form MA-I by filing an amended Form MA-I whenever the
information contained in the Form MA-I becomes inaccurate for any
reason. As discussed above, registered municipal advisors will be
responsible for filing and amending Form MA-I for each natural person
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf.\1267\ As discussed in the Proposal, unlike
municipal advisors filing Form MA, who must file annual updating
amendments, the Commission is not requiring municipal advisory firms to
update annually the Forms MA-I for each natural person who is
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf.\1268\ The Commission believes that the
additional gains obtained by requiring the confirmation of an annual
update would impose unnecessary burdens on municipal advisors and that
the standard adopted in Rule 15Ba1-5(b) strikes an appropriate balance
between maintaining current information regarding natural persons and
minimizing the burden on municipal advisors to provide this
information.
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\1267\ See supra note 1260 and accompanying text.
\1268\ See Proposal, 76 FR 858. As discussed in the Proposal, in
the case of firms, changes commonly occur over the course of a year,
and a wide range of changes is possible--e.g., changes in control
persons and personnel, number of employees, nature of services
provided, types of clients, and compensation arrangements, among
others, as well as new disclosures that may be necessary for all of
the firm's associated persons, rather than just one natural person.
Accordingly, the Commission believes it is appropriate to require a
firm to confirm through an annual update that its registration is
up-to-date. With respect to natural person municipal advisors,
however, an amendment to Form MA-I is promptly required whenever
information previously provided becomes inaccurate. The Commission
believes that any additional benefits of an annual update would not
justify the burden such a requirement would impose. See id.
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All amendments to Form MA and Form MA-I are required to be filed
electronically with the Commission.\1269\ In addition, amendments to
Form MA and Form MA-I constitute ``reports'' for purposes of Sections
15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c), 78q(a), 78r(a),
78ff(a)) and other applicable provisions of the Exchange Act.\1270\ As
discussed in the Proposal, these rules are consistent with the
Commission's requirements for other registrants (e.g., national
securities exchanges, securities information processors (``SIPs''),
broker-dealers) to file updated and annual amendments with the
Commission.\1271\ The Commission believes that such amendments are
important for obtaining updated information for registered municipal
advisory firms and their associated natural persons engaged in
municipal advisory activities on the firms' behalf so that the
Commission can assess whether such persons continue to be in compliance
with the federal securities laws and the rules and regulations
thereunder.\1272\ Obtaining updated information will also assist the
Commission in its inspection and examination of municipal advisors and
better inform the MSRB's regulation of municipal advisors. In addition,
the Commission believes it is important for
[[Page 67570]]
municipal entities and obligated persons, as well as the public
generally, to have access to current information regarding advisors
registered with the Commission.
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\1269\ See Rule 15Ba1-5(c).
\1270\ See Rule 15Ba1-5(d).
\1271\ See, e.g., Rules 6a-2 and 15b3-1 under the Exchange Act.
17 CFR 240.6a-2 and 240.15b3-1. See also 17 CFR 249.1001 (Form SIP,
application for registration as a securities information processor
or to amend such an application or registration).
\1272\ See Proposal, 76 FR 858.
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6. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-
Resident Registered Municipal Advisors; Legal Opinion To Be Provided by
Non-Resident Municipal Advisors; and Form MA-NR
a. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-
Resident Registered Municipal Advisors; Legal Opinion To Be Provided by
Non-Resident Municipal Advisors
Proposed Rule 15Ba1-5 required each non-resident \1273\ municipal
advisor and each non-resident general partner and managing agent \1274\
of a municipal advisor to furnish to the Commission, at the time of
filing Form MA or Form MA-I, a written irrevocable consent and power of
attorney on Form MA-NR to appoint an agent in the United States upon
whom may be served any process, pleadings, or other papers in any
action brought against the non-resident municipal advisor, general
partner or managing agent.\1275\ Proposed Rule 15Ba1-5 also specified
circumstances when each non-resident municipal advisor, general partner
and managing agent would be required to amend Form MA-NR. In addition,
proposed Rule 15Ba1-5 required that each non-resident municipal
advisor, other than a natural person, provide an opinion of counsel
that the municipal advisor can provide the Commission with access to
the advisor's books and records and submit to onsite inspection and
examination by the Commission. The Commission received one comment
letter regarding this proposed rule which supported the proposed
rule.\1276\
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\1273\ The definition of ``non-resident'' in Rule 15Ba1-1(j)
that the Commission is adopting is substantially similar to the
definition of ``non-resident'' that the Commission set forth in
proposed Rule 15Ba1-1(h). However, the Commission is modifying this
definition so that it includes only those persons residing, having
their principal office and place of business, or incorporated in any
place not subject to the jurisdiction of the United States.
Therefore, persons residing; having their principal office and place
of business; and incorporated in the United States or a territory of
the United States would not be considered non-residents. Rule 15Ba1-
1(j), as adopted, defines ``non-resident'' as ``(1) [i]n the case of
an individual, one who resides in or has his principal office and
place of business in any place not subject to the jurisdiction of
the United States; (2) [i]n the case of a corporation, one
incorporated in or having its principal office and place of business
in any place not subject to the jurisdiction of the United States;
or (3) [i]n the case of a partnership or other unincorporated
organization or association, one having its principal office and
place of business in any place not subject to the jurisdiction of
the United States.'' As adopted, this definition of ``non-resident''
is similar to the definition of ``non-resident broker-dealer'' in
Rule 15b1-5 under the Exchange Act. See 17 CFR 240.15b1-5. See also
17 CFR 275.0-2 (defining the term ``non-resident'' for purposes of
serving non-residents in connection with Form ADV).
\1274\ Rule 15Ba1-1(c) defines a ``managing agent'' as ``any
person, including a trustee, who directs or manages, or who
participates in directing or managing, the affairs of any
unincorporated organization or association other than a
partnership.'' As discussed in the Proposal, this definition is
consistent with the definition of a ``managing agent'' as used in
Rule 15b1-5 under the Exchange Act relating to consent to service of
process to be furnished by non-resident brokers or dealers and by
non-resident general partners or managing agents of brokers or
dealers. See 17 CFR 240.15b1-5. See also 17 CFR 275.0-2 (discussing
general procedures for serving non-resident investment advisers in
connection with Form ADV); and Proposal, 76 FR 859, note 262 and
accompanying text.
\1275\ See Rule 15Ba1-5(a). The agent may not be a Commission
member, official, or employee.
\1276\ See MSRB Letter I.
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While adopted Rule 15Ba1-6 retains the same purpose and focus of
the proposed rule, the Commission is adopting Rule 15Ba1-6 with certain
modifications to reflect the Commission's decision to exempt certain
natural persons from municipal advisor registration in Rule 15Ba1-3, as
adopted, and to clarify and update the rule text as described below.
First, the Commission is removing certain references that contemplate
individual registration on Form MA-I of natural persons associated
persons with a municipal advisor and is revising the rule text to
clarify that a municipal advisor is required to file a Form MA-NR for
each of its non-resident general partners, managing agents, and
associated natural persons engaged in municipal advisor activities on
the municipal advisor's behalf. Second, since the term registered
municipal advisor no longer includes natural persons who are associated
with a municipal advisor and engaged in municipal advisory activity on
its behalf, the Commission is adding new language to Rule 15Ba1-6 to
address such persons. For example, Rule 15Ba1-6(a)(2) requires a
registered municipal advisor, at the time of the Form MA-I filing, to
file with the Commission a Form MA-NR for each non-resident natural
person associated with a municipal advisor and engaged in municipal
advisory activities on its behalf.\1277\ Third, the Commission is
modifying the rule to require registered municipal advisors to file a
new Form MA-NR in the instances where the proposed rule required an
amendment because, unlike Form MA and Form MA-I, Form MA-NR is not
completed online and signed electronically.\1278\ Form MA-NR must be
printed out and signed manually and a scanned copy of the signed and
notarized form must be attached as a PDF file to the Form MA or Form
MA-I being submitted.\1279\ Finally, the Commission made other
clarifying revisions to and updated the citations in the rule
text.\1280\
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\1277\ Similarly, Rule 15Ba1-6(c)(2), as adopted, sets forth
requirements regarding when a registered municipal advisor is
required to file a new Form MA-NR for its non-resident natural
persons who are associated with the municipal advisor and engaged in
municipal advisory activities on its behalf.
\1278\ See General Instruction 2.c. in the Instructions for the
Form MA Series.
\1279\ See id.
\1280\ For example, the Commission removed ``onsite'' from Rule
15Ba1-6(d), as adopted, because the Commission does not conduct all
inspections and examinations onsite.
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As discussed in the Proposal,\1281\ the provisions in Rule 15Ba1-6,
as adopted, are designed to allow the Commission and others to provide
service of process to a registered non-resident municipal advisor, a
non-resident general partner or managing agent of a registered
municipal advisor, and non-resident natural person associated with a
municipal advisor and engaged in municipal advisory activities on its
behalf by requiring the municipal advisor to file a written irrevocable
consent and power of attorney on Form MA-NR to appoint an agent in the
United States for service of process.\1282\ Rule 15Ba1-6 also requires
a municipal advisor to file promptly a new Form MA-NR to reflect any
change to the name or address of the agent for service of process for
itself if the municipal advisor is a non-resident and for each of a
municipal advisor's non-resident general partners, managing agents, or
natural persons associated with the municipal advisor and engaged in
municipal advisory activities on its behalf.\1283\ The rule further
requires a registered non-resident municipal advisor to appoint
promptly a successor agent and file a new Form MA-NR if the non-
resident municipal advisor discharges its agent or if its agent becomes
unwilling or unable to accept service on behalf of the non-resident
municipal advisor.\1284\ Similarly, Rule 15Ba1-6(c)(2) provides that
each registered municipal advisor must require each of its non-resident
general partners or non-resident managing agents, or non-resident
natural persons
[[Page 67571]]
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf to appoint promptly a successor agent and the
registered municipal advisor must file a new Form MA-NR if such non-
resident general partner, managing agent, or associated natural person
discharges the agent or if the agent is unwilling or unable to accept
service on behalf of such person. Rule 15Ba1-6 also requires each non-
resident municipal advisor applying for registration to provide an
opinion of counsel on Form MA that the municipal advisor can, as a
matter of law, provide the Commission with access to the municipal
advisor's books and records and that the municipal advisor can, as a
matter of law, submit to inspection and examination by the
Commission.\1285\ Finally, similar to the other forms in the MA series,
Form MA-NR must be filed electronically.\1286\
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\1281\ See Proposal, 76 FR 859.
\1282\ See Rule 15Ba1-6(a)(1) and (2) (requiring a non-resident
municipal advisor to file a Form MA-NR on its own behalf and
requiring municipal advisors to file a Form MA-NR for each of the
municipal advisor's non-resident general partners, managing agents,
or natural persons associated with the municipal advisor and engaged
in municipal advisory activities on its behalf).
\1283\ See Rule 15Ba1-6(b).
\1284\ See Rule 15Ba1-6(c)(1).
\1285\ See Rule 15Ba1-6(d). See also supra notes 1264-1265 and
accompanying text (discussing when a non-resident municipal advisory
firm must file an amendment to Form MA to attach an updated opinion
of counsel).
\1286\ See Rule 15Ba1-6(e).
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b. Form MA-NR
The Commission received one comment letter on proposed Form MA-NR,
which generally supported Form MA-NR.\1287\ While Form MA-NR, as
adopted, retains the same purpose and focus of the proposed Form MA-NR,
the Commission is adopting Form MA-NR with certain modifications.
First, the Commission has provided more detailed instructions to
improve the form's readability and ease of use. For example, the
Commission included an introductory direction to refer to the General
Instructions for the forms in the MA series before completing Form MA-
NR, a paragraph explaining the purpose of the form, and a specific
instruction providing technical guidance for how to attach Form MA-NR
to Form MA or Form MA-I. Second, the Commission has expanded its
discussion of certain concepts in Form MA-NR so that persons executing
the form have a clearer and more complete understanding of the
information they are required to provide. For example, Section A of
Form MA-NR, as adopted, instructs the person executing the form to
``[i]dentify the agent for service of process for the non-resident
municipal advisor, for the non-resident general partner or managing
agent of a municipal advisor, or for the non-resident natural person
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf. Fill in all lines.'' \1288\ The Commission
expanded the discussions in several other parts of Form MA-NR, such as
the description relating to the designation and appointment of the
agent for service of process immediately following the agent's address
and phone number in Section A.2, including language addressing the
effect on partnerships of the irrevocable power of attorney appointment
and consent to service of process, the designator's certification, and
the method by which the designator discloses the capacity in which he
or she is signing the form. Third, the Commission has included Section
B and Section C in Form MA-NR, as adopted. Section B requires the
municipal advisor to obtain the signature of the United States person
identified in Section A as the agent for service of process to
demonstrate that this person has accepted the designation and
appointment as the agent for service of process. This certification
that the agent for service of process has accepted the designation and
appointment is necessary to ensure effective service of process upon a
non-resident municipal advisor, non-resident general partner or
managing agent of a municipal advisor, or non-resident natural person
associated with the municipal advisor and engaged in municipal advisory
activities on its behalf. Additionally, the Commission believes that
the additional burden imposed on municipal advisors to obtain the
signature of the U.S. agent for service of process would be minimal.
Section C requires the person executing the form to disclose whether
any signature is pursuant to a written authorization and whether there
is a written contractual agreement or other written document evidencing
the designation and appointment of the named agent for service of
process and/or the agent's acceptance, and if so, to identify the
document and provide an accurate and complete copy with submission of
the Form MA or Form MA-I.
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\1287\ See MSRB Letter I.
\1288\ Section A in Form MA-NR, as proposed, consisted only of
``Name of United States person applicant designates and appoints as
agent for service of process'' with space for the name provided in a
blank box immediately underneath.
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Pursuant to General Instruction 2, and consistent with the rule,
every non-resident municipal advisor must file Form MA-NR in connection
with the municipal advisor's initial application for registration on
Form MA and file a new Form MA-NR when required.\1289\ In addition,
regardless of whether a municipal advisory firm is a resident of the
United States, the firm must file a separately completed and executed
Form MA-NR for (i) non-resident general partners and managing agents of
the firm, and (ii) every non-resident natural person associated with
the firm and engaged in municipal advisory activities on the firm's
behalf.\1290\ Form MA-NR for general partners and managing agents is
filed by the firm together with the firm's Form MA.\1291\ Form MA-NR
for natural persons associated with the firm and engaged in municipal
advisory activities on the firm's behalf is filed by the firm together
with the Form MA-I relating to the natural person associated with the
firm.\1292\
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\1289\ See General Instruction 2.c. As discussed in the
Proposal, failure to attach a signed and notarized Form MA-NR, where
required, for a non-resident municipal advisor or for any non-
resident general partner or managing agent of a municipal advisory
firm or non-resident natural person associated with a municipal
advisor who engages in municipal advisory activities on behalf of
the advisor, may delay SEC consideration of the municipal advisor's
application for registration. Additionally, an SEC-registered
municipal advisory firm that becomes a non-resident after the
municipal advisor firm's initial application has been submitted must
file a Form MA-NR within 30 days of becoming a non-resident. The
same applies when a general partner or managing agent of a municipal
advisory firm becomes a non-resident, or a non-resident becomes a
general partner or managing agent of a municipal advisory firm,
after the firm's initial application. Also, a municipal advisory
firm must file a Form MA-NR together with Form MA-I if, after the
firm's initial registration, a non-resident natural person becomes
associated with the firm and engages in municipal advisory
activities on the firm's behalf. In addition, a municipal advisory
firm must file a form MA-NR if a natural person associated with the
firm and engaged in municipal advisory activities on behalf of the
firm becomes a non-resident after the firm has filed a Form MA-I
relating to that individual. The firm must file the Form MA-NR
within 30 days of such individual becoming a non-resident. See
Instruction 3 in the General Instructions to Form MA-NR. See also
Proposal, 76 FR 859, note 263.
\1290\ See General Instruction 2.c.
\1291\ See id.
\1292\ See id.
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7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor
Proposed Rule 15Ba1-6 was designed to govern the registration of a
successor to a registered municipal advisor.\1293\
[[Page 67572]]
The rule is substantially similar to Rule 15b1-3 under the Exchange
Act, which governs the registration of a successor to a registered
broker-dealer.\1294\ The Commission received no comments on the
proposed Rule 15Ba1-6 and is adopting the rule as Rule 15Ba1-7 without
modification.
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\1293\ As discussed in the Proposal, the purpose of Rule 15Ba1-7
is to enable a successor municipal advisor to operate without an
interruption of business by relying for a limited period of time on
the registration of the predecessor municipal advisor until the
successor's own registration becomes effective. See Proposal, 76 FR
860. The rule is intended to facilitate the legitimate transfer of
business between two or more municipal advisors and to be used only
where there is a direct and substantial business nexus between the
predecessor and the successor municipal advisor. The rule is not
designed to allow a registered municipal advisor to sell its
registration, eliminate substantial liabilities, spin off personnel,
or facilitate the transfer of the registration of a ``shell''
organization that does not conduct any business. As discussed in the
Proposal, no entity is permitted to rely on Rule 15Ba1-7 unless it
is acquiring or assuming substantially all of the assets and
liabilities of the predecessor's municipal advisor business, or
there has been no practical change of control. See General
Instruction 1 to Form MA.
The Commission will not apply Rule 15Ba1-7 to a reorganization
that involves only registered municipal advisors. See Proposal, 76
FR 860. In those situations, the registered municipal advisors need
not rely on the rule because they can continue to rely on their
existing registrations. The rule also will not apply to situations
in which the predecessor intends to continue to engage in municipal
advisory activities. Otherwise, confusion may result as to the
identities and registration statuses of the parties.
\1294\ See 17 CFR 240.15b1-3. See also Registration of
Successors to Broker-Dealers and Investment Advisers, Exchange Act
Release No. 31661 (December 28, 1992), 58 FR 7 (January 4, 1993)
(providing interpretive guidance regarding amendments to Rule 15b1-
3).
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Succession by Application
Rule 15Ba1-7(a) provides that in the event that a municipal advisor
succeeds to and continues the business of a municipal advisor
registered pursuant to Exchange Act Section 15B(a), the registration of
the predecessor will be deemed to remain effective as the registration
of the successor if the successor, within 30 days after the succession,
files an application for registration on Form MA and the predecessor
files a notice of withdrawal from registration with the Commission on
Form MA-W. The rule further provides that the registration of the
predecessor municipal advisor will cease to be effective as the
registration of the successor municipal advisor 45 days after the
application for registration on Form MA is filed by the
successor.\1295\ In other words, the 45-day period will not begin to
run until a complete Form MA has been filed by the successor with the
Commission. This 45-day period is consistent with Exchange Act Section
15B(a)(2), pursuant to which the Commission has 45 days to grant a
registration or institute proceedings to determine if a registration
should be denied.\1296\
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\1295\ See Rule 15Ba1-7(a).
\1296\ See 15 U.S.C. 78o-4(a)(2).
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Succession by Amendment
Rule 15Ba1-7(b) provides that, notwithstanding Rule 15Ba1-7(a), if
a municipal advisor succeeds to and continues the business of a
registered predecessor municipal advisor, and the succession is based
solely on a change in the predecessor's date or state of incorporation,
form of organization, or composition of a partnership, the successor
may, within 30 days after the succession, amend the registration of the
predecessor municipal advisor on Form MA to reflect these changes. Such
an amendment will be deemed an application for registration filed by
the predecessor and adopted by the successor.
In all three types of successions specified in Rule 15Ba1-7(b)
(change in the date or state of incorporation, change in form of
organization, and change in composition of a partnership), the
predecessor must cease operating as a municipal advisor. As stated in
the Proposal, the Commission believes that it is appropriate to allow a
successor to file an amendment to the predecessor's Form MA in these
types of successions because such successions do not typically result
in a change of control of the municipal advisor.\1297\
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\1297\ See Proposal, 76 FR 860.
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8. General Instructions and Glossary
The Commission proposed a set of instructions, which includes
general instructions for proper completion and submission of Forms MA,
MA-I, MA-W, and MA-NR (``General Instructions''),\1298\ as well as
specific instructions relating to each of the forms individually, as
applicable. A glossary of terms (``Glossary'') is included at the end
of the General Instructions to help applicants complete the forms. As
discussed in the Proposal, the definitions in the Glossary generally
are derived from the terms in Exchange Act Section 15B(e),\1299\ the
definitions in Rule 15Ba1-1,\1300\ and Form ADV.\1301\ For ease of
reference, the Commission proposed one Glossary to define terms that
may appear in any or all of the forms. All terms that are defined or
described in the Glossary appear in the forms in italics.
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\1298\ Form MA-W is for withdrawal from registration as a
municipal advisor, and Form MA-NR is for the appointment of an agent
for service of process by a non-resident municipal advisor, non-
resident general partner or managing agent of a municipal advisor,
or non-resident natural person associated with a municipal advisor
and engaged in municipal advisory activities on behalf of the
municipal advisor. See supra Sections III.A.4.b. and III.A.6.
(discussing Forms MA-W and MA-NR, respectively).
\1299\ See 15 U.S.C. 78o-4(e).
\1300\ See Rule 15Ba1-1. See also Proposal, 76 FR 839.
\1301\ See 17 CFR 279.1.
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The Commission did not receive any comments on the General
Instructions and Glossary and is adopting the General Instructions and
Glossary generally as proposed. However, some revisions have been made
to clarify or modify instructions and definitions or to provide
additional guidance, as discussed more fully below. In particular, the
instructions are being revised to reflect that Form MA-I, as adopted,
will not serve as a registration form and that municipal advisory
firms, rather than natural persons (other than sole proprietors), have
the obligation to file and complete Form MA-I. In addition, some
sections of the General Instructions have been reorganized to enhance
their readability, three new instructions have been added, additional
defined terms have been introduced and included in the Glossary, and
one term has been removed from the Glossary.
General Instruction 1, as proposed, directed applicants to the
Commission's Web site for additional information about the Commission's
rules regarding municipal advisors and the Exchange Act. General
Instruction 1, as adopted, notes that a comprehensive explanation of
the form requirements is provided in this release.
General Instruction 2, as proposed, discussed who should file Form
MA and Form MA-I and explained that these forms must be used to
register with the Commission and to amend previously submitted Forms MA
and MA-I. The instruction also discussed the responsibility of sole
proprietors to file both forms. General Instruction 2, as proposed,
further included information regarding voluntary registration for
certain individuals; the requirement that a Form MA-NR must be
submitted for municipal advisors and general partners and managing
agents of municipal advisors that are not residents of the United
States; and the requirement that a municipal advisor that is no longer
required to be registered must file Form MA-W.
As adopted, General Instruction 2 has been revised for clarity and
now also provides more details about the use of Form MA. For example,
it now notes the requirement for a municipal advisor that registers on
Form MA to submit an annual update of that form.\1302\
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\1302\ The instruction, as proposed, referred only to
amendments, which may have implied that additional filings are
required only in the instance of changes in the information provided
on previously-submitted forms.
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General Instruction 2 has been revised to reflect the fact that
Form MA-I is no longer a registration form. It explains that municipal
advisory firms must complete and file Form MA-I on behalf of natural
persons associated with the firm and engaged in municipal advisory
activities on behalf of the firm, including employees of the firm. In
[[Page 67573]]
addition, General Instruction 2 notes that independent contractors are
included in the definition of ``employee'' of a municipal advisor for
purposes of a firm's obligation to complete and file Form MA-I.\1303\
The instruction explains that Form MA-I is also used to amend a
previously submitted Form MA-I.
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\1303\ Although independent contractors are included in the
definition of employee for purposes of these forms in the Glossary
(as both proposed and adopted), their inclusion is noted in General
Instruction 2, as adopted, because it might otherwise be overlooked.
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With regard to Form MA-NR, General Instruction 2 now more clearly
indicates that every municipal advisory firm must file with the firm's
Form MA a separately completed and executed Form MA-NR for every
general partner and/or managing agent of a firm that is a non-resident.
In addition, the instruction has been revised to indicate that
municipal advisory firms must also file Form MA-NR for every non-
resident natural person associated with the firm and engaged in
municipal advisory activities on the firm's behalf together with the
Form MA-I related to the person. General Instruction 2 indicates that
firms have an obligation to file Form MA-NR in these circumstances,
regardless of whether the firm itself is domiciled in the United States
or is a non-resident filing a Form MA-NR on its own behalf. In
addition, General Instruction 2 clarifies that a Form MA-NR for a non-
resident general partner or managing agent of a municipal advisor must
be filed with the Form MA of the municipal advisor. The instruction, as
adopted, also explains that, unlike the other forms in the Form MA
series, which are completed online and signed electronically, Form MA-
NR must be printed out and signed manually by both the non-resident and
the person designated as agent for service of process. Each of the
signatures must be separately notarized, and a scanned copy of the
signed and notarized form must then be attached as a PDF file to the
electronically-completed Form MA or Form MA-I. To emphasize the
importance of submitting a Form MA-NR, where required, General
Instruction 2, as adopted, includes a warning that failure to attach a
signed and notarized Form MA-NR for a non-resident municipal advisor,
any non-resident general partner or managing agent of a municipal
advisory firm, or non-resident natural person associated with a
municipal advisory firm who engages in municipal advisory activities on
behalf of the firm may delay Commission consideration of the municipal
advisor's application for registration.
General Instruction 2 indicates that Form MA-W does not need to be
completed when a natural person with respect to whom a municipal
advisory firm filed Form MA-I is no longer associated with the firm or
no longer engaged in municipal advisory activities on behalf of the
firm. The instruction now explains that the firm must indicate this
change by filing an amendment to Form MA-I.
The proposed instructions in General Instruction 2 regarding
voluntary registration as a municipal advisor have been deleted, as the
purpose for which this option was created is no longer relevant.\1304\
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\1304\ The Commission notes that several commenters raised
concerns regarding the interaction of the Commission's proposed rule
regarding voluntary municipal advisor registration with amendments
that had been proposed in November 2010 to the Commission's ``Pay-
to-Play Rule.'' See, e.g., ICI Letter and MFA Letter. See also
Investment Advisers Act Release No. 3010 (November 10, 2010), 75 FR
77052 (December 10, 2010) (Pay-to-Play Proposed Amendments); and
Proposal, 76 FR 832 n.104 and accompanying text. The Commission
notes that it adopted amendments to its Pay-to-Play Rule on June 22,
2011. See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 3221 (June 22,
2011), 76 FR 42950 (July 19, 2011). As proposed, the amendments to
the Pay-to-Play Rule would have excepted only registered municipal
advisors from that rule's ban on compensating third-party
solicitors. If the amendments had been adopted as proposed, an
investment adviser may have been unable to hire an affiliated
solicitor to solicit government entities on its behalf (absent the
option for voluntary municipal advisor registration) because
affiliated solicitors would not fall within the statutory definition
of municipal advisor. The final amendments to the Pay-to-Play Rule,
however, permit advisers to compensate municipal advisors and
Commission registered investment advisers and broker-dealers for
soliciting government entities if they are subject to restrictions
substantially equivalent to or more stringent than the Pay-to-Play
Rule. See id. See also Rule 206(4)-5 under the Investment Advisers
Act (17 CFR 275.206(4)(5)). Consequently, the option of voluntary
registration as a municipal advisor for persons undertaking
solicitation of a municipal entity is no longer necessary.
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General Instruction 3, as proposed, instructed applicants with
respect to the organization of Form MA (for example, that Form MA also
includes Schedules A, B, C, and D, as well as Criminal Action,
Regulatory Action, and Civil Judicial Action DRPs) and made clear that
an applicant must complete all items in Form MA. General Instruction 3
is being adopted substantially as proposed, with only minor revisions,
including an explanation that Form MA includes an ``Execution Page''
where the form is signed.
General Instruction 4, as proposed, provided comparable
instructions with respect to the organization and completion of Form
MA-I and the schedules and the DRPs required by that form. General
Instruction 4 is being revised to state that Form MA-I asks questions
about sole proprietors and natural persons associated with a municipal
advisory firm and engaged in municipal advisory activities on behalf of
the firm, and to reflect the fact that Form MA-I, as adopted, is not a
registration form.
General Instructions 5-7 are being adopted substantially as
proposed, with revisions to reflect the fact that municipal advisory
firms, not natural persons associated with the firms and engaged in
municipal advisory activities on behalf of the firms, must sign and
file Form MA-I. However, the order of these instructions has been
rearranged in their adopted version for purposes of clarity.
First, General Instruction 5 (in the order as adopted) sets forth
who must sign Form MA or MA-I. General Instruction 5 explains that such
person will be a sole proprietor (in the case of a sole
proprietorship), a general partner (in the case of a partnership), an
authorized principal (in the case of a corporation), and, for all
others, an authorized individual who participates in managing or
directing the municipal advisor's affairs.\1305\ It further makes clear
that in all cases the signature should be a typed name. Next, General
Instruction 6 makes clear where Form MA must be signed, explaining that
domestic municipal advisors are required to execute the Domestic
Execution Page to Form MA, while non-resident municipal advisors are
required to execute the Non-Resident Municipal Advisor Execution
Page.\1306\ General Instruction 7 provides that a municipal advisory
firm signs Item 7 of Form MA-I.
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\1305\ Because natural persons that are not sole proprietors are
not required to file Form MA-I, the part of General Instruction 5
set forth in the Proposal that stated that a natural person filing
Form MA-I on his or her own behalf must sign the form has been
deleted.
\1306\ See supra Section III.A.6. (discussing Rule 15Ba1-6 and
Form MA-NR).
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General Instructions 8 and 9 discuss when to amend and/or update
Forms MA and MA-I respectively, as discussed above.\1307\ General
Instruction 8 (which pertains to Form MA), has been adopted
substantially as proposed, but has been revised to distinguish more
clearly between an amendment and an annual update. To clarify how
amendments and updates will work in the electronic filing system, the
instruction also now explains that each time a firm accesses its Form
MA after its initial filing of the form, the
[[Page 67574]]
information from the firm's most recent previous filing will appear.
Only the information that has changed will need to be amended; the
applicant will not need to complete the entire form again. The
statement in General Instruction 8 regarding the requirement for a non-
resident municipal advisor to amend its form and attach an updated
opinion of counsel has been revised to more accurately reflect the
required content of the opinion of counsel as stated on Form MA.\1308\
General Instruction 9, as proposed, concerned when Form MA-I (for
natural person municipal advisors) needs ``to be updated.'' The
instruction has been revised in its adopted form to state generally
that Form MA-I must ``be amended'' whenever information previously
provided on the form becomes inaccurate.\1309\
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\1307\ See supra Section III.A.5.
\1308\ See supra note 1264 and accompanying text for the revised
language.
\1309\ The instruction no longer states that every ``natural
person municipal advisor'' must amend Form MA-I because the rule, as
adopted, requires municipal advisory firms, and not natural persons
(other than sole proprietors), to complete and file Form MA-I. See
Rule 15Ba1-2(b)(1) of the adopted rules.
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General Instruction 10, as proposed, provided that an applicant
must complete and file the forms electronically. As adopted, General
Instruction 10 provides that a municipal advisor must complete and
submit the relevant form, including any required attachments,
electronically. General Instruction 10 reflects the change to Rule
15Ba1-2(c), as adopted,\1310\ that Form MA is considered filed upon
submission of a completed Form MA, together with all additional
required documents, including all required filings of Form MA-I (17 CFR
249.1310), to EDGAR. General Instruction 10 also explains that when a
municipal advisor's submitted Form MA is accepted by the Commission,
the municipal advisor will receive an SEC file number. General
Instruction 11 is being adopted to provide more specific information
about how to electronically file the forms in the Form MA series and,
specifically, how to obtain access to EDGAR to do so.\1311\
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\1310\ See supra note 971 and accompanying text.
\1311\ See supra note 961. General Instructions 12 and 13 as
proposed, regarding self-certification by municipal advisors filing
on Form MA and Form MA-I, have been removed, because, as discussed
above, the Commission has eliminated the self-certification
requirement in Form MA and Form MA-I as adopted.
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A new General Instruction 12 has been added to the General
Instructions, as adopted, to clarify what a municipal advisor (or, in
the case of a firm, its authorized representative) represents by
signing and executing the form as a whole.\1312\ General Instruction 12
explains that, by signing the Execution Page of Form MA, the authorized
signatory of a domestic municipal advisory firm is appointing the
Secretary of State or other legally designated officer of the state in
which the firm maintains its principal office and place of business as
the firm's agent to receive service of process.\1313\ The signatory is
also attesting to the truth and correctness of the information provided
in the form and declaring that the firm's books and records will be
preserved and available for inspection and that any person having
custody of the books and records is authorized to make them available
to federal regulators.
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\1312\ General Instruction 12 does not introduce new substantive
requirements that are being added in the adopting phase of this
rulemaking. They were set forth in the forms, as proposed, and are
now being added to the General Instructions in order to highlight
them for applicants preparing to file. See also supra notes 1150-
1156 and accompanying text.
\1313\ See also supra notes 1275-1287 and accompanying text.
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General Instruction 12 further explains that a signatory on behalf
of a non-resident municipal advisory firm must use the version of the
Execution Page of Form MA that is specifically required for non-
resident firms. Besides attesting to the truth and correctness of the
information provided on the form and making the same representations as
a U.S. firm regarding books and records, the signatory on behalf of the
firm is agreeing to provide, at the firm's own expense, current,
correct, and complete copies of its books and records to the SEC upon
request. The instruction explains that a non-resident firm must
designate an agent for service of process on a separate form, Form MA-
NR.
General Instruction 12 explains that an authorized signatory of a
domestic municipal advisory firm filing Form MA-I with respect to a
natural person who is associated with the firm and engaged in municipal
advisory activities on behalf of the firm, by signing the Execution
Page of Form MA-I, is attesting to the truth and correctness of the
information provided in the form. The instruction also explains that
the authorized signatory is attesting that the firm has obtained and
retained written consent from the natural person associated with the
firm that service of any civil action brought by, or notice of any
proceeding before, the SEC or any SRO in connection with the
individual's municipal advisory activities may be given by registered
or certified mail to the individual's address provided in Item 1 of the
form.
General Instruction 12 further explains that by signing the
Execution Page of Form MA-I, a sole proprietor filing Form MA-I is
consenting that service of process may be given by registered or
certified mail to the address the sole proprietor has supplied in Item
1 of the form and is also attesting to the truth and correctness of the
information he or she has provided in the form.
General Instruction 13, as adopted, (General Instruction 14 as
proposed) discusses the requirement for a non-resident municipal
advisory firm to attach a legal opinion to its Form MA that the
municipal advisor can, as a matter of law, provide the Commission with
access to its books and records and that the municipal advisor can, as
a matter of law, submit to inspection and examination by the
Commission.\1314\ As adopted, General Instruction 13 reflects the fact
that the opinion of counsel that non-residents must file no longer
needs to state that the municipal advisor can submit to ``onsite''
inspection and examination.\1315\
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\1314\ See supra note 1154 and accompanying text.
\1315\ See supra note 1280 and accompanying text.
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The Commission has also added new General Instruction 14 to list
together in one place all the circumstances in which additional
documents must be attached to a Form MA or Form MA-I. The list of such
documents does not include any new requirements that were not included
in the Proposal. General Instruction 14 has been added for purposes of
clarity and convenience. The required documents enumerated include: (1)
any documents relating to criminal actions, as specified in the
Criminal Action DRPs of Form MA and Form MA-I, and any other supporting
documentation; (2) a manually-signed Form MA-NR for each non-resident
for whom such form is required; \1316\ (3) any written document (e.g.,
board resolution or power of attorney) authorizing a signatory to sign
a Form MA-NR; and (4) any written contractual agreements relating to
Form MA-NR; and (5) the required opinion of counsel for non-resident
municipal advisory firms.
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\1316\ Form MA-NR, by which a non-resident municipal advisor
designates an agent for service of process in the U.S., is accessed
electronically via links within Form MA and Form MA-I. The
information requested by the form may be entered online. However,
the form must be printed out and signed manually--both by the
applicant (an authorized signatory in the case of a firm) and by the
designated agent for service of process--and each of the signatures
must be notarized. After the signatures and notarizations are
completed, Form MA-NR must be attached in PDF format to the Form MA
or Form MA-I.
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The Commission has added new General Instruction 15 to provide
clarity
[[Page 67575]]
with respect to filing deadlines. General Instruction 15 provides that
if the deadline for submitting an initial filing, annual update, or
amendment to a form occurs on a Saturday, Sunday, or holiday on which
the Commission is not open for business, then the deadline shall be the
next business day.
The General Instructions also provide some instructions and
explanations specific to certain items in Form MA and Form MA-I.\1317\
In addition, the General Instructions provide some instructions and
explanations specific to Form MA-NR. Specific Instruction 1 for Form
MA, as adopted, explains that a municipal advisor that is not currently
registered as a municipal advisor and has taken over the business of
another municipal advisor or was registered as a municipal advisor but
has changed its structure or legal status will be a new organization
with registration obligations under the Exchange Act.\1318\ It further
explains that an applicant not registered with the SEC as a municipal
advisor that is acquiring or assuming substantially all of the assets
and liabilities of the advisory business of a registered municipal
advisor will be required to file a new application for registration on
Form MA within 30 calendar days after the succession. The instruction
also provides that, once the new registration is effective, Form MA-W
(as described above) must be filed to withdraw the registration of the
acquired municipal advisor. The instruction also explains that, if a
new municipal advisor is formed solely as a result of a change in the
form of organization or in the composition of a partnership or the date
or the state of incorporation, and there has been no practical change
in control or management, the applicant will be permitted to amend the
existing registration to reflect the changes by filing an amendment
within 30 calendar days after the change or reorganization.
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\1317\ As proposed, the sections of the General Instructions
that explained how to complete certain items in Form MA and Form MA-
I did not have names. As adopted, these sections are now called
``Specific Instructions for Certain Items in Form MA'' and
``Specific Instructions for Certain Items in Form MA-I.''
\1318\ Specific Instruction 1 for Form MA as adopted has been
significantly revised for purposes of clarity but includes no
substantive changes. See also infra Section III.A.7, regarding Rule
15Ba1-7, adopted as part of this rulemaking, upon which this
instruction is based.
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Specific Instruction 2 for Form MA is being adopted substantially
as proposed and has been revised only for clarity and to correct
certain citations that have changed. The instruction provides guidance
for newly-formed municipal advisors regarding how to respond to several
questions in Item 4 of Form MA (described above) that may be difficult
to answer when the applicant for registration has not been in existence
for a significant amount of time. The instruction advises that, for a
newly-formed municipal advisor, responses should reflect the
applicant's current municipal advisory activities (i.e., its activities
at the time of filing, with certain exceptions). With respect to
specified questions regarding the applicant's compensation
arrangements, the instructions provide that the applicant base its
responses on the types of compensation it expects to accept. Further,
with respect to its business activities relating to municipal
securities, the applicant is instructed to base its responses on the
types of municipal advisory activities in which it expects to engage
during the next year.
Specific Instruction 3 for Form MA is being adopted substantially
as proposed, with non-substantive revisions. The instruction explains
that Schedule D is to be completed if any response to Form MA requires
further explanation, or if the applicant wishes to provide additional
information.
The Specific Instructions for Certain Items in Form MA-I, as
adopted, have been revised to reflect the fact Form MA-I is not a
registration form and that municipal advisory firms, rather than
natural persons (other than sole proprietors), have the obligation to
complete and file Form MA-I. Specific Instruction 1 for Form MA-I
explains that, in Item 1 of Form MA-I, the municipal advisory firm must
enter the individual's CRD Number (if assigned), the individual's
social security number,\1319\ and the addresses of all offices at which
the individual is or will be physically located or from which the
individual is or will be supervised, even if the individual does not
work at that location.\1320\
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\1319\ As discussed above, social security numbers will not be
made publicly available. This information is necessary in connection
with the Commission's enforcement and examination functions pursuant
to Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See
Proposal, 76 FR 840, note 171.
\1320\ General Instruction 1 to Form MA-I in its adopted form
has been expanded to provide more explanation for a firm that
submits Form MA-I on behalf of natural persons associated with the
firm and engaged in municipal advisory activities on the firm's
behalf, but no new requirements have been added.
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Specific Instruction 2 for Form MA-I is being adopted substantially
as proposed, with revisions made for clarity. The instruction
emphasizes that, for purposes of completing Item 2 to Form MA-I, the
firm must enter all the other names that the individual is using, has
used, is known or has been known by, other than the individual's legal
name, since the age of 18, which includes nicknames, aliases, and names
used before and after marriage.
Specific Instruction 3 for Form MA-I is being adopted substantially
as proposed, but expanded with more information. The instruction
explains that, for purposes of Item 3, with respect to the individual's
residential history for the past 5 years, post office boxes may not be
used to complete the response and the firm may not leave any gaps in
the individual's residential history greater than three months. As
adopted, this instruction also includes the statement: ``This
information is needed for regulatory purposes. However, the version of
completed Form MA-I that will be available for viewing by the public
will not show the private residential addresses that you enter.''
Specific Instruction 4 for Form MA-I is being adopted substantially
as proposed, with an added clarification. The instruction provides
that, with respect to Item 4 of Form MA-I, the individual's employment
history for the past 10 years must be provided with no gaps greater
than three months; that the history should account for full-time and
part-time employment, self-employment, military service and homemaking;
and that unemployment, full-time education, extended travel, and other
similar statuses should be included. The added clarification explains
that such statuses should be entered on the line provided for ``Name of
Municipal Advisor or Company.''
Specific Instruction 5 for Form MA-I, regarding Item 5 of Form MA-I
(``Other Business''), has been revised in its adopted version. Instead
of restating, as proposed, some of the information requests specified
in Item 5, the instruction explains that other businesses in which the
individual ``is engaged'' is intended to capture such engagements as a
proprietor, partner, officer, director, or employee (including
independent contractor, trustee, agent or otherwise). As adopted, the
instruction also informs firms that if the number of hours per week
that individuals devote to the other business varies, the firms should
provide an average.
Specific Instruction 6 for Form MA-I, regarding Item 6 of Form MA-
I, is being adopted as proposed. The instruction advises firms that
affirmative responses to certain disclosure questions in the form could
make an individual subject to a statutory disqualification.
Specific Instruction 7 for Form MA-I is being adopted as proposed,
with an
[[Page 67576]]
added reminder for non-residents. The instruction indicates that, as
with Form MA, the form is to be signed (in Item 7 of Form MA-I) by
typing a signature in the designated field and makes clear that, by
typing a name, the signatory acknowledges and represents that the entry
constitutes in every way, use, or aspect, his or her legally binding
signature. The added reminder advises the firm that if the individual
is a non-resident, the firm must attach a manually-signed Form MA-NR to
the form.
The General Instructions contain a new section called ``General
Instructions to Form MA-NR'' that consists of instructions and
explanations specific to Form MA-NR. General Instruction 1 to Form MA-
NR repeats the information in General Instruction 2, discussed above,
regarding when Form MA-NR must be filed.
General Instruction 2 to Form MA-NR describes the circumstances in
which more than one Form MA-NR must be filed by a municipal advisory
firm. For example, the instruction states that a non-resident municipal
advisory firm filing a Form MA for itself would also need to file Form
MA-NR for each of its non-resident general partners and managing
agents, even if a Form MA-NR had been previously filed by another
municipal advisor for the general partner or managing agent. In
addition, a firm filing Form MA-I must attach Form MA-NR for every non-
resident natural person associated with the firm and engaged in
municipal activities on the firm's behalf.
General Instruction 3 to Form MA-NR describes when a Form MA-NR
must be filed at times other than when a municipal advisor submits its
initial application for registration. The instruction explains that a
registered municipal advisory firm must file a Form MA-NR within 30
days of the firm becoming a non-resident. The same applies when a
general partner or managing agent of the municipal advisory firm
becomes a non-resident, or a non-resident becomes a general partner or
managing agent of the firm after the firm's initial application for
registration. In such cases, the municipal advisor must file an
amendment to Form MA with the new Form MA-NR attached. The instruction
explains that a municipal advisory firm must also file Form MA-NR with
Form MA-I if, after the firm's initial registration, a non-resident
natural person becomes associated with the firm and engages in
municipal advisory activities on the firm's behalf. In addition, a firm
must file Form MA-NR if a natural person associated with the firm and
engaged in municipal advisory activities on behalf of the firm becomes
a non-resident after the firm has filed Form MA-I relating to that
individual. The firm must file Form MA-NR within 30 days of the
individual becoming a non-resident.\1321\
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\1321\ General Instruction 3 to Form MA-NR also contains a note
reminding non-resident municipal advisory firms of two additional
requirements for non-resident municipal advisory firms that are
discussed in General Instruction 12 (to complete Form MA Execution
Page for non-residents and the undertaking regarding books and
records) and General Instruction 13 (to attach an opinion of counsel
that the firm can provide the Commission with access to its books
and records and can submit to inspection and examination by the
Commission).
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General Instruction 4 to Form MA-NR describes when a new Form MA-NR
must be filed. The instruction indicates that a new Form MA-NR must be
filed promptly if a previously-filed Form MA-NR becomes invalid or
inaccurate.\1322\ This includes any change to the name or address of
the non-resident municipal advisory firm, general partner, managing
agent, or natural person associated with the firm and engaged in
municipal advisory activities on behalf of the firm, or any change to
the name or address of the agent of service of process of such non-
resident, to which the previously-filed Form MA-NR relates. The
instruction explains that a non-resident must promptly appoint a
successor agent for service of process and the municipal advisor must
file a new Form MA-NR if the non-resident discharges its identified
agent for service of process or if its agent for service of process
becomes unwilling or unable to accept service on behalf of the non-
resident.
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\1322\ A new Form MA-NR is filed by submitting an amendment to
Form MA with a new Form MA-NR attached.
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In the Proposal, the term ``non-resident'' was defined as an
individual, corporation, or partnership or other unincorporated
organization or association that resides in or has his or its principal
office and place of business in ``any place not in the United States.''
As adopted, the language in the term ``non-resident'' that determines
whether an individual, corporation, or partnership or other
unincorporated organization or association is a ``non-resident'' has
been slightly modified to whether the person resides in or has his or
its principal office and place of business in ``any place not subject
to the jurisdiction of the United States.'' The language has been
changed to clarify that persons that reside or have their principal
office and place of business in United States territories do not fall
within the definition of ``non-resident.''
The Glossary of Terms is being adopted substantially as proposed.
However, the Glossary, as adopted, contains some revisions that are
being made for clarity. As adopted, the Glossary includes some
revisions to terms that reflect changes to the definitions being
adopted in Rule 15Ba1-1. For example, the definition of ``Guaranteed
Investment Contract'' has been revised to clarify that the contract at
issue must relate to investments of proceeds of municipal securities or
municipal escrow investments. The definition of the term ``municipal
advisor,'' as adopted, has been revised to make clear that the
definition is subject to the exclusions that are being adopted under
Rule 15Ba1-1(d)(2) \1323\ and the exemptions under Rule 15Ba1-
1(d)(3).\1324\ Likewise, the definition of the term ``obligated
persons,'' consistent with the definition in adopted Rule 15Ba1-1, has
been revised to state that the term does not include a person whose
financial information or operating data is not material to a municipal
securities offering or the federal government. The Glossary contains
other revisions to terms that are consistent with revisions to the
definitions in Rule 15Ba1-1, as adopted.
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\1323\ 17 CFR 240.15Ba1-1(d)(2).
\1324\ 17 CFR 240.15Ba1-1(d)(3).
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The Glossary includes some new definitions that were not in the
Proposal. For example, the Glossary now defines the term ``federal
regulatory agency'' to include any federal banking agency and the
National Credit Union Administration. The Glossary also defines the
term ``state regulatory agency'' to include any State securities
commission (or any agency or officer performing like functions); State
authority that supervises or examines banks, savings associations, or
credit unions; or State insurance commission (or any agency or office
performing like functions to the above). The definitions of the terms
``federal regulatory agency'' and ``state regulatory agency'' are
consistent with the language in Exchange Act Section 15(b)(4)(H).\1325\
The Glossary has also been revised to include a new definition of the
term ``affiliate, affiliated, affiliation,'' which is derived from the
definition of ``advisory affiliate'' for Form ADV.
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\1325\ The statutory disqualification language of Section
15(b)(4)(H) is referenced in Exchange Act Section 15B(c)(2), which
describes the Commission's power to censure, place limitations on
the activities, functions, or operations, or suspend, or revoke the
registration of a municipal advisor.
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The term ``natural person municipal advisor'' has been removed from
the Glossary, as adopted. In the Proposal,
[[Page 67577]]
the term was defined to mean any natural person that is a municipal
advisor, including sole proprietors. The term had been included in the
Proposal to collectively describe natural persons who were required to
file Form MA-I. Because municipal advisory firms, rather than natural
persons (other than sole proprietors), are now responsible for filing
Form MA-I, the term is no longer necessary, and is therefore being
removed from the Glossary.
9. Rule 15Bc4-1: Persons Associated With Municipal Advisors
As noted in the Proposal, Section 975(c)(5) of the Dodd-Frank Act
provides the Commission with authority to censure or place limitations
on the activities or functions of any person associated with a
municipal advisor or to suspend or bar any such person from being
associated with a municipal advisor. As discussed in the Proposal,
however, it appears that a technical error was made in the final draft
of this provision.\1326\ Specifically, Section 975(c)(5) of the Dodd-
Frank Act provides that Section 15B(c)(4) of the Exchange Act be
amended ``by inserting `or municipal advisor' after `municipal
securities dealer or obligated person' each place that term appears.''
\1327\ At the time the Dodd-Frank Act was enacted, however, Section
15B(c)(4) of the Exchange Act included the term ``municipal securities
dealer,'' but did not include the phrase ``municipal securities dealer
or obligated person'' (emphasis added).
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\1326\ See Proposal, 76 FR 850, n.233.
\1327\ See Section 975(c)(5) of the Dodd-Frank Act.
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To address any ambiguity created by this error, the Commission
stated in the Proposal its intent to recommend a technical amendment to
Section 975(c)(5) of the Dodd-Frank Act.\1328\ To date, however, the
Exchange Act has not been amended to correct this technical error.
Therefore, to clarify the Commission's interpretation of Section
15B(c)(4) of the Exchange Act, the Commission is adopting new Rule
15Bc4-1 to make clear the Commission's understanding of its authority
with respect to associated persons of municipal advisors. Specifically,
Rule 15Bc4-1 states that the Commission has the authority to, by order,
censure or place limitations on the activities or functions of any
person associated, seeking to become associated, or, at the time of the
alleged misconduct, associated or seeking to become associated with a
municipal advisor, or suspend for a period not exceeding 12 months or
bar any such person from being associated with a broker, dealer,
investment adviser, municipal securities dealer, municipal advisor,
transfer agent, or nationally recognized statistical rating
organization, if the Commission finds, on the record after notice and
opportunity for hearing, that such censure, placing of limitations,
suspension, or bar is in the public interest and that such person has
committed any act, or is subject to an order or finding, enumerated in
subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of Section
15(b) of the Exchange Act, has been convicted of any offense specified
in subparagraph (B) of such paragraph (4) within 10 years of the
commencement of the proceedings under section 15B(c)(4) of the Exchange
Act, or is enjoined from any action, conduct, or practice specified in
subparagraph (C) of Section 15(b)(4). Rule 15Bc4-1 also states the
Commission's interpretation that Section 15B(c)(4) of the Exchange Act
makes it unlawful for any person, as to whom an order is entered
pursuant to Section 15B(c)(4) or Section 15B(c)(5) of the Exchange Act
suspending or barring him from being associated with a municipal
advisor is in effect, willfully to become, or to be, associated with a
municipal advisor without the consent of the Commission. Further, Rule
15Bc4-1 sets forth the Commission's understanding that it is unlawful
for any municipal advisor to permit such a person to become, or remain,
an associated person without the consent of the Commission, if such
municipal advisor knew, or, in the exercise of reasonable care should
have known, of such order. Not only does the Commission believe that
such interpretation is the only one that is consistent with the
Congressional intent underlying Section 975(c)(5) of the Dodd-Frank
Act, and that any other reading would produce the absurd result that no
amendment would be made to Section 15(c)(4) of the Exchange Act, but
the Commission also believes that this interpretation and the adoption
of Rule 15Bc4-1 are necessary and appropriate to ensure that the
Commission may censure or place limitations on the activities or
functions of any person associated with a municipal advisor or to
suspend or bar any such person from being associated with a municipal
advisor.
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\1328\ See Proposal, 76 FR 850, n.233.
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B. Approval or Denial of Registration
As discussed in the Proposal,\1329\ Exchange Act Section 15B(a)(2)
provides that within forty-five days of the filing of an application to
register as a municipal advisor,\1330\ the Commission must either:
``(A) by order grant registration, or (B) institute proceedings to
determine whether registration should be denied. Such proceedings shall
include notice of the grounds for denial under consideration and
opportunity for hearing and shall be concluded within one hundred
twenty days of the date of the filing of the application for
registration. At the conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. The Commission may extend
the time for the conclusion of such proceedings for up to ninety days
if it finds good cause for such extension and publishes its reasons for
so finding or for such longer period as to which the applicant
consents.'' \1331\
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\1329\ See id., at 860.
\1330\ The statute allows for a longer period if the applicant
consents. See 15 U.S.C. 78o-4(a)(2).
\1331\ See 15 U.S.C. 78o-4(a)(2).
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In accordance with Exchange Act Section 15B(a)(2), the Commission
will grant the registration of a municipal advisor if the Commission
finds that the requirements of Section 15B of the Exchange Act are
satisfied. The Commission will deny the registration of a municipal
advisor if the Commission does not make such a finding or if it finds
that, if the applicant were registered, its registration would be
subject to suspension or revocation under Section 15B(c) of the
Exchange Act.\1332\
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\1332\ See 15 U.S.C. 78o-4(c).
---------------------------------------------------------------------------
As discussed in the Proposal, the information currently required by
Form MA-T is not reviewed by the Commission prior to registration,
although the Commission retains full authority to review such
information and examine any registered municipal advisor at any
time.\1333\ The Commission intends that the permanent registration
process will entail a review of each filed Form MA.
---------------------------------------------------------------------------
\1333\ See Proposal, 76 FR 860.
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In considering whether to grant an application for registration as
a municipal advisor, the Commission will review the information
provided on Form MA. For example, as discussed in the Proposal, the
Commission may perform cross checks of applicants through the use of
the applicant's other registration numbers, such as its CRD or other
SEC registration numbers, to the extent available.\1334\ Also, the
Commission may review the disclosures required by Item 9 of Form MA,
including the disciplinary history of an applicant.\1335\ In addition,
as discussed
[[Page 67578]]
in the Proposal, the municipal advisor registration process will allow
the Commission and staff to ask questions and, as needed, to request
amendments before granting an application for registration.\1336\
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\1334\ See id.
\1335\ See id.
\1336\ See id.
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C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by
Municipal Advisors
Section 17(a)(1) of the Exchange Act provides, in pertinent part,
that all registered municipal advisors shall make and keep for
prescribed periods such records, furnish such copies thereof, and make
and disseminate such reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange
Act.\1337\ With proposed Rule 15Ba1-7, the Commission proposed to
specify the books and records requirements applicable to municipal
advisors.\1338\ The Commission is adopting Rule 15Ba1-7 as proposed,
but renumbered as Rule 15Ba1-8, with a few technical clarifications,
the addition of general ledgers, and the addition of written consents
to service of process from certain natural persons.
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\1337\ See 15 U.S.C. 78q(a)(1).
\1338\ See Proposal, 76 FR 860-862. In addition, Section
15B(b)(2)(G) of the Exchange Act provides that the rules of the MSRB
shall ``prescribe records to be made and kept by . . . municipal
advisors and the periods for which such records shall be
preserved.'' 15 U.S.C. 78o-4(b)(2)(G).
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Record-Keeping for Municipal Advisors
As discussed in the Proposal, the Commission based Rule 15Ba1-7(a)
(as adopted, Rule 15Ba1-8(a)) generally on the books and records
requirements for broker-dealers and investment advisers.\1339\ Rule
15Ba1-8(a), among other things, requires a municipal advisory firm to
make and keep true, accurate, and current certain books and records
relating to its municipal advisory activities.\1340\ Specifically, Rule
15Ba1-8(a) requires all municipal advisory firms to make and keep
originals or copies of all written communications received, and
originals or copies of all written communications sent, by such
municipal advisor (including inter-office memoranda and communications)
relating to municipal advisory activities, regardless of the format of
the communications.\1341\ Municipal advisory firms also must keep all
check books, bank statements, general ledgers,\1342\ cancelled checks,
and cash reconciliations; a copy of each version of the municipal
advisor's policies and procedures, if any, that (i) are in effect or
(ii) at any time within the last five years were in effect (not
including those in effect prior to the effective date of Rule 15Ba1-8);
and a copy of any document created by the municipal advisor that was
material to making a recommendation to a municipal entity or obligated
person that memorializes the basis for that recommendation. In
addition, a municipal advisory firm must keep all written agreements
(or copies thereof) entered into by the municipal advisor with any
municipal entity, employee of a municipal entity, or an obligated
person or otherwise relating to the business of the municipal advisor
as such. Further, a municipal advisory firm is required to keep a
record of the names of persons who are, or have been in the past five
years, associated with the municipal advisor (not including persons
associated with the municipal advisor prior to the effective date of
Rule 15Ba1-8); names, titles, and business and residence addresses of
all persons associated with the municipal advisor;\1343\ all municipal
entities or obligated persons with which the municipal advisor is
engaging or has engaged in municipal advisory activities in the past
five years (not including those prior to the effective date of Rule
15Ba1-8); the name and business address of each person to whom the
municipal advisor provides or agrees to provide payment to solicit a
municipal entity, an employee of a municipal entity, or an obligated
person on its behalf; and the name and business address of each person
that provides or agrees to provide payment to the municipal advisor to
solicit a municipal entity, an employee of a municipal entity, or an
obligated person on its behalf.\1344\ Finally, a municipal advisory
firm must keep written consents to service of process from each natural
person who is a person associated with the municipal advisor and
engages in municipal advisory activities solely on behalf of such
municipal advisor.\1345\
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\1339\ See Proposal, 76 FR 861, note 274 and accompanying text.
\1340\ Therefore, the books and records listed in Rule 15Ba1-
8(a) are limited to those relating to a municipal advisor's
municipal advisory activities.
\1341\ As discussed in the Proposal, materials posted on a
municipal advisor's Web site relating to municipal advisory
activities are written communications sent by the municipal advisor
for purposes of this provision. See Proposal, 76 FR 861, note 275.
The Commission notes that written communications may be in
electronic form, such as emails or instant messages. Further, as
discussed above, in determining whether or not funds to be invested
constitute proceeds of municipal securities for purposes of Rule
15Ba1-1(m), a person may rely on representations in writing made by
a knowledgeable official of a municipal entity or obligated person
whose funds are to be invested regarding the nature of such funds,
provided that the person seeking to rely on such representations has
a reasonable basis for such reliance. See Rule 15Ba1-1(m)(3).
Similarly, in determining whether or not funds to be invested or
reinvested constitute municipal escrow investments for purposes of
Rule 15Ba1-1(h), a person may rely on representations in writing
made by a knowledgeable official of a municipal entity or obligated
person whose funds are to be invested or reinvested regarding the
nature of such investments, provided that the person seeking to rely
on such representations has a reasonable basis for such reliance.
See Rule 15Ba1-1(h)(2). Such representations provided by the
municipal entity or obligated person official constitute written
communications received by a municipal advisor relating to municipal
advisory activities.
\1342\ As discussed below in this section, the Commission is
including ``general ledgers'' in the final books and records rule.
\1343\ The Commission notes that this provision does not cover
persons who were previously and are no longer associated with the
municipal advisor.
\1344\ Proposed Rule 15Ba1-7 also required municipal advisory
firms to make and keep a record of the initial or annual review, as
applicable, conducted by the municipal advisory firm of its business
in connection with its self-certification on Form MA. Because the
Commission is not adopting a self-certification requirement, the
Commission is also not adopting this corresponding books and records
requirement.
\1345\ As discussed below in this section, the Commission is
including ``written consents to service of process from each natural
person who is a person associated with the municipal advisor and
engages in municipal advisory activities solely on behalf of such
municipal advisor'' in the final books and records rule.
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Rule 15Ba1-8(b)(1) requires municipal advisory firms to maintain
and preserve all books and records required to be made for a period of
not less than five years, the first two years in an easily accessible
place. Further, corporate governance documents, such as articles of
incorporation and stock certificate books of the municipal advisor, and
those of any predecessor, excluding those that were only in effect
prior to the effective date of Rule 15Ba1-8, must be maintained in the
principal office of the municipal advisor and preserved until at least
three years after termination of the business or withdrawal from
registration as a municipal advisor.
As discussed in the Proposal, Rule 15Ba1-7(d) (as adopted, Rule
15Ba1-8(d)) is modeled on Rule 204-2 under the Investment Advisers
Act.\1346\ Specifically, Rule 15Ba1-8(d) permits, and sets forth the
requirements for, electronic storage of the records required to be
maintained and preserved pursuant to Rule 15Ba1-8. The rule further
sets forth requirements with respect to the prompt \1347\ provision of
[[Page 67579]]
records upon request by the Commission or by its staff or other
representatives. In addition, Rule 15Ba1-8(e) provides that any books
or records made, kept, maintained, and preserved in compliance with
Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or
Rule 204-2 under the Investment Advisers Act, which are substantially
the same as the books and records required to be made, kept,
maintained, and preserved under Rule 15Ba1-8, will satisfy the record-
keeping requirements under Rule 15Ba1-8.\1348\ Subparagraph (e) of Rule
15Ba1-8 is designed to minimize the record-keeping burden for municipal
advisory firms that are otherwise subject to similar record-keeping
requirements.\1349\
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\1346\ See 17 CFR 275.204-2. See also Proposal, 76 FR 861.
\1347\ For purposes of Rule 15Ba1-8(d), the Commission
interprets the term ``prompt'' to mean making reasonable efforts to
produce records that are requested by the staff during an
examination without delay. The Commission believes that in many
cases a municipal advisor could, and therefore will be required to,
furnish records immediately or within a few hours of a request. The
Commission expects that only in unusual circumstances would a
municipal advisor be permitted to delay furnishing records for more
than 24 hours.
\1348\ See Rule 15Ba1-8(e).
\1349\ See Proposal, 76 FR 861.
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In the Proposal, the Commission requested comment on the proposed
books and records requirements. Specifically, the Commission requested
comment regarding, among other things, the types of documents and data
that should be retained; whether it is appropriate for the books and
records requirements to be based on the books and records requirements
for broker-dealers and investment advisers; the length of the period
for maintaining and preserving books and records; the format of the
records retained; and whether the proposed requirements are overly
burdensome.\1350\
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\1350\ See id., at 862.
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The Commission received several letters that specifically addressed
the books and records requirements. One commenter generally supported
the proposed record-keeping rule. This commenter stated it does not
oppose establishing a five-year period for municipal advisor record
retention and suggested that a record retention period of five years
should be the same for broker-dealers, investment advisers, and
municipal advisors.\1351\ However, other commenters criticized some of
the requirements as being too burdensome, especially for small
independent municipal advisors.\1352\ For example, one commenter noted
that the expense required for firms to retain originals or copies of
all written communications, internal or external, relating to their
municipal advisory activities caused particular concern.\1353\ This
commenter recommended that this requirement be eliminated, while all
other books and records requirements could remain.\1354\ Alternatively,
this commenter suggested that only certain communications with a client
or generated internally be required to be kept.\1355\ Another commenter
stated that, because independent municipal advisors neither hold client
accounts nor hold custody of monies from clients, audited financial
statements should not be required, particularly as they are costly and
burdensome for small firms.\1356\ This commenter suggested that the
Commission should narrow the record-keeping requirements to
communication material specifically relevant to financing topics and
financing recommendations or advice.\1357\ One commenter also requested
that the Commission clarify that every iteration of commonly used and
routinely changing technical financial documents, typically referred to
as ``numbers runs,'' need not be retained, and that only iterations
either sent to a client or used internally to form the basis for a
recommendation to a client must be retained.\1358\
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\1351\ See MSRB Letter I.
\1352\ See, e.g., letter from Gerald Gornish, Chief Counsel,
Pennsylvania Public School Employees' Retirement System,
Pennsylvania Municipal Retirement System, Jeffrey B. Clay, Executive
Director, Pennsylvania Public School Employees' Retirement System,
and James B. Allen, Secretary, Pennsylvania Municipal Retirement
System, dated February 22, 2011 (``Pennsylvania Public School
Employees' Retirement Board Letter'') (noting that the Commission's
estimate of 181 burden hours for books and records is not broken
down further to an individual municipal advisor); letter from John
B. Payne, Principal, B-Payne Group Financial Advisors, dated March
28, 2011 (``Bradley Payne Letter'') (``I can manage and support fee
and conflict disclosures and outgoing email and client file
retention, but that is it.''); letter from UFS Bancorp, dated
February 22, 2011 (``UFS Bancorp Letter'') (``[The 181-hour annual
burden for books and records] is nearly ten percent of a full-time
person's time.''); letter from Adam W. Rygmyr, Associate General
Counsel, TIAA-CREF, Individual & Institutional Services, LLC, dated
February 22, 2011 (stating that the books and records requirement
would largely duplicate existing record-keeping requirements for
broker-dealers).
\1353\ See Rule 15Ba1-8(a)(1) and NAIPFA Letter I (``The
information technology and storage facilities required to keep all
email or similar electronic communication and to segregate those
that relate to municipal advisory business from other unrelated
email is expensive. Firms would be required to either outsource this
function or develop the capability in-house, which would necessitate
hiring one or more IT professionals. Either way, the cost would be
significant to firms with such limited revenue.''). See also letter
from Thomas DeMars, Managing Principal, Fieldman, Rolapp &
Associates, dated February 22, 2011 (``Fieldman Rolapp Letter'')
(recommending that the Commission modify the record-keeping
requirements to eliminate the need to retain all written
communications, and clarify all other record-keeping requirements);
and letter from Phillip C. Dotts, President, Public FA, Inc., dated
February 22, 2011 (``Public FA Letter'').
\1354\ See NAIPFA Letter I.
\1355\ See id.
\1356\ See Public FA Letter.
\1357\ See id.
\1358\ See NAIPFA Letter I.
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The Commission has carefully considered the issues raised by
commenters and is adopting Rule 15Ba1-7 generally as proposed, but
renumbered as Rule 15Ba1-8 and with modifications to include general
ledgers, as well as written consents to service of process from each
natural person who is a person associated with the municipal advisor
and engages in municipal advisory activities solely on behalf of such
municipal advisor.
General ledgers would reflect asset, liability, reserve, capital,
income and expense accounts.\1359\ In the Proposal, the Commission
inadvertently omitted general ledgers from proposed Rule 15Ba1-7. The
Commission notes that ledgers are part of the books and records
requirements for broker-dealers and investment advisers, and would
already be made and kept by dually-registered municipal advisors.\1360\
The Commission believes that general ledgers will assist its staff in
understanding a municipal advisor's business dealings and financial
condition, identifying and tracking illicit expenses, identifying
sources of revenue that were previously undisclosed or that pose a
conflict of interest, identifying and tracing possible acts of fraud
and violations of applicable laws and rules (e.g., MSRB Rule G-37
(Political Contributions and Prohibitions on Municipal Securities
Business)), and conducting asset verification. In addition, the
Commission notes that a municipal advisor's balance sheet and profit
loss statement are derived from the general ledger.
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\1359\ See Rule 15Ba1-8(a)(2).
\1360\ See 17 CFR 240.17a-3(a)(2) and 17 CFR 275.204-2(a)(2).
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The Commission believes it is also appropriate to include in the
record-keeping requirement written consents to service of process from
each natural person who is a person associated with the municipal
advisor and engages in municipal advisory activities solely on behalf
of such municipal advisor. Under proposed Rule 15Ba1-2(b), each natural
person who met the definition of municipal advisor would have been
required to register as a municipal advisor by filing Form MA-I.\1361\
Proposed Form MA-I included consent to service of process that a
natural person would have been required to execute. In contrast,
adopted Rule 15Ba1-2(b) requires a person applying
[[Page 67580]]
for registration or registered as a municipal advisor to complete Form
MA-I with respect to each natural person who is a person associated
with the municipal advisor and engaged in municipal advisory activities
on its behalf.\1362\ As such, Form MA-I no longer includes consents to
service of process executed by such natural persons. Because the
Commission would no longer receive these consents to service of process
as part of Form MA-I, the Commission believes it is appropriate to
include in the record-keeping requirement written consents to service
of process from each natural person who is a person associated with the
municipal advisor and engages in municipal advisory activities solely
on behalf of such municipal advisor. Specifically, the Commission
believes that this requirement will help ensure that such natural
persons have indeed executed consents to service of process and will
allow Commission staff to examine such consents to service of process.
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\1361\ See proposed Rule 15Ba1-2(b).
\1362\ See Rule 15Ba1-2(b).
---------------------------------------------------------------------------
With respect to concerns related to the burden of the books and
records requirements, including the burden for retaining originals or
copies of all written communications relating to municipal advisory
activities,\1363\ the Commission continues to believe that the final
books and records requirements are appropriate for all municipal
advisors because they will facilitate the Commission's inspections and
examinations of municipal advisors and assist the Commission in
evaluating a municipal advisor's compliance with Section 15B of the
Exchange Act, the rules and regulations thereunder, and MSRB rules.
Moreover, even though it recognizes that such requirements may impose
burdens and costs upon municipal advisors, the Commission understands
that many municipal advisors already make and keep certain types of the
books and records required to be made and kept under Rule 15Ba1-8(a)
under other regulatory requirements or general industry practices.
Specifically, because the books and records required to be made and
kept under Rule 15Ba1-8(a) are generally based on the existing books
and records requirements for broker-dealers and investment advisers,
the Commission believes that many municipal advisors would already be
familiar and in compliance with such requirements because they are also
registered as broker-dealers or investment advisers. Moreover, as noted
above, to reduce the burden that would result from the books and
records requirements, Rule 15Ba1-8(e)(1) provides that any books or
other records made, kept, maintained, and preserved in compliance with
Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or
Rule 204-2 under the Investment Advisers Act, which are substantially
the same as the books and records required to be made, kept,
maintained, and preserved under Rule 15Ba1-8, will satisfy the
requirements of Rule 15Ba1-8.
---------------------------------------------------------------------------
\1363\ See supra notes 1353-1355.
---------------------------------------------------------------------------
With respect to those municipal advisors that are not also
registered with the Commission as broker-dealers or investment
advisers, the Commission recognizes that Rule 15Ba1-8 establishes new
record-keeping requirements for these entities and may impact these
entities to a greater degree than entities that have previously
registered as broker-dealers or investment advisers.\1364\ However, the
Commission believes that all municipal advisors should be subject to
the same record-keeping requirements, regardless of whether they have
previously registered with the Commission in another capacity. As noted
above, the Commission believes that Rule 15Ba1-8 is appropriate for all
municipal advisors because it will facilitate the Commission's
inspections and examinations of municipal advisors \1365\ and assist
the Commission in evaluating a municipal advisor's compliance with
Section 15B of the Exchange Act, the rules and regulations thereunder,
and MSRB rules. The Commission also believes that regulation of
municipal advisors is in the public interest and will improve the
protection of municipal entities and investors.
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\1364\ See infra Sections VII.D.8.; VIII.D.3.a.; and X.D.
(discussing the costs and burdens of Rule 15Ba1-8).
\1365\ See 15 U.S.C. 78o-4(c)(7)(A). Based on the Commission's
experience in conducting examinations of broker-dealers and
investment advisers, which includes examinations of the types of
books and records required by Rule 15Ba1-8(a), the Commission
believes that the municipal advisor books and records requirements
under Rule 15Ba1-8 will facilitate the Commission's inspections and
examinations of municipal advisors.
---------------------------------------------------------------------------
Further, because the Commission is adopting certain additional
exemptions from the definition of municipal advisor, including an
exemption for persons providing advice with respect to investment
strategies that are not plans or programs for the investment of the
proceeds of municipal securities or the recommendation of and brokerage
of municipal escrow investments, the burden of the books and records
requirements is similarly reduced (i.e., fewer persons would be
required to register as municipal advisors and the record-keeping
requirements would not cover activities that fall under an exemption or
exclusion from the definition of municipal advisor). The Commission
also notes that the burden of the books and records requirements for
municipal advisors depends on the complexity of the business of a
municipal advisor, which means smaller municipal advisors would be
subject to proportionately lower burden in complying with such
requirements.\1366\ Further, as noted below, the Commission assumes
that municipal advisors will use the most cost-effective method
available, depending on their size and specific circumstances, to
comply with Rule 15Ba1-8. The Commission understands that many
municipal advisors generally make and keep the required records in
electronic form, which will likely minimize the burdens and costs
associated with record-keeping.\1367\ Therefore, the Commission does
not believe Rule 15Ba1-8 will be overly burdensome for municipal
advisory firms, including small municipal advisory firms.\1368\
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\1366\ See also infra notes 1594 and accompanying text
(discussing PRA burdens of Rule 15Ba1-8) and 1867 and accompanying
text (discussing the technological costs of Rule 15Ba1-8).
\1367\ See infra note 1601 and accompanying text (discussing PRA
burdens in connection with electronic storage of books and records).
\1368\ Concerns expressed with respect to the impact of the rule
on small municipal advisors are further discussed in Section IX
below.
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Finally, in response to comments, the Commission confirms that only
iterations of ``numbers runs'' sent to a client or that are used to
form the basis for a recommendation to a client must be retained.\1369\
With respect to a commenter's suggestion that audited financial
statements should not be required, the Commission notes that the
requirements of Rule 15Ba1-8 do not apply to audited financial
statements.\1370\
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\1369\ See supra note 1358 and accompanying text.
\1370\ See supra note 1356 and accompanying text.
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Record-keeping After a Municipal Advisor Ceases To Do Business
As proposed, Rule 15Ba1-8(c)\1371\ requires a municipal advisory
firm, before ceasing to conduct or discontinuing business as a
municipal advisor, to arrange and be responsible for the continued
preservation of the books and records for the remainder of the period
required by Rule 15Ba1-8. It also requires the municipal advisory firm
to notify the Commission in writing of the exact address where such
books and records will be maintained during such period. The Commission
did not
[[Page 67581]]
receive any comments on this aspect of the proposal and is adopting
Rule 15Ba1-8(c) without modification.
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\1371\ In the Proposal, this provision was numbered Rule 15Ba1-
7(c).
---------------------------------------------------------------------------
Requirements for Non-Residents
As proposed, Rule 15Ba1-8(f), which is modeled on Rule 204-2(j)
under the Investment Advisers Act,\1372\ sets forth the books and
records requirements for non-resident municipal advisory firms,
including requirements for keeping, maintaining, and preserving copies
of the books and records that these municipal advisors are required to
make, keep, maintain, and preserve under any rule or regulation adopted
under the Exchange Act, as well as requirements for providing written
notice to the Commission of the location of such books and
records.\1373\ Specifically, Rule 15Ba1-8(f) requires non-resident
municipal advisory firms to keep, maintain, and preserve all such books
and records in the United States \1374\ and provide notice to the
Commission of the address of such location within 30 calendar days
\1375\ after Rule 15Ba1-8 becomes effective (in the case of municipal
advisory firms that are already registered or in the process of
applying for registration when the rule becomes effective) or when
filing an application for registration (in the case of municipal
advisory firms that file applications for registration after the rule
becomes effective).\1376\ A non-resident municipal advisory firm is not
required to keep, maintain, and preserve such books and records in the
United States if the municipal advisor timely files with the Commission
a written undertaking (in a form acceptable to the Commission and
signed by a duly authorized person) to furnish the Commission, upon
demand, copies of any or all of such books and records at the municipal
advisor's expense at the Commission's principal or regional office (as
specified by the Commission).\1377\ Specifically, a non-resident
municipal advisory firm must furnish the requested books and records
within 14 calendar days \1378\ of the Commission's written demand to
the offices of the Commission as specified in the written demand.\1379\
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\1372\ 17 CFR 275.204-2(j).
\1373\ In the Proposal, this provision was numbered Rule 15Ba1-
7(f).
\1374\ See Rule 15Ba1-8(f)(1).
\1375\ The Commission is clarifying that the 30-day period
refers to 30 calendar days.
\1376\ See Rule 15Ba1-8(f)(2).
\1377\ See Rule 15Ba1-8(f)(3)(i). Rule 15Ba1-8(f)(3)(i) sets
forth the form of the undertaking.
\1378\ The Commission is clarifying that the 14-day period
refers to 14 calendar days.
\1379\ See Rule 15Ba1-8(f)(3)(ii). The rule requires that any
written demand be forwarded by the Commission to the municipal
advisor by registered mail at the municipal advisor's last address
of record filed with the Commission. See id.
---------------------------------------------------------------------------
The Commission did not receive any comments on its proposed record-
keeping requirements for non-resident municipal advisory firms and is
adopting Rule 15Ba1-8(f) without substantive modification.\1380\ The
Commission believes the requirements for non-resident municipal
advisory firms will help ensure the Commission's effective regulation
of municipal advisors. Further, as discussed in the Proposal, such
requirements are designed to ensure that the Commission has access to
the books and records of municipal advisors located outside of the
United States to enable it to perform effective examinations and
inspections. The requirements will also serve to mitigate the time and
cost burdens the Commission may otherwise face in attempting to gain
access to books and records located outside of the United States, such
as in the case of any jurisdictional dispute relating to such
access.\1381\
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\1380\ See supra notes 1375 and 1378.
\1381\ See Proposal, 76 FR 862.
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IV. Designation of FINRA To Examine FINRA Member Municipal Advisors
The Dodd-Frank Act amended the Exchange Act to, among other things,
require new entities and individuals to register with the Commission
and authorize the Commission to examine such registrants, including
municipal advisors. Some entities that are currently registered, or
will be registered, with the Commission as municipal advisors are also
registered with the Commission as broker-dealers and are members of
FINRA. The Commission anticipates that FINRA will conduct examinations
of Commission-registered municipal advisors that are also FINRA
members, subject to the Commission's oversight. The Commission will be
responsible for examining registered municipal advisors that are not
FINRA members, which comprise the vast majority of the anticipated
registrants.\1382\
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\1382\ As of December 31, 2012, approximately twenty-five
percent of the 1,110 MA-T registrants were also registered with
FINRA as broker-dealers. Accordingly, under the permanent
registration regime, the Commission believes that FINRA will examine
but a small percentage of registered municipal advisors.
---------------------------------------------------------------------------
The Commission believes that Section 15A of the Exchange Act
provides authority to FINRA to examine its members' municipal advisory
activities. Section 15A provides, in relevant part, that an association
of brokers and dealers shall not be registered as a national securities
association unless the Commission determines that: (1) The association
has the capacity to be able to enforce compliance by its members and
persons associated with its members with the provisions of the Exchange
Act, the rules and regulations thereunder, the rules of the MSRB, and
the rules of the association; \1383\ and (2) the rules of the
association provide that the association shall provide information to
the MSRB about the examinations of the association so that the MSRB may
assist in such examinations.\1384\ In accordance with these provisions,
FINRA, as a registered national securities association, has
traditionally conducted examinations of its members' activities in
connection with municipal securities for compliance with the Exchange
Act, rules and regulations thereunder, and MSRB rules.
---------------------------------------------------------------------------
\1383\ See 15 U.S.C. 78o-3(b)(2).
\1384\ See 15 U.S.C. 78o-3(b)(15).
---------------------------------------------------------------------------
Registered municipal advisors are subject to the Exchange Act,
rules and regulations thereunder, and MSRB rules. As such, Section 15A
provides FINRA with authority to conduct examinations of its members'
activities as registered municipal advisors in order to evaluate their
compliance with the applicable laws and rules.\1385\ In addition, the
Dodd-Frank Act amended Section 15B of the Exchange Act to expressly
provide that ``the Commission, or its designee, in the case of
municipal advisors,'' conduct periodic examinations.\1386\ Accordingly,
the Commission designates FINRA as a designee to examine its members'
activities as registered municipal advisors and evaluate compliance by
such members with federal securities laws, Commission rules and
regulations, and MSRB rules applicable to municipal advisors.
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\1385\ Moreover, as noted above, Section 15A(b)(15) of the
Exchange Act requires FINRA rules to specify that it shall provide
information to the MSRB about its examinations so that the MSRB may
``assist in such . . . examinations.'' 15 U.S.C. 78o-3(b)(15). This
statutory provision implies that FINRA has the requisite authority
to examine municipal advisors.
\1386\ 15 U.S.C. 78o-4(c)(7)(A)(iii). Specifically, Section
15B(c)(7) provides that ``periodic examinations . . . shall be
conducted by--(i) a registered securities association, in the case
of municipal securities brokers and municipal securities dealers who
are members of such association; (ii) the appropriate regulatory
agency for any municipal securities broker or municipal securities
dealer, in the case of all other municipal securities brokers and
municipal securities dealers; and (iii) the Commission, or its
designee, in the case of municipal advisors.''
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V. Implementation and Compliance Dates
As discussed above, Section 15B of the Exchange Act, as amended by
the Dodd-Frank Act, makes it unlawful for a municipal advisor to
provide advice to
[[Page 67582]]
or on behalf of a municipal entity or obligated person with respect to
municipal financial products or the issuance of municipal securities,
or to undertake a solicitation of a municipal entity or obligated
person, unless the municipal advisor is registered with the
Commission.\1387\ Section 15B of the Exchange Act also provides that a
municipal advisor may be registered by filing with the Commission an
application for registration in such form and containing such
information and documents concerning the municipal advisor and any
person associated with the municipal advisor as the Commission, by
rule, may prescribe as necessary or appropriate in the public interest
or for the protection of investors.\1388\ The temporary municipal
advisor registration regime, also as discussed above, is set to expire
on December 31, 2014.\1389\ Rules 15Ba1-1 through 15Ba1-8, Rule 15Bc4-
1, and Forms MA, MA-I, MA-W, and MA-NR will become effective 60 days
after publication of the rules in the Federal Register, and municipal
advisors must comply with the new rules within the applicable
compliance filing periods described below.
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\1387\ See 15 U.S.C. 78o-4(a)(1)(B).
\1388\ See 15 U.S.C. 78o-4(a)(2).
\1389\ See supra Section II.C. See also Rule 15Ba2-6T and Form
MA-T Extension Release, supra note 7.
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The permanent municipal advisor registration system on EDGAR will
be available to accept registration applications for municipal advisory
firms, including sole proprietors, beginning July 1, 2014. As discussed
below, however, the Commission is providing specific compliance filing
periods for filing applications for registration under the permanent
registration regime. To continue doing business as a municipal advisory
firm, any firm that is registered as a municipal advisor under Rule
15Ba2-6T and Form MA-T as of the Effective Date must file a complete
application for registration as a municipal advisor within the
applicable filing period, as set forth below. In accordance with
Section 15B(a)(2) of the Exchange Act, within forty-five days of the
date such complete application is considered filed (or within such
longer period as to which the applicant consents), the Commission shall
grant registration or institute proceedings to determine whether
registration should be denied.\1390\ Before filing applications for
registration as municipal advisors, municipal advisory firms will need
to file a Form ID requesting an EDGAR access code as soon as possible,
and should do so by no later than 30 days after the Effective Date to
minimize processing delays.\1391\
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\1390\ See 15 U.S.C. 78o-4(a)(2).
\1391\ As discussed in the Instructions, before a municipal
advisory firm can electronically file the application with the
Commission on EDGAR, such person must become an EDGAR filer with
authorized access codes through the ``Form ID'' authorization
process. Form ID is available on the Commission's Web site at http://www.sec.gov/about/forms/secforms.htm#EDGAR. For staff guidance
regarding Form ID, Electronic Form ID Frequently Asked Questions are
available on the Commission's Web site at http://www.sec.gov/info/edgar/feifaq052306.htm.
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To help ensure an orderly transition from the temporary
registration regime to the permanent registration regime and the
submission of applications through EDGAR, the Commission is providing
the following compliance dates for municipal advisory firms to complete
their applications for registration under the permanent registration
regime. These compliance dates are based on the registration number a
municipal advisor received (or will receive) when it registered (or
will register) as a municipal advisor under Rule 15Ba2-6T and on Form
MA-T (``temporary registration number''). A municipal advisory firm
that has a temporary registration number falling within the range that
begins on 866-00001-00 and ends on 866-00400-00 must file a complete
application for registration under the permanent registration regime on
or after July 1, 2014, but no later than July 31, 2014. A municipal
advisory firm that has a temporary registration number falling within
the range that begins on 866-00401-00 and ends on 866-00800-00 must
file a complete application for registration under the permanent
registration regime on or after August 1, 2014, but no later than
August 31, 2014. A municipal advisory firm that has a temporary
registration number falling within the range that begins on 866-00801-
00 and ends on 866-01200-00 must file a complete application for
registration under the permanent registration regime on or after
September 1, 2014, but no later than September 30, 2014. A municipal
advisory firm that has a temporary registration number that falls after
866-01200-00 must file a complete application for registration under
the permanent registration regime on or after October 1, 2014, but no
later than October 31, 2014.
A municipal advisory firm that enters into the municipal advisory
business on or after October 1, 2014 and does not have a temporary
registration number as of October 1, 2014, must file a complete
application for registration under the permanent registration regime on
or after October 1, 2014 and be registered with the Commission before
engaging in municipal advisory activities. The Commission believes that
this staggered compliance approach will help to facilitate an orderly
transition from the temporary registration regime to the permanent
registration regime.
For a municipal advisory firm that files a complete application
during the applicable filing period, its temporary municipal advisor
registration will continue in effect until the Commission grants or
denies the application for registration, unless the temporary
registration is rescinded by the Commission or withdrawn by the
municipal advisory firm. Any complete application for registration
received prior to the start of the applicable filing period for a
municipal advisory firm will be considered filed \1392\ on the first
day of the applicable filing period.\1393\ For a municipal advisory
firm that engages in municipal advisory activities before and during
the applicable filing period but that fails to file a complete
application within the applicable filing period, the firm's temporary
registration will expire forty-five days after the end of the
applicable filing period. Therefore, a firm that continues to engage in
municipal advisory activities after the expiration of its temporary
registration would be in violation of Section 15B of the Exchange Act
until it submits a complete application and the Commission grants its
application for registration under the permanent registration regime.
---------------------------------------------------------------------------
\1392\ See Rule 15Ba1-2(c). See also supra note 971 and
accompanying text (discussing that a Form MA is considered filed
upon submission of a completed Form MA, together with all additional
required documents, and clarifying that, if a Form MA is not
considered complete, the Commission's statutory forty-five day
review period will not commence).
\1393\ For example, if a municipal advisory firm with a
temporary registration number that falls between 866-00401-00 and
866-00800-00 files a complete application for registration on July
15, 2014, its application will be considered filed on August 1,
2014.
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A municipal advisory firm that is required to register as a
municipal advisor with the Commission on or after the Effective Date
but before the applicable filing period must register under the
temporary registration regime as a municipal advisor and must file an
application for registration under the permanent registration regime
during the applicable filing period. Such municipal advisory firm's
temporary registration will continue to be in effect until the date
that its registration is granted or denied by the Commission under the
permanent registration regime, unless the municipal advisory
[[Page 67583]]
firm's temporary registration is rescinded by the Commission or
withdrawn by the municipal advisory firm. A municipal advisory firm
that is required to register as a municipal advisor with the Commission
after the commencement of the applicable filing period must file an
application with the Commission under the permanent registration
regime.
VI. Delegation of Authority \1394\
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\1394\ The Administrative Procedure Act (``APA'') generally
requires an agency to publish notice of a proposed rulemaking in the
Federal Register. See 5 U.S.C. 553(b). This requirement does not
apply, however, to rules of agency organization, procedure, or
practice. See 5 U.S.C. 553(b)(3)(A). Because the amendments
described in this Section VI are limited to the Commission's Rules
of Organization and Program Management, they are not subject to the
provisions of the APA requiring notice and opportunity for comment.
Because the Commission is not publishing these rule amendments in a
notice of proposed rulemaking, the provisions of the Regulatory
Flexibility Act are not applicable. See 5 U.S.C. 603. For the same
reason, and because these amendments do not substantially affect the
rights or obligations of non-agency parties, the provisions of the
Small Business Regulatory Enforcement Fairness Act are also not
applicable. See 5 U.S.C. 804(3)(C). Additionally, the Commission
does not believe the amendments will have any anti-competitive
effects for purposes of Section 23(a)(2) of the Exchange Act because
they will not impose any new burden on municipal advisors or other
market participants. See 15 U.S.C. 78w(a)(2). Finally, this
amendment does not contain any collection of information
requirements as defined by the Paperwork Reduction Act of 1980, as
amended. See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
A. Delegation to the Director of the Office of Municipal Securities
Rule 30-3a of the Commission's Rules of Organization and Program
Management
The Commission is amending its existing delegations of authority by
adding Rule 30-3a to its Rules of Organization and Program Management,
which governs the delegations of authority to the Director of the
Office of Municipal Securities (``Director'').\1395\ Section 15B(a)(2)
of the Exchange Act, as amended by the Dodd-Frank Act, provides that
``[w]ithin forty-five days of the date of the filing of [a municipal
advisor registration] application (or within such longer period as to
which the applicant consents), the Commission shall . . . by order
grant registration, or . . . institute proceedings to determine whether
registration should be denied.'' \1396\ New Rule 30-3a delegates to the
Director the authority to issue orders granting registration of
municipal advisors within forty-five days of the filing of an
application for registration as a municipal advisor (or within such
longer period as to which the applicant consents).\1397\
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\1395\ 17 CFR 200.30-3a.
\1396\ 15 U.S.C. 78o-4(a)(2).
\1397\ See 17 CFR 200.30-3a(a)(1)(i).
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Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank
Act, provides the Commission with the authority to cancel the
registration of a municipal advisor if it finds that such municipal
advisor is no longer in existence or has ceased to do business as a
municipal advisor.\1398\ Rule 30-3a delegates to the Director the
authority to issue orders canceling the registration of a municipal
advisor, if such municipal advisor is no longer in existence or has
ceased to do business as a municipal advisor.\1399\
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\1398\ See 15 U.S.C. 78o-4(c)(3).
\1399\ See 17 CFR 200.30-3a(a)(1)(ii).
---------------------------------------------------------------------------
The delegations of authority to the Director in Rule 30-3a will
allow the staff, on behalf of the Commission, pursuant to Section 15B
of the Exchange Act,\1400\ to review and act upon applications for
registration, and to issue orders canceling municipal advisor
registrations. The Commission believes that these delegations of
authority will facilitate efficient registration and regulation of
municipal advisors. Also, pursuant to Rule 30-3a, the Director may
submit matters to the Commission for consideration as it deems
appropriate.\1401\
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\1400\ 15 U.S.C. 78o-4.
\1401\ See 17 CFR 200.30-3a(b).
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Rule 19d of the Commission's Rules of Organization and Program
Management
The Commission is also amending its existing Rules of Organization
and Program Management by adding Rule 19d, which sets forth the
responsibilities of the Director.\1402\ In light of the changes made by
the Dodd-Frank Act to Section 15B of the Exchange Act regarding the
registration and regulation of municipal advisors, the Commission is
adding Rule 19d, which states that the Director is responsible to the
Commission for the administration and execution of the Commission's
programs under the Exchange Act relating to the registration and
regulation of municipal advisors. Rule 19d also states that the
functions involved in the regulation of municipal advisors include
recommending the adoption and amendment of Commission rules, and
responding to interpretive and no-action requests. Therefore, Rule 19d
specifies the role of staff in the registration and regulation of
municipal advisors.
---------------------------------------------------------------------------
\1402\ 17 CFR 200.19d.
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B. Delegation to the Director of the Office of Compliance Inspections
and Examinations
Rule 30-18 of the Commission's Rules of Organization and Program
Management
The Commission is amending its existing delegations of authority by
amending Rule 30-18 of its Rules of Organization and Program Management
governing the delegations of authority to the Director of the Office of
Compliance Inspections and Examinations (``OCIE Director'').\1403\ As
noted above, Section 15B(a)(2) of the Exchange Act, as amended by the
Dodd-Frank Act, provides that ``[w]ithin forty-five days of the date of
the filing of [a municipal advisor registration] application (or within
such longer period as to which the applicant consents), the Commission
shall . . . by order grant registration, or . . . institute proceedings
to determine whether registration should be denied.'' \1404\ The
Commission delegates to the OCIE Director the authority to issue orders
granting registration of municipal advisors within 45 days of the
filing of an application for registration as a municipal advisor (or
within such longer period as to which the applicant consents), and to
grant registration of municipal advisors sooner than 45 days after the
filing of an application for registration.\1405\
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\1403\ 17 CFR 200.30-18.
\1404\ 15 U.S.C. 78o-4(a)(2).
\1405\ See 17 CFR 200.30-18(j)(7).
---------------------------------------------------------------------------
Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank
Act, provides the Commission with the authority to cancel the
registration of a municipal advisor if the Commission finds that such
municipal advisor is no longer in existence or has ceased to do
business as a municipal advisor.\1406\ The amendment to Rule 30-18
delegates to the OCIE Director the authority to issue orders to cancel
the registration of a municipal advisor, if such municipal advisor is
no longer in existence or has ceased to do business as a municipal
advisor.\1407\
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\1406\ See 15 U.S.C. 78o-4(c)(3).
\1407\ See 17 CFR 200.30-18(j)(8)(i).
---------------------------------------------------------------------------
Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank
Act, also provides for the withdrawal of municipal advisors from
registration under such terms and conditions that the Commission deems
necessary in the public interest or for the protection of investors or
municipal entities or obligated persons.\1408\ The amendment to Rule
30-18 delegates to the OCIE Director the authority to determine
[[Page 67584]]
whether notices of withdrawal from registration on Form MA-W may become
effective sooner than the 60-day waiting period.\1409\
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\1408\ See 15 U.S.C. 78o-4(c)(3).
\1409\ See 17 CFR 200.30-18(j)(8)(ii).
---------------------------------------------------------------------------
These delegations of authority to the OCIE Director will allow the
staff, on behalf of the Commission, pursuant to Section 15B of the
Exchange Act,\1410\ to review and act upon applications for
registration and withdrawals from registration, and to make
determinations with regard to the cancellation of municipal advisor
registrations. These delegations of authority will facilitate efficient
registration and regulation of municipal advisors. Also, the OCIE
Director may submit matters to the Commission for consideration as it
deems appropriate.\1411\
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\1410\ 15 U.S.C. 78o-4.
\1411\ See 17 CFR 200.30-18(m).
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Rule 19c of the Commission's Rules of Organization and Program
Management
The Commission is also amending its existing Rules of Organization
and Program Management by amending Rule 19c, which sets forth the
responsibilities of the OCIE Director.\1412\ Currently, Rule 19c
provides that the OCIE Director is responsible for the compliance
inspections and examinations relating to the regulation of exchanges,
national securities associations, clearing agencies, securities
information processors, the MSRB, brokers and dealers, municipal
securities dealers, transfer agents, investment companies, and
investment advisers. Under Sections 15B and 17(a) of the Exchange Act,
as amended by the Dodd-Frank Act, municipal advisors are now required
to be registered with the Commission and are subject to record-keeping
requirements promulgated by the Commission.\1413\ Further, Section
17(b) of the Exchange Act provides that all records of persons
described in Section 17(a) are subject ``to such reasonable periodic,
special, or other examinations by representatives of the Commission . .
. as the Commission * * * deems necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of this title.'' \1414\ In light of the changes made by
the Dodd-Frank Act, the Commission is amending Rule 19c to reflect the
responsibilities of the OCIE Director with respect to all persons
subject to compliance inspections and examinations, including municipal
advisors. These amendments specify the role of OCIE staff in the
inspection and examination of records kept by municipal advisors.
---------------------------------------------------------------------------
\1412\ 17 CFR 200.19c.
\1413\ 15 U.S.C. 78o-4 and 78q(a).
\1414\ 15 U.S.C. 78q(b).
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VII. Paperwork Reduction Act
Certain rules that the Commission is adopting impose new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\1415\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. In accordance with 44 U.S.C. 3507 and 5 CFR 1320.11, the
Commission submitted these collections of information to the Office of
Management and Budget (``OMB'') for review. The title for the
collection of information requirement is ``Rules 15Ba1-1 to 15Ba1-8--
Registration of Municipal Advisors.'' The collection of information was
assigned OMB Control No. 3235-0681.
---------------------------------------------------------------------------
\1415\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
In the Proposal, the Commission solicited comments on the
collection of information requirements. In particular, the Commission
solicited comments on whether the calculations of either the burden
hours or associated costs were too high or too low.\1416\ Some
commenters addressed the collection of information aspects of the
Proposal.
---------------------------------------------------------------------------
\1416\ See Proposal, 76 FR 872, 878.
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Many commenters opined generally that municipal advisor
registration under the proposed rules would be overly burdensome and
would impose significant costs that would prove detrimental, especially
to smaller ``community banks'' and local and state
municipalities.\1417\ Although most of these letters neither provided
specific suggestions to revise the Commission's estimates, nor provided
specific alternative figures or calculations for actual burden hour
figures, the Commission addresses the comments below.
---------------------------------------------------------------------------
\1417\ See, e.g., Form Letter A.
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A. Summary of Collection of Information
Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank
Act, provides that a municipal advisor may be registered by filing with
the Commission an application for registration in such form, and
containing such information and documents concerning the municipal
advisor and any persons associated with the municipal advisor, as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors.\1418\
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\1418\ See 15 U.S.C. 78o-4(a)(2).
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Under the final rules and forms, the permanent registration regime
for municipal advisors will be more comprehensive than the temporary
one and will require more detailed disclosures. Under Rule 15Ba1-2(a),
each firm applying for registration with the Commission as a municipal
advisor is required to complete and file electronically with the
Commission Form MA. In addition, each person applying for registration,
or registered with, the Commission as a municipal advisor must complete
and file electronically with the Commission Form MA-I with respect to
each natural person who is a person associated with the municipal
advisor and engages in municipal advisory activities on its
behalf.\1419\ Each Form MA shall be considered filed with the
Commission upon acceptance of Form MA, together with all additional
required documents, including all required Form MA-Is, by the
Commission's EDGAR system.\1420\ A sole proprietor will have to
complete both Form MA and Form MA-I.\1421\
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\1419\ See Rule 15Ba1-2(b)(1).
\1420\ See Rule 15Ba1-2(c).
\1421\ See Rule 15Ba1-2(b)(2). The Commission has developed an
online filing system to permit municipal advisors to file a
completed Form MA and Form MA-I through the EDGAR system.
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Under the permanent registration regime, municipal advisors will
include sole proprietorships and firms of varying sizes. In addition,
municipal advisors will include firms that engage in municipal advisory
activities as part of a broader array of financial services, serving
many types of clients, and that have many associated persons. Thus, the
paperwork burden will reflect these differences in size and types of
other financial services in which the municipal advisors engage.
Pursuant to Rule 15Ba1-5(a), a municipal advisory firm that
registers on Form MA must amend its Form MA at least annually, within
90 days of the end of the municipal advisor's fiscal year in the case
of firms or within 90 days of the end of the calendar year for sole
proprietors, and more frequently as required by the General
Instructions. In addition, a registered municipal advisor must promptly
amend Form MA-I whenever any information previously provided therein
becomes inaccurate.\1422\ Municipal advisory firms must also amend Form
MA-I to indicate that an individual is no longer an associated person
of the municipal advisory firm filing the form or no longer engaged in
municipal advisory
[[Page 67585]]
activities on its behalf. Finally, registered municipal advisors must
report successions of registration on Form MA.\1423\
---------------------------------------------------------------------------
\1422\ See Rule 15Ba1-5(b).
\1423\ See Rule 15Ba1-7.
---------------------------------------------------------------------------
Pursuant to Rule 15Ba1-4, all registered municipal advisors are
required to file Form MA-W to withdraw from registration with the
Commission as a municipal advisor. As will be the case with both Forms
MA and MA-I, Form MA-W will be required to be filed electronically with
the Commission.
Rule 15Ba1-6 sets forth the general procedures for serving non-
residents. Pursuant to Rule 15Ba1-6 and the instructions to Form MA-NR,
each non-resident municipal advisor applying for registration, at the
time of filing of the municipal advisor's application on Form MA, must
file with the Commission a written irrevocable consent and power of
attorney on Form MA-NR to appoint an agent in the United States upon
whom may be served any process, pleadings, or other papers in any
action brought against the non-resident municipal advisor. In addition,
each municipal advisor applying for registration pursuant to, or
registered under, Section 15B of the Exchange Act must file Form MA-NR
with the Commission for each non-resident general partner, non-resident
managing agent, and non-resident natural person associated with the
municipal advisor who engages in municipal advisory activities on
behalf of the municipal advisor.\1424\ Rule 15Ba1-6(d) requires each
non-resident municipal advisor to provide an opinion of counsel that
the municipal advisor can, as a matter of law, provide the Commission
with access to its books and records and submit to inspection and
examination by the Commission.
---------------------------------------------------------------------------
\1424\ See Rule 15Ba1-6(a)(2).
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Rule 15Ba1-8 requires all registered municipal advisors to maintain
true, accurate, and current books and records relating to their
municipal advisory activities. Generally, Rule 15Ba1-8 requires such
books and records to be maintained and preserved for a period of not
less than five years, the first two years in an easily accessible
place.
Rule 15Ba1-1(d)(3)(vi) exempts from the definition of ``municipal
advisor'' any person engaging in municipal advisory activities in a
circumstance in which a municipal entity or obligated person is
otherwise represented by an independent registered municipal advisor
with respect to the same aspects of a municipal financial product or an
issuance of municipal securities, provided that certain requirements
are met. First, an independent registered municipal advisor must be
providing advice with respect to the same aspects of the municipal
financial product or issuance of municipal securities.\1425\ Second,
the person seeking to rely on Rule 15Ba1-1(d)(3)(vi) must receive from
the municipal entity or obligated person a representation in writing
that the municipal entity or obligated person is represented by, and
will rely on the advice of, an independent registered municipal
advisor.\1426\ Third, the person must make certain disclosures to the
municipal entity or obligated person and provide a copy of such
disclosures to the municipal entity's or obligated person's independent
registered municipal advisor.\1427\ With respect to a municipal entity,
the person seeking to rely on the exemption must disclose in writing
that, by obtaining the representation discussed above from the
municipal entity, such person is not a municipal advisor and is not
subject to the fiduciary duty set forth in Section 15B(c)(1) of the
Exchange Act \1428\ with respect to the municipal financial product or
the issuance of municipal securities.\1429\ With respect to an
obligated person, the person seeking to rely on the exemption must
disclose in writing that, by obtaining the representation discussed
above from the obligated person, such person is not a municipal advisor
with respect to the municipal financial product or issuance of
municipal securities.\1430\
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\1425\ See Rule 15Ba1-1(d)(3)(vi)(A). For purposes of this
exemption, the term ``independent registered municipal advisor''
means a municipal advisor registered pursuant to Section 15B of the
Exchange Act (15 U.S.C. 78o-4) and the rules and regulations
thereunder and that is not, and within at least the past two years
was not, associated with the person seeking to rely on Rule 15Ba1-
1(d)(3)(vi).
\1426\ See Rule 15Ba1-1(d)(3)(vi)(B). The person receiving the
written representation may rely on the representation, provided that
the person receiving such representation has a reasonable basis for
relying on the representation.
\1427\ Each such disclosure must be made at a time and in a
manner reasonably designed to allow the municipal entity or
obligated person to assess the material incentives and conflicts of
interest that such person may have in connection with the municipal
advisory activities. See Rule 15Ba1-1(d)(3)(vi)(C)(3).
\1428\ 15 U.S.C. 78o-4(c)(1).
\1429\ See Rule 15Ba1-1(d)(3)(vi)(C)(1).
\1430\ See Rule 15Ba1-1(d)(3)(vi)(C)(2).
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Rule 15Ba1-1(h) defines ``municipal escrow investments'' to mean
proceeds of municipal securities and any other funds of a municipal
entity that are deposited in an escrow account to pay the principal of,
premium, if any, and interest on one or more issues of municipal
securities. In determining whether or not funds to be invested or
reinvested constitute municipal escrow investments, a person may rely
on representations in writing made by a knowledgeable official of a
municipal entity or obligated person whose funds are to be invested or
reinvested regarding the nature of such investments, provided that the
person seeking to rely on such representations has a reasonable basis
for such reliance.\1431\
---------------------------------------------------------------------------
\1431\ See Rule 15Ba1-1(h)(2).
---------------------------------------------------------------------------
Similarly, the Commission is adopting a qualification to the
definition of ``proceeds of municipal securities'' that provides that
in determining whether or not funds to be invested constitute proceeds
of municipal securities, a person may rely on representations in
writing made by a knowledgeable official of a municipal entity or
obligated person whose funds are to be invested regarding the nature of
such funds, provided that the person seeking to rely on such
representations has a reasonable basis for such reliance.\1432\
---------------------------------------------------------------------------
\1432\ See Rule 15Ba1-1(m)(3).
---------------------------------------------------------------------------
B. Use of Information
The Commission believes Form MA and Form MA-I will help to ensure
that the Commission can make information about municipal advisors
transparent and easily accessible to the investing public, including
municipal entities and obligated persons who engage municipal advisors;
investors who may purchase securities from offerings in which municipal
advisors participated; and other regulators. Further, the information
provided on Form MA and Form MA-I will expand the amount of publicly
available information about municipal advisors, including conflicts of
interest and disciplinary history. Although much of the information
required by Form MA is already publicly available with respect to
municipal advisors that are already registered with the Commission as
investment advisers or broker-dealers, many municipal advisors that are
not currently registered with the Commission in another capacity will
make this information available for the first time. In addition, while
municipal advisors are currently required to disclose disciplinary
history for some of their associated persons on Form MA-T, municipal
advisors will be required to disclose on Form MA disciplinary history
for all associated persons. Consequently, the final rules and forms
will allow municipal entities and obligated persons, as well as others,
to become more fully informed about municipal advisors in a more
efficient manner.
In addition, the requirement that each municipal advisory firm
register with
[[Page 67586]]
the Commission on Form MA and complete Form MA-I with respect to each
natural person who is a person associated with the municipal advisor
and engages in municipal advisory activities on its behalf will help
ensure that the Commission has information to oversee respondents and
their activities in the municipal securities market effectively. In
particular, the information provided in Form MA will be used to
determine whether to grant a municipal advisor's application for
registration or to institute proceedings to determine whether
registration should be denied. The information will also be used to
focus examinations and aid in risk-based examination. Moreover, Form MA
and Form MA-I will enable the Commission to obtain an accurate estimate
of the number of municipal advisors, by size and by municipal advisory
activity; analyze data regarding the various types of municipal
advisory activities in which municipal advisors engage; and evaluate
the disciplinary history of all municipal advisors and associated
persons, including all regulatory, civil, and criminal proceedings.
The requirement that a municipal advisor make and keep books and
records, including written communications and records of associated
persons, will help to ensure that records of the respondent's primary
municipal advisory activities, as well as the activities of its
associated persons, exist. The Commission and other regulators could
potentially request books and records during an examination to evaluate
the municipal advisor's compliance with the Exchange Act, the rules
thereunder, and MSRB rules, as well as for other regulatory purposes.
The requirement that a non-resident municipal advisor complete Form
MA-NR, and furnish Form MA-NR for its non-resident general partners,
non-resident managing agents, and associated persons engaged in
municipal advisory activities, will help minimize legal or logistical
obstacles that the Commission may encounter when attempting to effect
service, conserve Commission resources, and avoid potential conflicts
of law. The requirement that a non-resident municipal advisor provide
an opinion of counsel on Form MA will help ensure that such non-
resident municipal advisor can provide access to its books and records
and submit to inspection and examination by the Commission.
The requirement that certain written representations and
disclosures be made in order for a person to be exempt from the
definition of municipal advisor where a municipal entity or obligated
person is represented by an independent registered municipal advisor
with respect to the same aspects of a municipal financial product or an
issuance of municipal securities will allow the Commission staff to
determine whether a person engaging in municipal advisory activities
has failed to register with the Commission. Further, the information
will allow municipal entities and obligated persons to understand
whether a person is acting as a municipal advisor. Similarly, the
exceptions from the definitions of municipal escrow investments and
proceeds of municipal securities for reasonable inquiries will allow
the Commission staff to determine whether a person engaging in
municipal advisory activities has failed to register with the
Commission.
C. Respondents
In the Proposal, the Commission estimated that the proposed
``collections of information'' would initially apply to approximately
1,000 municipal advisory firms, including sole proprietors.\1433\ This
estimate was based partly on the number of municipal advisors that had
registered with the Commission under Rule 15Ba2-6T. As of October 2010,
there were approximately 800 total unique electronic temporary
registrations for municipal advisors where Form MA-T was completed and
not withdrawn.\1434\ In the Proposal, the Commission stated its belief
that the number of Form MA-T registrants would likely increase beyond
800 because numerous applicants that would have been required to
register might have missed the October 1, 2010, deadline for a variety
of reasons, such as concluding, based on their interpretation of the
Dodd-Frank Act, that they were not required to register as municipal
advisors.\1435\ For the PRA analysis of Rule 15Ba2-6T, the Commission
estimated that approximately 1,000 applicants would be required to
complete Form MA-T.\1436\ The Commission therefore believed that 1,000
applicants would remain an appropriate estimate for the total number of
municipal advisory firms that would be required to register on Form MA
under the proposed permanent registration regime. The Commission also
estimated that the average number of new Form MA applicants per year
would be 100.\1437\
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\1433\ See Proposal, 76 FR 865.
\1434\ See id.
\1435\ See id.
\1436\ See Temporary Registration Rule Release, 75 FR 54473.
\1437\ See Proposal, 76 FR 866.
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In the Proposal, the Commission also estimated that approximately
21,800 individuals would be required to register as natural person
municipal advisors on Form MA-I,\1438\ while the average number of new
Form MA-I applicants per year would be 1,800.\1439\ These estimates
were based on trends observed in registrations of investment advisers
and Form U4 applications submitted to FINRA.
---------------------------------------------------------------------------
\1438\ See id. at 865.
\1439\ See id.
---------------------------------------------------------------------------
In the Proposal, the Commission solicited comments on how many
municipal advisors would incur collection of information burdens if the
proposed rules and forms were adopted by the Commission.\1440\ The
Commission received no comments regarding the estimated number of
municipal advisory firms that would be required to register initially
on Form MA \1441\ and no comments regarding estimates for the average
annual number of new Form MA and Form MA-I applicants. Nevertheless,
the Commission is revising its initial estimates of the numbers of
applicants required to complete Form MA. The Commission's decision to
revise its estimates is based, in part, on a comparison between the
current number of Form MA-T registrants and the number of municipal
advisors that are registered with the MSRB.
---------------------------------------------------------------------------
\1440\ See id. at 872.
\1441\ For a discussion of comments regarding the number of
natural persons who will need to initially register on Form MA-I,
see infra note 1447-1467 and accompanying text.
---------------------------------------------------------------------------
In October 2010, there were approximately 800 Form MA-T
registrants. According to Form MA-T data, as of December 31, 2012,
there were approximately 1,110 Form MA-T registrants. Of these Form MA-
T registrants, as of December 31, 2012, approximately 901 were also
registered as municipal advisors with the MSRB, as they are required to
do prior to engaging in municipal advisory activities.\1442\ For the
reasons discussed below, the Commission believes that the number of
Form MA-T registrants may not be an accurate representation of the
number of municipal advisors and that MSRB data represents a better
basis on which to estimate the number of municipal advisors active in
the market.
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\1442\ The Commission staff obtained this estimate by comparing
the list of MSRB registrants to the Commission's list of Form MA-T
registrants as of December 31, 2012.
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The Commission believes that a number of persons, recognizing that
the
[[Page 67587]]
Commission does not impose any fees for registration, may have
registered with the Commission as municipal advisors out of an initial
overabundance of caution. Although some current Form MA-T registrants
may not have registered with the MSRB because of uncertainty regarding
the scope of the temporary registration regime, others may have
determined in the intervening time after October 1, 2010, that
registration with the MSRB was not required because they were not
engaging in municipal advisory activities. The Commission staff
understands based on discussions with market participants that these
Form MA-T registrants may have retained Commission registration because
there are no associated fees to maintain such registration.\1443\ In
addition, the Commission anticipates that the exemption for persons
providing advice with respect to investment strategies that are not
plans or programs for the investment of proceeds of municipal
securities or the recommendation of and brokerage of municipal escrow
investments \1444\ will reduce the estimated number of initial Form MA
applicants. Likewise, the Commission anticipates the additional
exemptions adopted today will also reduce the estimated number of
initial Form MA applicants.\1445\ For these reasons, the Commission now
estimates that the ``collections of information'' will initially apply
to approximately 910 municipal advisory firms, including sole
proprietors.\1446\
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\1443\ The Commission staff also understands based on
discussions with market participants that some municipal advisors
may have maintained Form MA-T registration instead of withdrawing
from registration to wait and see whether registration would be
required under the permanent registration regime, while others may
not have realized they could withdraw from registration or may have
determined not to withdraw for other reasons.
\1444\ See Rule 15Ba1-1(d)(3)(vii).
\1445\ See supra Section III.A.1.c.
\1446\ This estimate rounds to the nearest higher multiple of
ten the number of municipal advisors that are registered with the
MSRB to engage in municipal advisory activities. The Commission uses
a similar rounding convention in estimating the number of municipal
advisors that will newly register with the Commission in subsequent
years, amend prior filings, and withdraw from registration.
---------------------------------------------------------------------------
In addition, the Commission is revising its estimate of the number
of Form MA-I submissions the Commission expects municipal advisory
firms will be required to file.\1447\ For reasons discussed below, the
Commission is revising its estimate of approximately 21,800 Form MA-I
submissions downward and currently estimates that, during the first
year, municipal advisors will need to complete a Form MA-I for
approximately 11,250 individuals.\1448\
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\1447\ As discussed above, natural person municipal advisors who
are not sole proprietors no longer need to register with the
Commission. However, the Commission is retaining Form MA-I to obtain
information about individuals associated with municipal advisory
firms engaged in municipal advisory activities on behalf of such
firms. The Commission notes, moreover, that it is the municipal
advisory firms, not the individuals, that will be required to file
Form MA-I with the Commission.
\1448\ 5,602 (estimated number of individuals who are registered
as investment adviser representatives, registered representatives of
broker-dealers, or both, for whom a municipal advisor will be
required to file Form MA-I) + 4,910 (estimated number of individuals
employed by a municipal advisor not otherwise registered with the
Commission for whom a municipal advisor will be required to file
Form MA-I) + 730 (estimated number of individuals who are employed
at solicitors) = 11,242 Form MA-I applicants.
---------------------------------------------------------------------------
In the Proposal, the Commission divided the number of Form MA-I
applicants into three main categories: (1) Individuals who are
currently also registered as investment adviser representatives,
registered representatives of broker-dealers, or both, and who are
employed at investment advisory firms, broker-dealer firms, or banks;
(2) individuals who are employed at financial advisor firms that are
not registered as broker-dealers or investment advisers; and (3)
individual solicitors who are employed at third-party marketing and
solicitor firms.\1449\ First, the Commission estimated the number of
individuals who are currently registered as investment adviser
representatives, registered representatives of broker-dealers, or both,
and would register on Form MA-I. To calculate this estimate in the
Proposal, the Commission compared the proportion of FINRA Form U4
filers (i.e., individuals who are investment adviser representatives
and/or registered representatives of broker-dealers) to the sum of all
investment advisers registered on Form ADV and all broker-dealers
registered on Form BD. FINRA estimated that, as of October 2010,
637,000 individuals had registered as investment adviser
representatives and/or registered representatives of broker-dealers on
Form U4.\1450\ The Commission estimated that as of October 2010, 11,888
investment advisers had registered on Form ADV, while as of March 2010,
5,163 broker-dealers had registered on Form BD. The proportion of Form
U4 registrants to the sum of Form ADV and Form BD registrants was
approximately 37.36 to 1.\1451\ According to Form MA-T data that had
been collected as of October 2010, the Commission estimated that
approximately 450 of 1,000 Form MA-T registrants would be investment
adviser and/or broker-dealer firms. Thus, in the Proposal, the
Commission estimated that approximately 16,800 individuals who are
registered as investment adviser representatives, registered
representatives of broker-dealers, or both, would be required to
register on Form MA-I.\1452\
---------------------------------------------------------------------------
\1449\ See Proposal, 76 FR 865.
\1450\ See October 2010 ``Registered Reps'' in ``FINRA
Statistics,'' available at http://www.finra.org/Newsroom/Statistics.
See also Proposal, 76 FR 865.
\1451\ 637,000 (estimated number of Form U4 registrants) /
(11,888 (estimated number of Form ADV registrants) + 5,163
(estimated number of Form BD registrants)) = 37.36. See Proposal, 76
FR 865.
\1452\ 450 (total number of investment adviser and broker-dealer
firms registered as municipal advisors) x 37.36 (proportion of Form
U4 registrants to all Form ADV and Form BD registrants) = 16,812.
See id.
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Based on data collected as of December 31, 2012, the Commission is
revising its estimate of the number of individuals who are employed at
municipal advisors registered with the Commission as investment
advisers and/or broker-dealers and for whom a municipal advisor will be
required to file Form MA-I. FINRA estimates that, as of December 31,
2012, 670,016 individuals had registered as investment adviser
representatives and/or registered representatives of broker-dealers on
Form U4.\1453\ The Commission estimates that, as of December 31, 2012,
there were 32,645 broker-dealer and investment advisory firms.\1454\
Thus, the revised estimate of the average number of individuals who are
employed at municipal advisors registered with the Commission as
investment advisers and/or broker-dealers and for whom a municipal
advisor will be required to file Form MA-I is approximately
20.52.\1455\ The Commission estimates that approximately 273 of the 910
Form MA registrants will be municipal advisors registered with the
[[Page 67588]]
Commission as investment advisers and/or broker-dealers.\1456\
Accordingly, the Commission currently estimates there to be
approximately 5,602 individuals who are employed at municipal advisors
registered with the Commission as investment advisers and/or broker-
dealers for whom a Form MA-I will need to be filed.\1457\
---------------------------------------------------------------------------
\1453\ 630,391 (number of registered representatives of broker-
dealers) + 39,625 (number of investment adviser representatives who
are not also registered representatives of a broker-dealer) =
670,016. See 2012 ``Registered Reps'' in ``FINRA Statistics,''
available at http://www.finra.org/Newsroom/Statistics. The Proposal
did not include the number of investment adviser representatives who
are not also registered representatives of a broker-dealer when
determining the proportion of Form U4 registrants to the sum of Form
ADV and Form BD registrants.
\1454\ 4,632 (broker-dealers) + 10,754 (Commission-registered
investment advisers) + 17,259 (state-registered investment advisers)
= 32,645. The Proposal did not include the number of state-
registered investment advisers when determining the proportion of
Form U4 registrants to the sum of Form ADV and Form BD registrants.
\1455\ 670,016 (estimated number of Form U4 registrants) /
32,645 (number of broker-dealers, SEC-registered investment
advisers, and state-registered investment advisers) = 20.52.
\1456\ The Commission staff has examined Form MA-T data as of
December 31, 2012, and estimates that approximately 30% of Form MA-T
registrants are municipal advisors registered with the Commission as
investment advisers and/or broker-dealers (330 municipal advisors
registered with the Commission as investment advisers and/or broker-
dealers registered on Form MA-T / 1,110 municipal advisors
registered on Form MA-T = 29.73%). The Commission assumes that the
same percentage of municipal advisors registered with the Commission
as investment advisers and/or broker-dealers will register with the
Commission on Form MA. 910 (estimated number of municipal advisors
registered on Form MA) x 30% = 273.
\1457\ 273 (estimated number of municipal advisors registered
with the Commission as investment advisers and/or broker-dealers) x
20.52 (estimated average number of employees per municipal advisor
registered with the Commission as an investment adviser and/or
broker-dealer) = 5,601.96.
---------------------------------------------------------------------------
Second, in the Proposal, the Commission estimated the number of
individuals who are employed at municipal financial advisors and who
would register on Form MA-I. The Commission staff learned from
discussions with industry and market participants that it was
reasonable to estimate that there is an average of approximately 10
professional employees per financial advisor. According to Form MA-T
data that had been collected as of October 2010, the Commission
estimated that approximately 450 of 1,000 MA-T registrants would be
financial advisors. Thus, in the Proposal, the Commission estimated
that approximately 4,500 individuals who are employed at financial
advisors would be required to register on Form MA-I.\1458\
---------------------------------------------------------------------------
\1458\ 450 (total number of independent financial advisor firms
registered as municipal advisors) x 10 (estimated average number of
professional employees per independent financial advisor firm) =
4,500. See Proposal, 76 FR 865.
---------------------------------------------------------------------------
The Commission now estimates that approximately 491 of the 910 Form
MA registrants will be municipal advisors not otherwise registered with
the Commission.\1459\ Accordingly, the Commission currently estimates
there to be approximately 4,910 individuals employed by a municipal
advisor not otherwise registered with the Commission for whom a Form
MA-I will need to be filed.\1460\
---------------------------------------------------------------------------
\1459\ The Commission staff has examined Form MA-T data as of
December 31, 2012, and estimates that approximately 54% of Form MA-T
registrants are municipal advisors not otherwise registered with the
Commission (603 municipal advisors not otherwise registered with the
Commission registered on Form MA-T / 1,110 municipal advisors
registered on Form MA-T = 54.32%). The Commission assumes that the
same percentage of municipal advisors not otherwise registered with
the Commission will register with the Commission on Form MA. 910
(estimated number of municipal advisors registered on Form MA) x 54%
= 491.4.
\1460\ 491 (estimated number of municipal advisors not otherwise
registered with the Commission registered as municipal advisors) x
10 (estimated average number of professional employees per municipal
advisors not otherwise registered with the Commission) = 4,910.
---------------------------------------------------------------------------
Third, in the Proposal, the Commission estimated the number of
individual solicitors who would register on Form MA-I. The Commission
examined the data of all Form MA-T registrants as of October 2010, and
estimated that approximately 100 out of 1,000 registrants were
solicitors. For purposes of the Proposal's PRA, the Commission assumed
that there were five individual solicitors who would register on Form
MA-I for every solicitor firm that would register on Form MA.\1461\
Thus, in the Proposal, the Commission estimated that approximately 500
individual solicitors would be required to register on Form MA-I.\1462\
---------------------------------------------------------------------------
\1461\ See letter from Donna DiMaria, President, Third Party
Marketers Association, dated August 27, 2009, available at http://www.sec.gov/comments/s7-18-09/s71809-36.pdf (commenting on the
Commission's proposal to adopt a rule addressing ``pay-to-play''
practices by investment advisers and estimating that the typical
solicitor firm consists of 2 to 5 professionals). See Proposal, 76
FR 865.
\1462\ 100 (estimated number of solicitors) x 5 (estimated
number of Form MA-I applicants per solicitor) = 500. See Proposal,
76 FR 865.
---------------------------------------------------------------------------
The Commission now estimates that approximately 146 of the 910 Form
MA registrants will be solicitors.\1463\ Accordingly, the Commission
currently estimates there to be approximately 730 individuals employed
by solicitors for whom a Form MA-I will need to be filed.\1464\
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\1463\ The Commission staff has examined Form MA-T data as of
December 31, 2012, and estimates that approximately 16% of Form MA-T
registrants are solicitors (177 Form MA-T registrants that are
solicitors / 1,110 municipal advisors registered on Form MA-T =
15.95%). The Commission assumes that the same percentage of
solicitors will register with the Commission on Form MA. 910
(estimated number of municipal advisors registered on Form MA) x 16%
= 145.6.
\1464\ 146 (estimated number of solicitors that are registered
as municipal advisors) x 5 (estimated average number of professional
employees per solicitor) = 730.
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One commenter noted that, for the Proposal's estimate of 21,800
natural persons who will be required to register initially on Form MA-
I, the Commission ``completely disregards'' governing body appointees
``who may number in the tens of thousands and will likely require
significantly more time and expense per person to ensure compliance
than the population of financial professionals assumed in the Proposed
Rule.'' \1465\ In the Proposal, the Commission stated that it did 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 ``municipal advisor.'' \1466\ As discussed above,
however, Rule 15Ba1-1(d)(3)(ii) now provides an exemption from the
definition of municipal advisor for any 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 person is
acting within the scope of such person's official capacity, regardless
of whether such person is an employee of the municipal entity or
obligated person.\1467\ Therefore, the Commission does not believe that
it should increase the current estimated number of Form MA-I to account
for appointed board members of governing bodies.
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\1465\ See Wayne County Airport Authority Letter.
\1466\ See Proposal, 76 FR 834. As proposed, to trigger the
municipal advisor registration requirement, an appointed member of a
governing body would have needed to be engaged in municipal advisory
activities, and most appointed members do not engage in such
activities.
\1467\ See supra Section III.A.1.c.i.
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The Commission is not revising its initial estimate of the average
number of firms that will newly register as a municipal advisor each
year. In the Proposal, the Commission estimated that the average number
of new Form MA applicants per year would be approximately 100.\1468\
The Commission staff has reviewed Form MA-T data as of December 31,
2012, and estimates that approximately 205 municipal advisors filed an
initial Form MA-T in 2011 and approximately 115 filed an initial Form
MA-T in 2012. In the Proposal, the Commission stated that it believed
that the number of Form MA-T registrants would likely increase beyond
800 because numerous applicants that would have been required to
register might have missed the October 30, 2010, deadline for a variety
of reasons, such as concluding, based on their interpretation of the
Dodd-Frank Act, that they were not required to register as municipal
advisors.\1469\ The Commission believes
[[Page 67589]]
this could explain the higher number of municipal advisors that filed
an initial Form MA-T in 2011 than in 2012. Thus, the Commission
believes that, going forward, it is appropriate to estimate
approximately 115 new Form MA-T registrations per year (assuming the
temporary regime were to continue). Based on the estimate of the number
of new Form MA-T registrations per year, the Commission continues to
estimate that approximately 100 new municipal advisory firms will
register on Form MA each year.\1470\
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\1468\ For its estimate of the average annual number of new Form
MA applicants, the Commission relied on investment adviser
registration data, which indicated that new investment adviser
applicants comprise, on average, approximately 10.4% of the total
number of registered investment advisers. See Proposal, 76 FR 866.
1,000 (all Form MA applicants) x 10.4% = 104 new Form MA applicants
per year. See id.
\1469\ See id. at 865.
\1470\ The Commission estimates that the percentage of Form MA-T
registrants that will also be Form MA registrants is 82%, or 910
(estimated number of Form MA registrants) / 1,110 (current Form MA-T
registrants). The Commission assumes that this percentage adjustment
also applies in connection with its estimate of the number of new
municipal advisory firms that will register on Form MA each year.
115 (estimated number of new Form MA-T registrants per year) x 82% =
94.3 new Form MA registrants per year.
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The Commission, however, is revising its estimate of the average
number of individuals for whom municipal advisory firms will need to
submit a new Form MA-I. In the Proposal, the Commission estimated that
the average number of new Form MA-I applicants per year would be
1,800.\1471\ The Commission now estimates that municipal advisors will
need to submit a new Form MA-I for approximately 950 individuals
annually.\1472\
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\1471\ To estimate the average annual number of new Form MA-I
applicants, the Commission relied on FINRA registration data, which
indicated that new Form U4 applicants that are new to the industry
comprise, on average, approximately 8.39% of the total number of
Form U4 applicants. See Proposal, 76 FR 866. 21,800 (all Form MA-I
applicants) x 8.39% = 1,829 new Form MA-I applicants per year. See
id.
\1472\ 11,250 (initial number of individuals for whom municipal
advisory firms will need to submit a Form MA-I) x 8.39% = 943.88
individuals for whom municipal advisory firms will need to submit a
new Form MA-I.
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D. Total Initial and Annual Reporting and Recordkeeping Burdens
1. Initial Registration Burden
a. Form MA
In the Proposal, the Commission estimated that it would take a
municipal advisory firm an average of 3.5 hours to complete Form
MA.\1473\ This estimate was based on the estimated average amount of
time for a municipal advisory firm to complete Form MA-T and the
estimated average amount of time for an investment adviser to complete
Part 1A of Form ADV. The Commission stated in the Proposal that this
estimate would apply to all municipal advisory firms because even those
that had already completed Form MA-T under the temporary registration
regime would be required to register anew under the permanent
registration regime.\1474\
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\1473\ See Proposal, 76 FR 866.
\1474\ See id.
---------------------------------------------------------------------------
Additionally, the Commission stated in the Proposal that, at the
time it initially files Form MA, a municipal advisory firm would be
required to conduct an initial review of its business and certify that,
among other things, it and every natural person associated with the
municipal advisory firm would meet standards required by the
Commission, the MSRB, or any other relevant SRO to engage in municipal
advisory activities. The Commission estimated that the initial burden
to comply with the Form MA self-certification requirement would be, on
average, approximately 3.0 hours per applicant.\1475\ The Commission
based this estimate on burden estimates for Form N-CSR (``Certified
Shareholder Report of Registered Management Investment Companies'') and
Form N-Q (``Quarterly Schedule of Portfolio Holdings of Registered
Management Investment Company''), which include similar self-
certification requirements.\1476\ Thus, the Commission estimated that
the total average initial burden for Form MA would be 6.5 hours per
applicant.\1477\
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\1475\ See id. at 866-67.
\1476\ See Securities Exchange Act Release No. 47262 (January
27, 2003), 68 FR 5348 (February 3, 2003); Securities Exchange Act
Release No. 49333 (February 27, 2004), 69 FR 11244 (March 9, 2004).
See also Proposal, 76 FR 866.
\1477\ See Proposal, 76 FR 867.
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As noted above, the Commission is making some revisions to clarify
the questions asked in the forms and to elicit additional information.
The Commission recognizes that some revisions will increase the burden
for municipal advisors to complete the relevant forms, while others
will decrease the burden. For example, to reduce the burden for
municipal advisory firms with many offices, Form MA will require
information pertaining only to the five largest offices. On the other
hand, Form MA now requires certain additional information that will
result in additional burdens, including additional identifying
information and information regarding disciplinary history.
Because of these reasons and because most of the changes to Form MA
are clarifications not requiring additional information,\1478\ on
balance, the Commission does not believe the additional information
requirements will impose additional burdens on municipal advisors in
the aggregate. As noted in the Proposal, the average time necessary to
complete Form MA-T is 2.5 hours, while the average time necessary to
complete Part 1A of Form ADV, a lengthier registration form, is 4.32
hours.\1479\ Based on the comparative estimated burdens to complete
Form MA-T and Part 1A of Form ADV, the Commission continues to believe
that its burden estimate for the completion of Form MA is reasonable.
As discussed above, however, the Commission is not adopting a self-
certification requirement.\1480\ Therefore, the Commission estimates
that the total average initial burden for Form MA will be 3.5 hours per
applicant.
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\1478\ See supra Section III.A.2.
\1479\ See Proposal, 76 FR 866.
\1480\ See supra Section III.A.2.b.
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In the Proposal, the Commission estimated that the total initial
paperwork burden for completion and submission of Form MA during the
first year would be 6,500 hours.\1481\ Given its revised estimates for
Form MA applicants, as described above, and its decision not to adopt a
self-certification requirement, the Commission now estimates that the
total initial paperwork burden for completion and submission of Form MA
during the first year will be 3,185 hours.\1482\
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\1481\ 1,000 (persons required to submit Form MA) x 6.5 hours
(average estimated time required to complete Form MA and initial
self-certification) = 6,500 hours. Id.
\1482\ 910 (persons required to submit Form MA) x 3.5 hours
(average estimated time required to complete Form MA) = 3,185 hours.
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In the Proposal, the Commission solicited comments on the
collection of information burdens associated with the proposed rules
and forms.\1483\ The Commission received two comment letters that
addressed the Commission's burden estimates for Form MA. Both
commenters argued that completing Form MA would require significantly
more than the estimated 6.5 hours.\1484\ One commenter, in particular,
asserted that:
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\1483\ See Proposal, 76 FR 872.
\1484\ See, e.g., Union Bank Letter; Financial Services
Roundtable Letter.
[T]he cost estimates included in the Proposal are grossly
underestimated. Rather than the 6.5 hours estimated by the
Commission, our members estimate that the initial preparation of
Form MA would require significantly greater hours and much higher
costs. Annual updates are estimated to require exponentially higher
hours to update and maintain the filing. In this regard, some of our
members have observed that the time required to prepare the Form MA-
T to register under the Commission's temporary rules required well
in excess of 6.5 hours.\1485\
---------------------------------------------------------------------------
\1485\ See Financial Services Roundtable Letter.
However, this commenter did not provide specific figures by which to
recalculate the Commission's estimates,
[[Page 67590]]
making it difficult to evaluate these assertions.
While the Commission recognizes that some applicants will require
well in excess of 3.5 hours to complete Form MA, the Commission
reiterates that the hourly estimate is meant to reflect an average and
emphasizes that, as noted in the Proposal, depending on the specific
circumstances of the municipal advisory firm, the initial burden to
complete Form MA will vary greatly from respondent to respondent.\1486\
Factors that will affect the initial burden include the size of the
municipal advisory firm, the complexity of its business activities, and
the amount and type of information to be included on Form MA. Moreover,
as noted above, Form MA generally allows applicants for municipal
advisor registration to incorporate by reference information that
already has been submitted on other forms under other Commission
regulatory requirements.\1487\ The Commission believes that the ability
of registrants to incorporate by reference will lower the hourly
average burden for many applicants. The Commission anticipates that,
generally, many smaller municipal advisory firms will require less time
than the 3.5 hour average burden estimate, while larger municipal
advisory firms that offer a variety of services to municipal entities
will require considerably more time since they will have more
information to disclose in Form MA.
---------------------------------------------------------------------------
\1486\ See Proposal, 76 FR 867.
\1487\ See supra Section III.A.2.
---------------------------------------------------------------------------
The collection of information made pursuant to Form MA is mandatory
and generally will not be confidential and will be made publicly
available. Some information, such as social security numbers, will be
kept confidential subject to applicable law.
b. Form MA-I
In the Proposal, the Commission estimated that the average amount
of time for a natural person municipal advisor to complete Form MA-I
would be 3.0 hours.\1488\ The Commission determined this figure by
estimating the paperwork burden for Form MA-I compared to that of Form
MA-T, which is estimated to be 2.5 hours per applicant.\1489\ The
Commission believed that the paperwork burden of completing Form MA-I
would not be significantly greater than the amount of time required to
complete Form MA-T because some of the information required for Form
MA-I would have already been gathered to complete Form MA-T.\1490\ In
the Proposal, the Commission stated that the estimate of 3.0 hours to
complete Form MA-I would apply to all natural person municipal advisors
because even those that had already completed Form MA-T under the
temporary registration regime would be required to register anew under
the permanent registration regime.\1491\
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\1488\ See Proposal, 76 FR 867.
\1489\ See Temporary Registration Rule Release, 75 FR 54473. See
also Proposal, 76 FR 867.
\1490\ See Proposal, 76 FR 867.
\1491\ See id.
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As noted above, a natural person municipal advisor who is not a
sole proprietor is no longer required to register as a municipal
advisor by completing Form MA-I. However, the Commission has determined
that a municipal advisory firm must submit Form MA-I to provide
information pertaining to each associated person who engages in
municipal advisory activities on the firm's behalf. Although the person
responsible for submitting Form MA-I has changed since the Proposal,
the Commission does not believe that its estimate regarding the number
of hours required to complete Form MA-I would materially change.
Rather, the Commission believes that it would take an individual and a
municipal advisory firm substantially the same number of hours to
complete Form MA-I. Similarly, although municipal advisory firms may,
over time, become more efficient in completing Form MA-I, the
Commission does not believe the time savings would be substantial
enough to cause the Commission to revise its estimate.
As discussed above, the Commission is also making some revisions to
clarify the questions asked in Form MA-I and to elicit additional
information. The Commission recognizes that some revisions will change
the estimated burden provided in the Proposal to complete Form MA-I,
while others will decrease the burden. For example, to reduce the
paperwork burden, an individual's disciplinary history reported on Form
MA can be incorporated by reference in Form MA-I. On the other hand,
Form MA-I now requires certain additional information that would result
in additional burden, including additional identifying information and
information regarding disciplinary history.
As with Form MA, because most of the changes to Form MA-I are
clarifications not requiring additional information, on balance, the
Commission does not believe the additional information requirements
will impose additional burdens on municipal advisors in the
aggregate.\1492\ Moreover, as noted above, Form MA-I generally allows
information that already has been submitted on other forms to be
incorporated by reference.\1493\ Based on the comparative estimated
burden to complete Form MA-T and the ability to incorporate by
reference, the Commission continues to believe that its hourly burden
estimate for the completion of Form MA-I is reasonable and is retaining
the estimate as originally proposed. Therefore, the Commission
estimates that the average amount of time for a municipal advisory firm
to complete Form MA-I with respect to each natural person who is a
person associated with the municipal advisor and who engages in
municipal advisory activities on its behalf will be 3.0 hours.
---------------------------------------------------------------------------
\1492\ See supra Section III.A.2.
\1493\ See supra Section III.A.2.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that, during the first
year, the total paperwork burden for completion and submission of Form
MA-I would be 65,400 hours.\1494\ Given its revised estimate of the
number of individuals for whom municipal advisory firms will need to
complete a Form MA-I, as described above, the Commission now estimates
that the total initial paperwork burden for completion and submission
of Form MA-I during the first year will be 33,750 hours.\1495\
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\1494\ 21,800 (individuals required to submit Form MA-I) x 3.0
hours (average estimated time required to complete Form MA-I and
initial self-certification) = 65,400 hours. See Proposal, 76 FR 867.
\1495\ 11,250 (individuals for whom municipal advisors will be
required to submit Form MA-I) x 3.0 hours (average estimated time
required to complete Form MA-I) = 33,750 hours.
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The Commission received two comment letters addressing the
estimated burden to complete Form MA-I. One commenter contended that
Form MA-I, as proposed, contained many questions that are irrelevant to
board trustees who are not involved in investment transactions.\1496\
According to the commenter, completion of the form would likely take
longer than three hours, would not benefit the Commission, and would
impose unnecessary burdens and costs.\1497\ Another commenter argued
that the registration process would create burdens that would
significantly outweigh any benefits created for a citizen to volunteer
its services and that the registration requirements, such as paying
fees, meeting multiple disclosure requirements, and facing ongoing
[[Page 67591]]
potential liabilities, could act as a deterrent for volunteers.\1498\
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\1496\ See Pennsylvania Public School Employees' Retirement
Board Letter.
\1497\ See id.
\1498\ See National Association of Counties Letter.
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The Commission stated in the Proposal that it did not believe that
appointed members of a governing body of a municipal entity that are
not elected ex officio members, such as citizen volunteers, should be
excluded from the definition of ``municipal advisor.'' \1499\ As
discussed above, however, Rule 15Ba1-1(d)(3)(ii) now provides an
exemption from the definition of municipal advisor for any 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 person is acting within the scope of such person's
official capacity, regardless of whether such person is an employee of
the municipal entity or obligated person.\1500\ Accordingly, under the
rules that the Commission is adopting today, board trustees are not
required to complete Form MA-I. The Commission, therefore, has not
included citizen volunteers for purposes of the current PRA hourly
burden estimate or the economic analysis cost estimates.
---------------------------------------------------------------------------
\1499\ See Proposal, 76 FR 834.
\1500\ See supra Section III.A.1.c.i.
---------------------------------------------------------------------------
The collection of information made pursuant to Form MA-I is
mandatory and generally will not be confidential and will be made
publicly available. Some information, such as social security numbers,
will be kept confidential subject to applicable law.
c. Total Initial Registration Burden Calculation
The Commission now estimates that the total initial one-time burden
for municipal advisors to register with the Commission will be
approximately 36,935 hours.\1501\
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\1501\ 3,185 (estimated initial burden for completion and
submission of Form MA during the first year) + 33,750 (estimated
initial burden for completion and submission of Form MA-I during the
first year) = 36,935 hours.
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2. Annual Burden for Newly Registered Municipal Advisors
In the Proposal, the Commission estimated that the annual paperwork
burden for firms to newly register as municipal advisors after the
first year would be 650 hours for Form MA \1502\ and 5,400 hours for
Form MA-I.\1503\ In light of its decision not to adopt a self-
certification requirement, the Commission now estimates that the total
ongoing annual burden for firms that will newly register as municipal
advisors each year to complete Form MA will be approximately 350
hours.\1504\ In addition, given the revised estimate of the average
number of individuals for whom municipal advisory firms will need to
submit a new Form MA-I, the Commission now estimates that the total
annual burden to submit a new Form MA-I will be approximately 2,850
hours.\1505\ Thus, the Commission estimates that the annual ongoing
registration burden for new municipal advisors after the first year
will be approximately 3,500 hours.\1506\
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\1502\ 100 (new Form MA applicants per year) x 6.5 hours
(average estimated time required to complete Form MA and initial
self-certification) = 650 hours. See Proposal, 76 FR 868.
\1503\ 1,800 (new Form MA-I registrants per year) x 3.0 hours
(average estimated time required to complete Form MA-I and initial
self-certification) = 5,400 hours. See id.
\1504\ 100 (new Form MA applicants per year) x 3.5 hours
(average estimated time required to complete Form MA) = 350 hours.
\1505\ 950 (new Form MA-I filings per year) x 3.0 hours (average
estimated time required to complete Form MA-I) = 2,850 hours.
\1506\ 350 (estimated annual ongoing burden to complete Form MA)
+ 2,850 (estimated annual ongoing burden to complete Form MA-I) =
3,200 hours.
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3. Annual Burden for Amendments to Form MA and Form MA-I
In the Proposal, the Commission estimated that the average time
necessary to prepare an annual amendment to Form MA would be
approximately 1.5 hours because only certain parts of Form MA would
need to be amended.\1507\ The Commission recognized that, depending on
the extent of the amendments, the burden to complete an annual
amendment to Form MA may vary greatly from respondent to respondent,
and that some municipal advisors would require significantly more time
than 1.5 hours, while others would require significantly less time than
1.5 hours.\1508\ In addition, the Commission estimated that the annual
burden to comply with the Form MA self-certification requirement would
be, on average, approximately one hour per respondent. This estimate
was based on burden estimates for Form N-CSR and Form N-Q.\1509\
---------------------------------------------------------------------------
\1507\ See Proposal, 76 FR 868.
\1508\ See id.
\1509\ See id.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that the average amount
of time necessary to prepare an interim updating amendment to Form MA
(i.e., any additional amendment other than the required annual
amendment) would be 0.5 hours.\1510\ The Commission based this figure
on its estimate for the amount of time required to prepare an interim
updating amendment to Form ADV.\1511\ The Commission estimated that
each municipal advisor would likely amend Form MA two times during the
year--one annual amendment and one interim updating amendment--although
the Commission recognized that the actual number of amendments per
municipal advisor might be higher or lower depending on the
circumstances.\1512\ Accordingly, the Commission estimated that the
total burden to amend Form MA per year, including compliance with the
annual self-certification requirement, would be 3,000 hours.\1513\
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\1510\ See id.
\1511\ See id.
\1512\ See id.
\1513\ (1,000 (persons required to amend Form MA) x 2.5 hours
(average estimated time to amend Form MA and complete self-
certification annually) x 1.0 (number of annual amendments per
year)) + (1,000 (persons required to amend Form MA) x 0.5 hours
(average estimated time to prepare an interim updating amendment for
Form MA) x 1.0 (number of interim updating amendments per year)) =
3,000 hours per year. See id.
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Given the revised estimate of the number of municipal advisors that
will register with the Commission on Form MA initially, as described
above, and its decision not to adopt a self-certification requirement,
the Commission now estimates that the total annual burden for municipal
advisors to amend Form MA will be 1,820 hours.\1514\
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\1514\ (910 (number of municipal advisors required to submit an
annual amendment to Form MA) x 1.5 hours (average estimated time to
prepare an annual amendment to Form MA) x 1.0 (number of annual
amendments per year)) + (910 (number of municipal advisors required
to submit an interim updating amendment to Form MA) x 0.5 hours
(average estimated time to prepare an interim updating amendment to
Form MA) x 1.0 (number of interim updating amendments per year)) =
1,820 hours per year.
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In the Proposal, the Commission estimated that the average amount
of time to complete an updating amendment to Form MA-I would be 0.5
hours.\1515\ The Commission based this figure on its estimate of the
amount of time required to prepare an interim updating amendment to
Form ADV.\1516\ The Commission further estimated that the time required
to complete the Form MA-I annual self-certification requirement would
be approximately five minutes, or 0.1 hours.\1517\ The Commission,
relying on FINRA U4 registration data, estimated that a Form MA-I
respondent would submit an average of 1.7 updating amendments per year.
Therefore, the Commission estimated the total burden to prepare
updating amendments to Form MA-I and to complete the annual self-
[[Page 67592]]
certification would be approximately 20,700 hours.\1518\
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\1515\ See Proposal, 76 FR 868.
\1516\ See id.
\1517\ See id. The Commission stated its belief that this
estimate was appropriate given the short time required to read and
review the self-certification statement and sign the section.
\1518\ (21,800 (persons required to amend Form MA-I during any
given year) x 0.5 hours (average estimated time to prepare any
updating amendment for Form MA-I) x 1.7 (average number of
amendments per year)) + (21,800 (persons required to complete annual
self-certification on Form MA-I) x 0.1 hours (average estimated time
to complete self-certification)) = 20,710 hours per year. See id. at
869.
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In addition, under the proposed rules and forms, the Commission
would have required individuals who register as municipal advisors by
completing Form MA-I to file Form MA-W to withdraw from registration.
Accordingly, in the proposal, the Commission estimated that the total
annual burden to withdraw from MA-I registration would be approximately
1,350 hours.\1519\
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\1519\ The Commission, relying on the proportion of individuals
who fully terminated FINRA registration to all Form U4 registrants,
estimated that the average number of Form MA-I withdrawals per year
would be approximately 2,700. 21,800 (all Form MA-I applicants) x
(79,722 / 637,000) (proportion of individuals who fully terminated
FINRA registration to all Form U4 registrants) = 2,728. See
Proposal, 76 FR 869. 2,700 (estimated number of persons withdrawing
from Form MA-I registration each year) x 0.5 hours (average
estimated time to complete Form MA-W) = 1,350 hours per year. Id.
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As noted above, a natural person municipal advisor who is not a
sole proprietor is no longer required to register as a municipal
advisor by completing Form MA-I. However, the Commission has determined
that municipal advisory firms must submit Form MA-I to provide
information pertaining to each associated person who engages in
municipal advisory activities on the firm's behalf. In addition, the
final rules and forms require municipal advisory firms to amend Form
MA-I to indicate that an individual is no longer an associated person
of the municipal advisory firm filing the form or no longer engaged in
municipal advisory activities on its behalf.
Given the revised estimate of the number of individuals for whom
municipal advisory firms will need to submit a Form MA-I, the
Commission now estimates that the average number of amendments to Form
MA-I that municipal advisory firms will need to submit to indicate that
an individual is no longer an associated person of the municipal
advisory firm filing the form or no longer engages in municipal
advisory activities on its behalf will be approximately 1,340.\1520\
Thus, the total annual ongoing burden for municipal advisory firms to
amend Form MA-I for this purpose will be approximately 670 hours.\1521\
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\1520\ 11,250 (estimated number of individuals for whom
municipal advisors will be required to submit Form MA-I) x (79,722 /
670,016) (proportion of individuals who fully terminated FINRA
registration to all Form U4 registrants) = 1,338.6.
\1521\ 1,340 (estimated number of persons withdrawing from Form
MA-I each year) x 0.5 hours (average estimated time to prepare an
updating amendment to Form MA-I) 670 hours per year.
---------------------------------------------------------------------------
Given the change to Form MA-I described above and the overall
revised estimate of the number of individuals for whom municipal
advisors will be required to submit a Form MA-I, the Commission now
estimates that the total annual burden municipal advisors will incur to
prepare updating amendments to Form MA-I will be approximately 9,563
hours.\1522\ As discussed in Section III.A.2, the final rules do not
require an annual self-certification on Form MA-I.
---------------------------------------------------------------------------
\1522\ 11,250 (estimated number of individuals who are employed
at municipal advisors for whom updating amendments to Form MA-I will
need to be filed) x 0.5 hours (average estimated time to prepare an
updating amendment to Form MA-I) x 1.7 (average number of amendments
per year) = 9,562.5 hours per year.
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The Commission received one comment that specifically addressed the
estimated burden for amendments to Form MA and Form MA-I.\1523\
Although the commenter did not provide its own burden estimates, it
argued that ``[a]nnual updates are estimated to require exponentially
higher hours to update and maintain the filing.'' \1524\ This commenter
also did not provide specific figures by which to recalculate the
estimates, making it difficult to evaluate these assertions.
---------------------------------------------------------------------------
\1523\ See Financial Services Roundtable Letter.
\1524\ See id.
---------------------------------------------------------------------------
While the Commission is aware that in some cases (i.e., for some
larger municipal advisors with a large number of municipal entity and
obligated person clients) annual updates may require significantly more
time than estimated in the Proposal, the Commission does not agree that
regular updates will generally require ``exponentially higher'' hours.
The Commission anticipates that such updates will involve incremental
or minor changes in reporting and in most cases will not require large-
scale changes to Form MA or Form MA-I. Thus, the Commission believes
that its hourly burden estimates for amendments to Form MA and Form MA-
I remain reasonable and retains them as originally proposed.
In summary, the Commission estimates that the total annual burden
for municipal advisors to complete amendments to Form MA and Form MA-I
will be approximately 12,053 hours.\1525\
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\1525\ 1,820 (estimated annual burden for municipal advisors to
amend Form MA) + 670 (estimated annual burden for municipal advisors
to amend Form MA-I to indicate that an individual is no longer an
associated person of the municipal advisory firm filing the form or
no longer engages in municipal advisory activities on its behalf) +
9,563 (estimated annual burden for municipal advisors to prepare
updating amendments to Form MA-I) = 12,053 hours.
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The collection of information made pursuant to amendments to Form
MA and Form MA-I is mandatory and generally will not be confidential
and will be made publicly available. Some information, such as social
security numbers, will be kept confidential subject to applicable law.
4. Withdrawal From Municipal Advisor Registration
In the Proposal, the Commission estimated that the average time
necessary to complete Form MA-W would be approximately 0.5 hours.\1526\
The Commission based this estimate on burden estimates for Form ADV-
W.\1527\ Further, in the Proposal, the Commission estimated that the
average number of withdrawals from Form MA registration per year would
be 60,\1528\ and that the total annual burden would be approximately 30
hours.\1529\
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\1526\ See Proposal, 76 FR 869.
\1527\ See id.
\1528\ To estimate the annual number of withdrawals for Form MA
registrants, the Commission staff relied on investment adviser
registration data, which indicated that, annually, investment
adviser withdrawals comprise, on average, approximately 6.4% of the
total number of registered investment advisers. 1,000 (all Form MA
applicants) x 6.4% = 64 Form MA withdrawals per year. See id.
\1529\ 60 (estimated number of persons withdrawing from Form MA
registration each year) x 0.5 hours (average estimated time to
complete Form MA-W) = 30 hours per year. See id.
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The Commission received no comment letters that specifically
addressed the Form MA-W hourly burden estimates. Although the
Commission has made modifications to Form MA-W since the Proposal,
because those changes are minor,\1530\ the Commission is retaining its
hourly burden estimates for Form MA-W as originally proposed.
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\1530\ See supra Section III.A.4.
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The Commission has reviewed Form MA-T data as of December 31, 2012,
and estimates that approximately 22 municipal advisors filed a
withdrawal on Form MA-T in 2011 and approximately 24 municipal advisors
filed a withdrawal on Form MA-T in 2012. Based on experience with
withdrawals on Form MA-T, the Commission now estimates that the average
number of withdrawals from Form MA registration per year will be
[[Page 67593]]
30,\1531\ and that the total annual burden will be approximately 15
hours.\1532\
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\1531\ This estimate represents an average of the number of
withdrawals on Form MA-T in 2011 (22) and 2012 (24) rounded to the
nearest higher multiple of ten.
\1532\ 30 (estimated number of persons withdrawing from Form MA
registration per year) x 0.5 hours (average estimated time to
complete Form MA-W) = 15 hours per year.
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The collection of information made pursuant to Form MA-W is
mandatory and generally will not be confidential and will be made
publicly available. Some information, such as social security numbers,
will be kept confidential subject to applicable law.
5. Non-Resident Municipal Advisors
In the Proposal, the Commission estimated that there would be
approximately 20 Form MA-NR filers: 16 non-resident general partners or
non-resident managing agents \1533\ and three non-resident municipal
advisory firms.\1534\ In the Proposal, the Commission noted that the
average time necessary to complete Form ADV-NR, which is similar to
Form MA-NR, is approximately one hour.\1535\ The Commission estimated
that, because of the additional time required to find and designate an
agent, the process to complete Form MA-NR would take longer than Form
ADV-NR, or approximately 1.5 hours on average.\1536\ Thus, the
Commission estimated that the total initial burden to complete Form MA-
NR would be approximately 30 hours.\1537\
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\1533\ 1,000 (all Form MA applicants) x 1.64% (percentage of
Form ADV-NR filings to total number of investment adviser
applicants) = 16 Form MA-NR filers that are non-resident general
partners or non-resident managing agents. See Proposal, 76 FR 869-
70.
\1534\ 1,000 (all Form MA applicants) x (2 / 800) (proportion of
non-U.S.-based Form MA-T registrants compared to all Form MA-T
registrants) = 2.5 Form MA-NR filers that are non-resident municipal
advisors. See id. at 870.
\1535\ See id. at 869.
\1536\ See id. The burden associated with this process would
primarily involve the designation and authorization of a United
States person as an agent for service of process.
\1537\ 20 (persons expected to file Form MA-NR for the first
time) x 1.5 hours (average estimated time to complete Form MA-NR) =
30 hours. See id. at 870.
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In addition, the Commission estimated that the additional burden to
provide an opinion of counsel would add approximately three hours and
$900 in outside legal costs per respondent.\1538\ To obtain this
estimate, the Commission relied on its burden estimates for Form 20-F,
a form submitted by certain foreign private issuers, which has a
similar opinion of counsel requirement to Rule 15Ba1-6(d).\1539\ The
Commission estimated that the total initial burden to provide an
opinion of counsel would be approximately 9 hours \1540\ and that the
total initial cost for all non-resident municipal advisory firms to
hire outside counsel as part of providing an opinion of counsel would
be approximately $2,700.\1541\ Thus, the Commission estimated that the
total initial burden to complete Form MA-NR and provide an opinion of
counsel would be 39 hours.
---------------------------------------------------------------------------
\1538\ See id. The $900 figure is based on an hourly cost
estimate of $400 on average for an outside attorney, which is based
on Commission conversations with law firms that regularly assist
regulated financial firms with compliance matters. See Investment
Advisers Act Release No. 3222 (June 22, 2011), 76 FR 39646 (July 6,
2011). Based on previous burden estimates, the Commission estimated
that outside counsel will take, on average, 2.25 hours to assist in
preparation of the opinion of counsel, for an average cost of $900
per respondent.
\1539\ See Proposal, 76 FR 870.
\1540\ 3 (non-resident municipal advisory firms expected to
provide an opinion of counsel) x 3.0 hours (average estimated time
to provide an opinion of counsel) = 9 hours. See id.
\1541\ 3 (non-resident municipal advisory firms expected to
provide opinion of counsel) x $900 (average estimated cost to hire
outside counsel for providing an opinion of counsel) = $2,700. See
id.
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The Commission received no comment letters that specifically
addressed the Form MA-NR hourly burden estimates. Although the
Commission has made modifications to Form MA-NR since the Proposal,
because most of the changes are clarifications not requiring additional
information, on balance, the Commission does not believe the additional
information requirements will impose significant additional burdens on
municipal advisors,\1542\ and is retaining its hourly burden estimates
to complete Form MA-NR as originally proposed.\1543\ Given the revised
estimate of Form MA applicants as described above, the Commission now
estimates that two non-resident municipal advisory firms will need to
complete Form MA-NR.\1544\ In addition, the Commission estimates that
those non-resident municipal advisory firms will need to furnish Form
MA-NR for 15 non-resident general partners and non-resident managing
agents.\1545\
---------------------------------------------------------------------------
\1542\ See supra Section III.A.6.
\1543\ See supra note 1536 and accompanying text.
\1544\ 910 (all Form MA applicants) x (2 / 900) (proportion of
non-U.S.-based Form MA-T registrants compared to all Form MA-T
registrants) = 2.02 Form MA-NR filers that are non-resident
municipal advisors.
\1545\ 910 (all Form MA applicants) x 1.64% (percentage of Form
ADV-NR filings to total number of investment adviser applicants) =
14.92 Form MA-NR filers that are non-resident general partners or
non-resident managing agents.
---------------------------------------------------------------------------
The final rules and forms will also require each non-resident
municipal advisory firm to file Form MA-NR for each non-resident
natural person associated with the municipal advisor who engages in
municipal advisory activities on behalf of the municipal advisor. The
Commission estimates that the number of such non-resident natural
persons will be the same as the number of non-resident general partners
or non-resident managing agents, or 15.\1546\ Thus, the total number of
Form MA-NR filers will be approximately 32, and the total initial
burden to complete Form MA-NR will be approximately 48 hours.\1547\
---------------------------------------------------------------------------
\1546\ See supra note 1545 and accompanying text. The Proposal
did not include the number of Form MA-I filers in estimating the
burden associated with Form MA-NR.
\1547\ 32 (persons expected to file Form MA-NR for the first
time) x 1.5 hours (average estimated time to complete Form MA-NR) =
48 hours.
---------------------------------------------------------------------------
The Commission also estimates that the total initial burden to
provide an opinion of counsel will be approximately 6 hours.\1548\
Thus, the Commission estimates that the total initial burden to
complete the estimated number of Form MA-NR submissions and provide an
opinion of counsel will be 54 hours.\1549\ In addition, the Commission
now estimates that the total initial cost for all non-resident
municipal advisory firms to hire outside counsel as part of providing
an opinion of counsel will be approximately $1,800.\1550\
---------------------------------------------------------------------------
\1548\ 2 (non-resident municipal advisory firms expected to
provide opinion of counsel) x 3.0 hours (average estimated time to
provide an opinion of counsel) = 6 hours.
\1549\ 48 hours (total initial burden to complete of Form MA-NR)
+ 6 hours (total initial burden to provide an opinion of counsel) =
54 hours.
\1550\ 2 (non-resident municipal advisory firms expected to
provide opinion of counsel) x $900 (average estimated cost to hire
outside counsel to provide an opinion of counsel) = $1,800.
---------------------------------------------------------------------------
In the Proposal, the Commission also estimated the ongoing annual
number of new Form MA-NR filers that are non-resident general partners
or non-resident managing agents. Relying on investment adviser
registration data, the Commission estimated that only one municipal
advisor respondent per year would have a non-resident general partner
or non-resident managing agent that would be required to complete a new
Form MA-NR.\1551\ This estimate included the ongoing annual number of
new Form MA-NR filers that are non-resident municipal advisors since
the small initial number of non-resident municipal advisors suggested
that, at most, there would be only one new non-resident municipal
advisor every several years. Thus, the Commission estimated that the
total burden per year to
[[Page 67594]]
complete Form MA-NR would be approximately two hours.\1552\ For the
purposes of the analysis, the Commission assumed that the one new non-
resident municipal advisor per year would not be a natural person and
would thus be required to provide opinion of counsel. The Commission
estimated that the total burden per year to provide opinion of counsel
would be approximately three hours\1553\ and that the ongoing annual
cost for non-resident municipal advisors to hire outside counsel as
part of providing opinion of counsel would be approximately $900.\1554\
---------------------------------------------------------------------------
\1551\ 1,000 (all Form MA applicants) x 0.09% (average annual
percentage filings of Form ADV-NR) = 0.9 Form MA-NR filers per year;
this number was rounded up to 1. See Proposal, 76 FR 870.
\1552\ 1 (persons expected to file Form MA-NR each year) x 1.5
(average estimated time to complete Form MA-NR) = 1.5 hours per
year. See id.
\1553\ 1 (municipal advisory firms expected to provide an
opinion of counsel) x 3.0 (average estimated time to provide opinion
of counsel) = 3.0 hours per year. See id.
\1554\ 1 (persons expected to file Form MA-NR each year) x $900
(average estimated cost to hire outside counsel to provide opinion
of counsel) = $900. See id.
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The Commission continues to estimate that only one municipal
advisor respondent per year will have a non-resident general partner,
non-resident managing agent, or associated person that would be
required to complete a new Form MA-NR.\1555\ Thus, as in the Proposal,
the Commission estimates that the total burden per year to complete a
new Form MA-NR will be approximately two hours; \1556\ the total burden
per year to provide opinion of counsel will be approximately three
hours; \1557\ and the ongoing annual cost for non-resident municipal
advisors to hire outside counsel as part of providing opinion of
counsel will be approximately $900.\1558\
---------------------------------------------------------------------------
\1555\ 910 (all Form MA applicants) x 0.09% (average annual
percentage filings of Form ADV-NR) = 0.82 Form MA-NR filers per
year; as in the initial estimate, this number is rounded up to 1.
\1556\ 1 (persons expected to file Form MA-NR each year) x 1.5
(average estimated time to complete Form MA-NR) = 1.5 hours per
year.
\1557\ 1 (municipal advisory firms expected to provide an
opinion of counsel) x 3.0 (average estimated time to provide opinion
of counsel) = 3.0 hours per year.
\1558\ See supra notes 1552-1554.
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The Commission notes that filers may incur recurring burdens
associated with Form MA-NR, such as costs incurred to monitor and
maintain the information required by the form. For the purposes of this
analysis, these recurring burdens are included in the estimates noted
above. Rule 15Ba1-6 also will require that municipal advisors update
the information on Form MA-NR if it becomes inaccurate. Similarly,
these burdens are accounted for in the above estimates.
In summary, the Commission now estimates that the total initial
burden for Form MA-NR will be approximately 54 hours; \1559\ the total
ongoing annual burden to complete a new Form MA-NR will be
approximately two hours; \1560\ the total initial cost for all non-
resident municipal advisory firms to hire outside counsel as part of
providing an opinion of counsel will be approximately $1,800; \1561\
and the ongoing annual cost for non-resident municipal advisors to hire
outside counsel as part of providing opinion of counsel will be
approximately $900.\1562\
---------------------------------------------------------------------------
\1559\ See supra note 1549 and accompanying text.
\1560\ See supra note 1552 and accompanying text.
\1561\ See supra note 1550 and accompanying text.
\1562\ See supra note 1554 and accompanying text.
---------------------------------------------------------------------------
The collection of information made pursuant to Form MA-NR is
mandatory and will not be confidential and will be made publicly
available.
6. Outside Counsel
In the Proposal, the Commission stated its belief that some
municipal advisory firms would seek outside counsel to help them comply
with the requirements of the proposed rules, if adopted, and to
complete Form MA.\1563\ The Commission also stated its belief that it
would be unlikely that natural person municipal advisors would obtain
or consult with counsel for purposes of completing Form MA-I.\1564\ For
PRA purposes, the Commission assumed that all 1,000 municipal advisory
firms registering on Form MA would, on average, consult with outside
counsel for one hour to help them comply with the requirements.\1565\
The Commission estimated that the total cost for all municipal advisory
firms to hire outside counsel to review their compliance with the
requirements of the proposed rules and forms would be approximately
$400,000.\1566\ Given the revised estimate of Form MA applicants as
described above, the Commission now estimates that such cost will be
approximately $364,000.\1567\ In addition, firms that seek to register
as municipal advisors in each year after the first will likely hire
outside counsel to review their compliance with the requirements of the
proposed rules and forms. As discussed above, the Commission estimates
that approximately 100 new municipal advisory firms will register on
Form MA each year.\1568\ Accordingly, the Commission estimates that the
ongoing cost for all municipal advisory firms to hire outside counsel
to review their compliance with the requirements of the proposed rules
and forms would be approximately $40,000.\1569\
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\1563\ See Proposal, 76 FR 871.
\1564\ See id.
\1565\ See id.
\1566\ 1,000 (estimated number of municipal advisory firms that
would hire outside counsel) x 1 hour (average estimated time spent
by outside counsel to help a municipal advisory firm comply with the
rule) x $400 (hourly rate for an outside attorney) = $400,000. The
hourly cost estimate of $400 on average for an attorney is based on
Commission conversations with law firms that regularly assist
regulated financial firms with compliance matters. See id.
\1567\ 910 (estimated number of municipal advisory firms that
would hire outside counsel) x 1 hour (average estimated time spent
by outside counsel to help a municipal advisory firm comply with the
rule) x $400 (hourly rate for an outside attorney) = $364,000. The
hourly cost estimate of $400 on average for an attorney is based on
Commission conversations with law firms that regularly assist
regulated financial firms with compliance matters. See supra note
1538 (calculating the hourly rate for an outside attorney).
\1568\ See supra note 1470 and accompanying text.
\1569\ 100 (estimated number of new municipal advisory firms
that would hire outside counsel each year) x 1 hour (average
estimated time spent by outside counsel to help a municipal advisory
firm comply with the rule) x $400 (hourly rate for an outside
attorney) = $40,000. See supra note 1538 (calculating the hourly
rate for an outside attorney).
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As discussed above, the Commission received many comments that
opined generally that municipal advisor registration under the proposed
rules would be overly burdensome and would impose significant costs
that would prove detrimental, especially to smaller ``community banks''
and local and state municipalities.\1570\ Among these comments, many
noted that local governments would need to hire counsel with expertise
in dealing with the Commission to ensure that these officials are
properly trained and advised in the intricacies of securities
law.\1571\
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\1570\ See, e.g., Form Letter A.
\1571\ See, e.g., City of St. Petersburg, Florida Letter; City
of Yuma, Arizona Letter; Texas Municipal League Letter; Spiroff &
Gosselar Letter.
---------------------------------------------------------------------------
As already discussed above, however, Rule 15Ba1-1(d)(3)(ii) now
provides an exemption from the definition of municipal advisor for any
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 person is acting within the scope of such person's
official capacity, regardless of whether such person is an employee of
the municipal entity or obligated person.\1572\ Therefore, the concern
that local governments would need to hire counsel to assist local
government officials that are required to register as municipal
advisors, thus raising the annual burden, is no longer warranted.
---------------------------------------------------------------------------
\1572\ See supra Section III.A.1.c.i.
---------------------------------------------------------------------------
Another commenter argued that a natural person municipal advisor
that registers on Form MA-I would require the assistance of an attorney
well-versed
[[Page 67595]]
in the federal securities laws.\1573\ As discussed above, it is the
obligation of the municipal advisory firm applying for registration
with the Commission to complete Form MA-I for each natural person who
is a person associated with the municipal advisor and engages in
municipal advisory activities on its behalf. In addition, the
Commission notes that the information requested on Form MA-I is similar
to the information requested on FINRA's Form U4. The Commission
believes that Form MA-I, like Form U4, does not require applicants to
possess any specialized knowledge of federal securities laws or retain
the services of a securities lawyer. For municipal advisory firms that
are not sole proprietors, the Commission does not anticipate that such
associated persons will require outside counsel to assist in the
completion of Form MA-I. With regard to municipal advisory firms that
are sole proprietors, the Commission anticipates that the estimate
above regarding firms that would consult with outside counsel to assist
in completing Form MA would also include the time required to complete
Form MA-I.
---------------------------------------------------------------------------
\1573\ See College Savings Plans of Maryland Letter.
---------------------------------------------------------------------------
One commenter argued that in many cases the Commission's estimate
of $400 per hour for outside counsel is too low because applicants
would generally seek to retain more experienced counsel when faced with
the new registration requirements.\1574\ The commenter also stated its
belief that, for a financial institution that provides a variety of
services to municipal clients, outside legal fees could easily exceed
$25,000.\1575\ However, this commenter did not provide specific figures
by which to recalculate the Commission's estimates.
---------------------------------------------------------------------------
\1574\ See Financial Services Roundtable Letter.
\1575\ Id.
---------------------------------------------------------------------------
The Commission recognizes that, for such larger financial
institutions offering diversified services, the outside legal fees will
likely exceed the $400-per-hour estimate. However, the Commission
calculated the estimate as an average cost across all municipal
advisory firms, and many smaller firms require far less assistance from
outside counsel or, in some cases, none at all. The $400 hourly rate
for outside legal counsel, based on Commission staff conversations with
law firms that regularly assist regulated financial firms with
compliance matters, represents an average from a diverse group of
industry sources, reflecting different geographical regions and
seniority levels. The Commission notes that, depending on such
variables, some outside counsel will charge more than $400 per hour,
but many others will charge less. The Commission, therefore, continues
to believe that its average hourly cost estimates for all municipal
advisory firms to hire outside counsel are accurate and retains them as
originally proposed.
7. Consent to Service of Process From Certain Associated Persons
If Form MA-I is being filed by a municipal advisory firm with
respect to a natural person engaged in municipal advisory activities on
its behalf, the authorized representative of the municipal advisory
firm who signs the Execution Page of Form MA-I must attest that the
municipal advisory firm has obtained and retained written consent from
the individual that service of any civil action brought by, or notice
of any proceeding before, the Commission or any SRO in connection with
the individual's municipal advisory activities may be given by
registered or certified mail to the individual's address given in Item
1 of Form MA-I. If Form MA-I is being filed by a natural person
municipal advisor who is a sole proprietor, by signing the Execution
Page of Form MA-I, he or she must consent that service of any civil
action brought by, or notice of any proceeding before, the Commission
or any SRO in connection with the sole proprietor's municipal advisory
activities may be given by registered or certified mail to the sole
proprietor's address given in Item 1 of Form MA-I.
The Commission estimates that each municipal advisory firm, other
than sole proprietors, seeking to register with the Commission
following adoption of the final rules and forms will need to obtain and
retain \1576\ a written consent to service of process from each natural
person engaged in municipal advisory activities on its behalf.\1577\
The Commission does not have the information necessary to provide a
reasonable estimate regarding the number of sole proprietors that will
register with the Commission as municipal advisors because this data is
not currently available to the Commission and the Commission is unaware
of any such data being publicly available. Accordingly, the Commission
estimates that all municipal advisory firms seeking to register with
the Commission (i.e., 910 applicants) will need to obtain written
consents to service of process.\1578\ The Commission estimates that
each municipal advisory firm would need approximately 1 hour to draft a
template document to use in obtaining the written consents to service
of process, amounting to an initial, one-time burden of approximately
910 hours.\1579\ In addition, as discussed above, the Commission
estimates that, during the first year, municipal advisors will need to
complete a Form MA-I for approximately 11,250 individuals.\1580\ The
Commission estimates that, once drafted, each applicant would need
approximately 6 minutes, or 0.10 hours, to obtain a written consent to
service of process from each natural person engaged in municipal
advisory activities on its behalf, amounting to an initial, one-time
burden of approximately 1,125 hours.\1581\ Accordingly, the Commission
estimates that the total initial, one-time burden for all municipal
advisory firms to obtain written consents to service of process from
each natural person engaged in municipal advisory activities on their
behalf will be approximately 2,035 hours.\1582\
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\1576\ Rule 15Ba1-8(a)(8) will require each municipal advisory
firm to retain written consents to service of process from each
natural person who is a person associated with the municipal advisor
and engages in municipal advisory activities solely on behalf of
such registered municipal advisor.
\1577\ Because sole proprietors will consent to service of
process by signing the Execution Page of Form MA-I, sole proprietors
will not need to obtain a separate consent to service of process.
The requirement related to sole proprietors is already accounted for
in the Commission's estimated burden to complete Form MA-I. See
supra Section VII.D.1.b.
\1578\ As discussed above, the Commission estimates that 910
municipal advisory firms, including sole proprietors, will register
under the permanent registration regime. See supra note 1446 and
accompanying text.
\1579\ 910 (estimated number of applicants for municipal advisor
registration during the first year) x 1.0 hours (estimated time
required to draft a template to use in obtaining the written
consents to service of process) = 910 hours.
\1580\ See supra note 1448 and accompanying text.
\1581\ 11,250 (estimated number of natural persons engaged in
municipal advisory activities on behalf of a municipal advisory firm
during the first year) x 0.10 hours (estimated time required to
obtain the written consents to service of process) = 1,125 hours.
\1582\ 910 hours (estimated one-time burden for all municipal
advisory firms to draft a template to use in obtaining the written
consents to service of process) + 1,125 hours (estimated one-time
burden for all municipal advisory firms to obtain the written
consents to service of process) = 2,035 hours.
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In addition, firms that seek to register as municipal advisors in
each year after the first will need to obtain a written consent to
service of process from each natural person engaged in municipal
advisory activities on their behalf. As discussed above, the Commission
estimates that approximately 100 new municipal advisory firms will
register on Form MA each year.\1583\ Accordingly, the Commission
estimates that the total ongoing annual burden for
[[Page 67596]]
firms that will newly register as municipal advisors each year to draft
a template document to use in obtaining the written consents to service
of process will be approximately 100 hours.\1584\ In addition, as
discussed above, the Commission estimates that municipal advisors will
need to submit a new Form MA-I for approximately 950 individuals
annually.\1585\ Accordingly, the Commission estimates that the total
ongoing annual burden for firms to obtain written consents to service
of process from these persons will be approximately 95 hours.\1586\ The
Commission estimates that the total ongoing burden for all municipal
advisory firms to obtain written consents to service of process from
each natural person engaged in municipal advisory activities on their
behalf in each year after the first will be approximately 195
hours.\1587\
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\1583\ See supra note 1470 and accompanying text.
\1584\ 100 (estimated number of new Form MA applicants per year)
x 1.0 hours (estimated time required to draft a template to use in
obtaining the written consents to service of process) = 100 hours.
\1585\ See supra note 1472 and accompanying text.
\1586\ 950 (estimated number of new Form MA-I filings per year)
x 0.10 hours (estimated time required to obtain the written consents
to service of process) = 95 hours.
\1587\ 100 hours (estimated ongoing annual burden for all firms
that will newly register as municipal advisors to draft a template
to use in obtaining the written consents to service of process) + 95
hours (estimated ongoing annual burden for municipal advisory firms
to obtain written consents to service of process) = 195 hours.
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8. Maintenance of Books and Records
The Commission proposed that all municipal advisory firms would be
required, pursuant to proposed Rule 15Ba1-7, to maintain books and
records relating to their municipal advisory activities. These books
and records requirements were generally based on Exchange Act Rules
17a-3 and 17a-4 and Investment Advisers Act Rule 204-2, which set forth
books and records requirements with respect to broker-dealers and
investment advisers, respectively.\1588\
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\1588\ See 17 CFR 240.17a-3 and 17a-4, and 17 CFR 275.204-2. See
also Proposal, 76 FR 871.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that the average annual
burden for a municipal advisory firm to comply with the proposed
recordkeeping requirements would be similar to that of an investment
adviser, or 181 hours.\1589\ The Commission noted that the proposed
recordkeeping requirements would likely impose initial burdens on
respondents in connection with necessary updates to their recordkeeping
systems, such as systems development or modifications.\1590\ For the
purposes of the Commission's analysis, these initial burdens were
included in the estimate of 181 burden hours per respondent per year.
Thus, the Commission estimated the total compliance burden would be
approximately 181,000 hours per year.\1591\
---------------------------------------------------------------------------
\1589\ See Proposal, 76 FR 871.
\1590\ Id.
\1591\ 1,000 (estimated number of municipal advisors) x 181
hours (estimated time spent by municipal advisors to ensure annual
compliance with the books and records requirement) = 181,000 hours.
Id.
---------------------------------------------------------------------------
The Commission has made two substantive modifications to the
recordkeeping requirements since the Proposal. As discussed above, Rule
15Ba1-8(a)(2) will require municipal advisors to maintain general
ledgers, a requirement that was inadvertently left out of proposed Rule
15Ba1-7.\1592\ In addition, as discussed above, Rule 15Ba1-8(a)(8) will
require each municipal advisory firm to retain written consents to
service of process from each natural person who is a person associated
with the municipal advisor and engages in municipal advisory activities
solely on behalf of such municipal advisor.\1593\ In light of these
changes, the Commission now estimates that the average annual burden
for a municipal advisory firm to comply with the recordkeeping
requirements will be approximately 182 hours. Given the revised
estimates of the number of Form MA applicants, the Commission now
estimates that the total compliance burden will be approximately
165,620 hours per year.\1594\
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\1592\ See supra notes 1359-1360 and accompanying text.
\1593\ See Proposal, 76 FR 871.
\1594\ 910 (estimated number of municipal advisors) x 182 hours
(estimated time spent by municipal advisors to ensure annual
compliance with the books and records requirement) = 165,620 hours.
---------------------------------------------------------------------------
The Commission received two comment letters that specifically
addressed the annual books and records burden estimate. One commenter
noted that, although the Commission estimated an annual burden of 181
hours for a municipal advisory firm, the estimate was not broken down
further to an individual municipal advisor, such as a retirement board
trustee.\1595\ The Commission notes that, as proposed, the
recordkeeping requirement would have applied only to municipal advisory
firms and sole proprietors.\1596\ For this reason, the Commission
estimated the books and records burden for municipal advisory firms and
sole proprietors only, and the estimate was not intended to reflect any
recordkeeping burden for any other persons. Similarly, Rule 15Ba1-8(a),
as adopted, states that the books and records requirement applies to
``[e]very person registered or required to be registered under section
15B of the Act.'' \1597\ Because natural person municipal advisors,
other than sole proprietors, are not required to register with the
Commission under the final rules,\1598\ the books and records
requirement does not apply to natural person municipal advisors that
are not sole proprietors.
---------------------------------------------------------------------------
\1595\ See Pennsylvania Public School Employees' Retirement
Board Letter.
\1596\ See Proposed Rule 15Ba1-7.
\1597\ See Rule 15Ba1-8(a).
\1598\ Rule 15Ba1-3, as adopted, exempts from the registration
requirement a natural person municipal advisor who is an associated
person of an advisor that is registered with the Commission pursuant
to Section 15B(a)(2) of the Exchange Act (15 U.S.C. 78o-4(a)(2)) and
the rules and regulations thereunder, and engages in municipal
advisory activities solely on behalf of a registered municipal
advisor.
---------------------------------------------------------------------------
Another commenter asserted that the Commission's estimate was
``optimistic,'' and that, although the estimated burden represents
nearly ten percent of a full-time person's time, the number of hours
did not include the cost of storage, and the actual burden would likely
be higher.\1599\
---------------------------------------------------------------------------
\1599\ See UFS Bancorp Letter.
---------------------------------------------------------------------------
The Commission recognizes that, for larger municipal advisory
firms, the annual burden estimate of 182 hours may be low. The
Commission anticipates that, for the purposes of calculating the
applicable PRA burden, the annual burden for larger municipal advisory
firms that offer a variety of services to municipal entities and have
significantly greater volumes of books and records to maintain will be
offset in the average by the significantly lower annual burden for
smaller firms. As the Commission stated in the Proposal,\1600\ given
the relatively smaller size of municipal advisory firms compared to
investment advisory firms and the fewer books and records requirements
imposed by Rule 15Ba1-8, in the Commission's view, the annual hourly
burden for smaller municipal advisory firms will likely be lower than
182 hours.
---------------------------------------------------------------------------
\1600\ See Proposal, 76 FR 871. The Commission also addresses
the burden for smaller municipal advisory firms in the Final
Regulatory Flexibility Analysis below. See infra Section IX.
---------------------------------------------------------------------------
The Commission also believes that variations in the current records
storage systems of respondents make it difficult for the Commission to
estimate separately the cost of storage for a typical respondent. To
the extent that the additional records required by the recordkeeping
requirements can be stored and produced for inspection by
[[Page 67597]]
electronic means, the additional costs should not be substantial. The
Commission also reiterates that the books and records estimate, as
originally proposed, included storage costs and any needed technology
refinements or upgrades.\1601\ Accordingly, the Commission believes
that the 182-hour figure, as an average annual hourly burden across all
firms regardless of their size is an appropriate estimate.
---------------------------------------------------------------------------
\1601\ See Proposal, 76 FR 871.
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This collection of information is mandatory. The Commission staff
will use the mandatory collection of information for maintenance of
books and records in its examinations and oversight program, and the
information will be kept confidential subject to applicable law.
9. Exemption When a Municipal Entity or Obligated Person Is Represented
by an Independent Registered Municipal Advisor
The Commission believes that underwriters in negotiated deals,
because of the services they provide and the nature of negotiated
deals,\1602\ are the persons most likely to rely on the exemption
available to persons engaging in municipal advisory activities where a
municipal entity or obligated person is otherwise represented by an
independent registered municipal advisor. The Commission believes other
persons will be less likely to rely on this exemption because the
nature of the services they provide may not require a municipal entity
or obligated person to engage an independent registered municipal
advisor. The determination of whether to rely on this exemption will
depend on the facts and circumstances of a particular deal and the
parties involved in that deal, as well as the type of entity seeking to
rely on the exemption. It is possible that not many persons will seek
to rely on the exemption because another exclusion or exemption from
the definition of municipal advisor is available. Although the
Commission is providing this exemption, any efforts to rely on the
exemption in Rule 15Ba1-1(d)(3)(vi) are purely voluntary.
---------------------------------------------------------------------------
\1602\ See supra note 604 and accompanying text (describing
typical services provided by an underwriter in a negotiated deal)
and note 614 (stating the definition of ``negotiated sale'').
---------------------------------------------------------------------------
According to available market data for 2012, approximately 204
underwriters participated in negotiated deals of municipal securities
in 2012.\1603\ The Commission estimates that 210 persons will seek to
rely on this exemption.\1604\
---------------------------------------------------------------------------
\1603\ According to data obtained from Thomson Reuters' SDC
Platinum database, in 2012, 156 lead underwriters participated in
negotiated deals. Including all underwriters that participated in
negotiated deals in 2012, that number increases to 204.
\1604\ This estimate rounds to the nearest higher multiple of
ten the number of underwriters that participated in negotiated deals
of municipal securities. The Commission believes this estimate,
which likely overestimates the number of underwriters who are likely
to seek to rely on this exemption, is inclusive of other persons who
may seek to rely on this exemption.
---------------------------------------------------------------------------
A person seeking to rely on the exemption pursuant to Rule 15Ba1-
1(d)(3)(vi) must obtain a written representation from the municipal
entity or obligated person that it will not rely on the advice of the
person seeking to rely on the exemption, and that it will rely on the
advice of an independent registered municipal advisor. The Commission
estimates that each person seeking to rely on this exemption would need
approximately 1 hour to draft a template document to use in obtaining
the written representation, amounting to an initial, one-time burden of
210 hours.\1605\
---------------------------------------------------------------------------
\1605\ 210 (estimated number of persons who will seek to rely on
the exemption) x 1.0 hours (estimated time required to draft the
written representation) = 210 hours.
---------------------------------------------------------------------------
There will also be an ongoing burden each time a person seeks to
rely on this exemption. The Commission estimates that, on average,
there are approximately 8,770 negotiated deals involving an underwriter
each year.\1606\ The Commission estimates that a person seeking to rely
on this exemption would need approximately 15 minutes, or 0.25 hours,
to obtain a written representation from a municipal entity or obligated
person, amounting to an annual burden of approximately 2,193
hours.\1607\
---------------------------------------------------------------------------
\1606\ This estimate represents an average of the number of
negotiated deals each year from 2009 through 2012 relying upon data
obtained from Thomson Reuters' SDC Platinum database.
\1607\ 8,770 (estimated number of negotiated deals per year) x
0.25 hours (estimated time required to obtain the written
representation) = 2,192.5 hours.
---------------------------------------------------------------------------
In addition, the person seeking to rely on this exemption must make
certain disclosures to the municipal entity or obligated person, and
provide a copy of such disclosures to the municipal entity's or
obligated person's independent registered municipal advisor. With
respect to a municipal entity, such person must disclose in writing
that, by obtaining the representation discussed above from the
municipal entity, such person is not a municipal advisor and is not
subject to the fiduciary duty set forth in Section 15B(c)(1) of the
Exchange Act with respect to municipal financial products or the
issuance of municipal securities.\1608\ With respect to an obligated
person, such person must disclose in writing that, by obtaining the
representation discussed above from the obligated person, such person
is not a municipal advisor with respect to the municipal financial
product or issuance of municipal securities.\1609\ The Commission
estimates that each person seeking to rely on this exemption would need
approximately 1 hour to draft the required disclosure, amounting to an
initial, one-time burden of approximately 210 hours.\1610\ The
Commission believes that once these disclosures have been drafted, such
language would become part of the standard municipal advice
documentation and, accordingly, there would be no further ongoing
associated burden.
---------------------------------------------------------------------------
\1608\ See Rule 15Ba1-1(d)(3)(vi)(C)(1).
\1609\ See Rule 15Ba1-1(d)(3)(vi)(C)(2). Each such disclosure
must be made at a time and in a manner reasonably designed to allow
the municipal entity or obligated person to assess the material
incentives and conflicts of interest that such person may have in
connection with the municipal advisory activities. See Rule 15Ba1-
1(d)(3)(vi)(C)(3).
\1610\ 210 (estimated number of persons who will seek to rely on
the exemption) x 1.0 hours (estimated time required to draft the
required disclosure) = 210 hours.
---------------------------------------------------------------------------
In summary, the Commission estimates that the initial burden
related to the exemption when a municipal entity or obligated person is
represented by an independent registered municipal advisor will be
2,613 hours.\1611\ In addition, the Commission estimates that the
ongoing burden will be 2,193 hours.\1612\
---------------------------------------------------------------------------
\1611\ 210 hours (estimated time to draft a template document to
use in obtaining the written representation) + 2,193 hours
(estimated time to obtain a written representation from a municipal
entity or obligated person) + 210 hours (estimated time to draft the
required disclosure) = 2,613 hours.
\1612\ See supra note 1607 and accompanying text.
---------------------------------------------------------------------------
The Commission staff will use the collection of information under
the exemption for independent registered municipal advisors in its
examinations and oversight program to ensure that unregistered
municipal advisors are properly exempt from registration. Any
information reviewed by the Commission will be kept confidential
subject to applicable law. In addition, the collection of information
will allow municipal entities and obligated persons to understand
whether a person is acting as a municipal advisor, and will allow
persons relying on the exemption to demonstrate that registration with
the Commission as municipal advisors was not required.
10. Municipal Escrow Investments
Rule 15Ba1-1(h) defines ``municipal escrow investments'' to mean
proceeds of municipal securities and any other funds of a municipal
entity that are deposited in an escrow account to pay the principal of,
premium, if any, and
[[Page 67598]]
interest on one or more issues of municipal securities. As discussed
above,\1613\ in determining whether or not funds to be invested or
reinvested constitute municipal escrow investments, a person may rely
on representations in writing made by a knowledgeable official of a
municipal entity or obligated person whose funds are to be invested or
reinvested regarding the nature of such investments, provided that the
person seeking to rely on such representations has a reasonable basis
for such reliance.\1614\
---------------------------------------------------------------------------
\1613\ See supra notes 383-384 and accompanying text.
\1614\ See Rule 15Ba1-1(h)(2).
---------------------------------------------------------------------------
The Commission believes that state-registered investment advisers
with municipal entity clients are the persons most likely to rely on
Rule 15Ba1-1(h)(2) for reasonable reliance on representations related
to municipal escrow investments. The Commission notes that no entity is
required to utilize Rule 15Ba1-1(h)(2) and that any efforts to do so
are voluntary.
The Commission estimates that approximately 700 persons may seek to
rely on the exception for reasonable reliance on representations
related to municipal escrow investments.\1615\ The Commission estimates
that each person seeking to rely on this exception would need
approximately 1 hour to draft a template document to use in obtaining
the written representation, amounting to an initial, one-time burden of
approximately 700 hours.\1616\
---------------------------------------------------------------------------
\1615\ To calculate this estimate, the Commission staff examined
data regarding investment advisers with assets under management
under $100 million as of May 3, 2010. Section 410 of the Dodd-Frank
Act reallocated primary responsibility for oversight of investment
advisers by delegating generally to the states responsibility over
certain investment advisers with assets under management between $25
million and $100 million (``mid-sized advisers''). The Commission
does not maintain aggregate data regarding state-registered
investment advisers, including mid-sized advisers registered with
one or more state securities authorities, and is not aware of any
publicly available data regarding state-registered investment
advisers that could be used to calculate this estimate. As described
in the paragraph below, however, the Commission does have such data
as of May 3, 2010, which was prior to the passage of the Dodd-Frank
Act (and the time those advisers were required to switch to state
registration). Given the relatively short period of time that has
elapsed since 2010 and the Commission's belief that, for purposes of
this analysis, the nature of the investment advisory industry has
not changed significantly since that time, the Commission is relying
on data from 2010 to calculate these estimates.
According to registration information from the Investment
Adviser Registration Depository (``IARD'') as of May 3, 2010,
responses to Item 5.F(2)(c) of Part 1 of Form ADV indicate that
there were 5,550 investment advisers with less than $100 million in
assets under management registered with the Commission. According to
responses to Item 5.D(9) of Part 1 of Form ADV, 211 of those
investment advisers (or approximately 4%) (211 / 5,550 = 0.038) had
clients that were ``state or municipal government entities.''
As of January 1, 2013, there were 17,259 state-registered
investment advisers. Using the same percentage of investment
advisers with clients that were state or municipal government
entities, the Commission staff estimates that approximately 700
state-registered investment advisers have clients that are state or
municipal government entities. 17,259 (number of state-registered
investment advisers as of January 1, 2013) x 0.04 (estimated
percentage of state-registered investment advisers with state or
municipal government entity clients) = 690.36. This estimate rounds
to the nearest higher multiple of ten the number of state-registered
investment advisers that have clients that are state or municipal
government entities. The Commission believes this estimate, which
likely overestimates the number of state-registered investment
advisers who are likely to seek to rely on this exception, is
inclusive of other persons who may seek to rely on this exception.
\1616\ 700 (estimated number of persons who will seek to rely on
the exception) x 1.0 hours (estimated time required to draft the
written representation) = 700 hours.
---------------------------------------------------------------------------
In addition, the Commission estimates that, once drafted, a person
seeking to rely on this exception would need approximately 15 minutes,
or 0.25 hours, to obtain a written representation from its client. The
Commission estimates that persons that will seek to rely on this
exception have approximately 8,620 clients that are municipal
entities.\1617\ Thus, the Commission estimates that the burden to
obtain the written representation will be 2,155 hours.\1618\
---------------------------------------------------------------------------
\1617\ According to responses to Item 5.D(9) of Part 1 of Form
ADV, as of May 3, 2010, the 211 investment advisers identified above
(see supra note 1615) had approximately 2,770 state or municipal
government entity clients. The Commission staff used the midpoint of
each range to estimate the number of such clients. The Commission
does not have exact data from 2010 on the number of clients of
investment advisers that are state or municipal government entities
because Form ADV responses are in the format of a range (e.g., 26-
100 clients). In addition, the Commission does not have the
information necessary to provide another point estimate.
The Commission staff, extrapolating from the ratio of the
estimated number of state or municipal government entity clients in
May 2010 to the number investment advisers with less than $100
million in assets under management registered with the Commission as
of May 2010, estimates that, currently, state-registered investment
advisers have approximately 8,620 clients that are state or
municipal government entities. (2,770 (approximate number of state
or municipal government entity clients of investment advisers having
less than $100 million in assets under management that were
registered with the Commission as of May 3, 2010) / 5,550 (number of
investment advisers with less than $100 million in assets under
management that were registered with the Commission as of May 3,
2010)) x 17,259 (number of state-registered investment advisers as
of January 1, 2013) = 8,613.95. This estimate rounds to the nearest
higher multiple of ten the number of clients of state-registered
investment advisers that are state or municipal government entities.
The Commission believes this estimate, which likely overestimates
the number of clients from which state-registered investment
advisers would obtain written representations in reliance on this
exception, is inclusive of the clients of other persons who may seek
to rely on this exception.
\1618\ 8,620 (estimated number of clients from which written
representation will be obtained) x 0.25 hours (estimated time
required to obtain the written representation) = 2,155 hours.
---------------------------------------------------------------------------
Accordingly, the Commission estimates that the total initial burden
for all persons to rely on the exception for reasonable reliance on
representations related to municipal escrow investments will be 2,855
hours.\1619\ Because the person seeking to rely on this exception only
needs to obtain the written representation one time, the Commission
does not believe that there will be an ongoing burden.
---------------------------------------------------------------------------
\1619\ 700 hours (estimated time to draft a template document to
use in obtaining the written representation) + 2,155 hours
(estimated time required to obtain the written representations from
clients) = 2,855 hours.
---------------------------------------------------------------------------
The Commission staff will use the collection of information under
Rule 15Ba1-1(h)(2) in its examinations and oversight program to
determine whether a person engaging in municipal advisory activities
has failed to register with the Commission. Any information reviewed by
the Commission will be kept confidential subject to applicable law. In
addition, the collection of information will allow persons relying on
Rule 15Ba1-1(h)(2) to demonstrate that registration with the Commission
as municipal advisors was not required.
11. Proceeds of Municipal Securities
The definition of ``proceeds of municipal securities'' includes a
qualification similar to Rule 15Ba1-1(h)(2) pertaining to municipal
escrow investments. Namely, in determining whether or not funds to be
invested constitute proceeds of municipal securities, a person may rely
on representations in writing made by a knowledgeable official of a
municipal entity or obligated person whose funds are to be invested
regarding the nature of such funds, provided that the person seeking to
rely on such representations has a reasonable basis for such
reliance.\1620\
---------------------------------------------------------------------------
\1620\ See Rule 15Ba1-1(m)(3). See also supra notes 363-365 and
accompanying text.
---------------------------------------------------------------------------
The Commission believes state-registered investment advisers with
clients that are municipal entities or certain pooled investment
vehicles in which municipal entities invest are the persons most likely
to rely on Rule 15Ba1-1(m)(3) for reasonable reliance on
representations related to proceeds of municipal securities. The
Commission notes that no entity is required to utilize Rule 15Ba1-
1(m)(3) and that any efforts to do so are voluntary.
The Commission estimates that approximately 880 persons may seek to
[[Page 67599]]
rely on the exception for reasonable reliance on representations
related to proceeds of municipal securities.\1621\ The Commission
estimates that each person seeking to rely on this exception would need
approximately 1 hour to draft a template document to use in obtaining
the written representation, amounting to an initial, one-time burden of
approximately 880 hours.\1622\
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\1621\ As discussed above, as of May 3, 2010, of the 5,550
investment advisers with less than $100 million in assets under
management registered with the Commission, 211 (or 4%) had clients
that were state or municipal government entities. See supra note
1615. So as not to double-count those investment advisers that had
clients that were state or municipal government entities, the
Commission staff identified 5,339 investment advisers with less than
$100 million in assets under management that did not respond that
they had clients that were state or municipal government entities
(5,550 - 211 = 5,339). Of those, responses to Item 5.D(6) of Part 1
of Form ADV indicate that 713 investment advisers with less than
$100 million in assets under management that did not respond that
they had clients that were state or municipal government entities
responded that they had some clients that were pooled investment
vehicles (other than registered investment companies). If the
Commission estimates that the same percentage of investment advisers
advise pooled investment vehicles (other than registered investment
companies) with municipal entity investors as investment advisers
that advise state or municipal government entities (i.e., 4%), 29 of
these investment advisers would be advisers to pooled investment
vehicles (other than registered investment companies) with municipal
entity investors (713 x 4% = 28.52). Accordingly, the Commission
estimates that approximately 1% of the 5,550 investment advisers
with less than $100 million in assets under management registered
with the Commission as of May 3, 2010, had clients that were pooled
investment vehicles (other than registered investment companies)
with municipal entity investors (29 / 5,550 = 0.0052). As of January
1, 2013, there were 17,259 state-registered investment advisers.
Using the same percentage, the Commission staff estimates that
approximately 180 state-registered investment advisers have clients
that are pooled investment vehicles (other than registered
investment companies) with municipal entity investors. 17,259
(number of state-registered investment advisers as of January 1,
2013) x 1% (estimated percentage of state-registered investment
advisers with clients that are pooled investment vehicles (other
than registered investment companies) with municipal entity
investors) = 172.59.
In addition, as discussed above, the Commission staff estimates
that 700 state-registered investment advisers have clients that are
state or municipal government entities. See supra note 1615.
Therefore, the Commission staff estimates that 880 state-registered
investment advisers have clients that are state or municipal
government entities or that are pooled investment vehicles (other
than registered investment companies) with municipal entity
investors. 700 (estimated number of state-registered investment
advisers with clients that are state or municipal government
entities) + 180 (estimated number of state-registered investment
advisers with clients that are pooled investment vehicles (other
than registered investment companies) with municipal entity
investors) = 880. This estimate rounds to the nearest higher
multiple of ten the estimated number of state-registered investment
advisers that have clients that are state or municipal government
entities and the estimated number of state-registered investment
advisers that have clients that are pooled investment vehicles
(other than registered investment companies) with municipal entity
investors. The Commission believes this estimate, which likely
overestimates the number of state-registered investment advisers who
are likely to seek to rely on this exception, is inclusive of other
persons who may seek to rely on this exception.
\1622\ 880 (estimated number of persons who will seek to rely on
the exception) x 1.0 hours (estimated time required to draft the
written representation) = 880 hours.
---------------------------------------------------------------------------
In addition, the Commission estimates that, once drafted, a person
seeking to rely on this exception would need approximately 15 minutes,
or 0.25 hours, to obtain a written representation from its client. The
Commission estimates that persons that will seek to rely on this
exception have approximately 25,420 clients that are state or municipal
government entities or that are pooled investment vehicles (other than
registered investment companies) with municipal entity investors.\1623\
Thus, the Commission estimates that the burden to obtain the written
representation will be 6,355 hours.\1624\
---------------------------------------------------------------------------
\1623\ According to responses to Item 5.D(6) of Part 1 of Form
ADV, as of May 3, 2010, 756 investment advisers registered with the
Commission having less than $100 million in assets under management
indicated that they had approximately 5,400 clients that were pooled
investment vehicles (other than registered investment companies)
with municipal entity investors. This estimate includes those
investment advisers that had clients that were state or municipal
government entities that were excluded from the estimate of the
number of investment advisers with clients that were pooled
investment vehicles (other than registered investment companies)
with municipal entity investors. See supra note 1621. The Commission
staff used the midpoint of each range to estimate the number of such
clients. The Commission does not have exact data from 2010 on the
number of clients of investment advisers because Form ADV responses
are in the format of a range (e.g., 26-100 clients). In addition,
the Commission does not have the information necessary to provide
another point estimate.
The Commission staff, extrapolating from the ratio of the
estimated number of pooled investment vehicle (other than registered
investment company) clients with municipal entity investors in May
2010 to the number investment advisers with less than $100 million
in assets under management registered with the Commission as of May
2010, estimates that, currently, state-registered investment
advisers now have approximately 16,800 clients that are pooled
investment vehicles (other than registered investment companies)
with municipal entity investors. (5,400 (approximate number of
pooled investment vehicle (other than registered investment company)
clients with municipal entity investors of investment advisers
having less than $100 million in assets under management that were
registered with the Commission as of May 3, 2010) / 5,550 (number of
investment advisers with less than $100 million in assets under
management that were registered with the Commission as of May 3,
2010)) x 17,259 (number of state-registered investment advisers as
of January 1, 2013) = 16,792.54.
In addition, as discussed above, the Commission staff estimates
that state-registered investment advisers now have approximately
8,620 clients that are state or municipal government entities. See
supra note 1617. Therefore, the Commission staff estimates that
state-registered investment advisers now have 25,420 clients that
are state or municipal government entities or that are pooled
investment vehicles (other than registered investment companies)
with municipal entity investors. 8,620 (estimated number of state or
municipal government entity clients of state-registered investment
advisers) + 16,800 (estimated number of clients of state-registered
investment advisers that are pooled investment vehicle (other than
registered investment company) clients with municipal entity
investors) = 25,420. This estimate rounds to the nearest higher
multiple of ten the number of clients of state-registered investment
advisers that are state or municipal government entities or pooled
investment vehicles (other than registered investment companies)
with municipal entity clients. The Commission believes this
estimate, which likely overestimates the number of clients from
which state-registered investment advisers would obtain written
representations in reliance on this exception, is inclusive of the
clients of other persons who may seek to rely on this exception.
\1624\ 25,420 (estimated number of clients from which written
representation will be obtained) x 0.25 hours (estimated time
required to obtain the written representation) = 6,355 hours.
---------------------------------------------------------------------------
Accordingly, the Commission estimates that the total initial burden
for all persons to rely on the exception for reasonable reliance on
representations related to proceeds of municipal securities will be
7,235 hours.\1625\ Because the person seeking to rely on this exception
only needs to obtain the written representation one time, the
Commission does not believe that there will be an ongoing burden.
---------------------------------------------------------------------------
\1625\ 880 hours (estimated time to draft a template document to
use in obtaining the written representation) + 6,355 hours
(estimated time required to obtain the written representations from
clients) = 7,235 hours.
---------------------------------------------------------------------------
The Commission staff will use the collection of information under
the qualification in the definition of proceeds of municipal securities
in its examinations and oversight program to determine whether a person
engaging in municipal advisory activities has failed to register with
the Commission. Any information reviewed by the Commission will be kept
confidential subject to applicable law. In addition, the collection of
information will allow persons relying on the exception for reasonable
reliance on representations related to proceeds of municipal securities
to demonstrate that registration with the Commission as municipal
advisors was not required.
[[Page 67600]]
------------------------------------------------------------------------
Total hourly burden estimate
Nature of information collection burden -------------------------------
Initial Ongoing
------------------------------------------------------------------------
Form MA: Application for Municipal 3,185 350
Advisor Registration...................
Form MA-I: Information Regarding Natural 33,750 2,850
Persons Who Engage in Municipal
Advisory Activities....................
Form MA-W: Notice of Withdrawal from 0 15
Registration as a Municipal Advisor....
Rule 15Ba1-5: Amendments to Form MA and 0 12,053
Form MA-I..............................
Form MA-NR: Designation of U.S. Agent 54 5
for Service of Process for Non-
Residents..............................
Consent to Service of Process for 2,035 195
Certain Associated Persons.............
Rule 15Ba1-8: Books and Records to be 0 165,620
Made and Maintained by Municipal
Advisors...............................
Rule 15Ba1-1(d)(3)(vi): Exemption When a 2,613 2,193
Municipal Entity or Obligated Person is
Represented by an Independent
Registered Municipal Advisor...........
Rule 15Ba1-1(h)(2): Exception to 2,855 0
Definition of Municipal Escrow
Investments............................
Rule 15Ba1-1(m)(3): Exception to 7,235 0
Definition of Proceeds of Municipal
Securities.............................
-------------------------------
Total Burden........................ 51,727 183,281
------------------------------------------------------------------------
12. Total Burden
In the Proposal, the Commission estimated that the total initial
one-time burden for all respondents would be approximately 71,939
hours,\1626\ while the total ongoing annual burden for all respondents
would be approximately 212,135 hours.\1627\ The total initial outside
cost for all respondents would be $402,700,\1628\ while the total
ongoing outside cost for all respondents would be $900 per year.\1629\
---------------------------------------------------------------------------
\1626\ 6,500 hours (initial burden for Form MA applicants) +
65,400 hours (initial burden to complete Form MA-I) + 39 hours
(initial burden for Form MA-NR filers) = 71,939 hours. See Proposal,
76 FR 871.
\1627\ 650 hours (annual burden for new Form MA applicants) +
5,400 hours (annual burden to complete new Form MA-I) + 3,000 hours
(annual burden for Form MA amendments) + 20,700 hours (annual burden
for Form MA-I amendments) + 30 hours (annual burden for Form MA
withdrawal) + 1,350 hours (annual burden for Form MA-I withdrawal) +
5 hours (annual burden for Form MA-NR filers) + 181,000 hours
(annual burden for books and records requirement) = 212,135 hours.
See id.
\1628\ $2,700 (estimated initial cost to hire outside counsel
for providing opinion of counsel) + $400,000 (initial cost for
review by outside counsel) = $402,700. See id. at 872.
\1629\ $900 = estimated ongoing cost to hire outside counsel for
providing opinion of counsel. See id.
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The Commission now estimates that, under the final rules and forms,
the total initial burden for all respondents will be approximately
51,727 hours,\1630\ while the total ongoing annual burden for all
respondents will be approximately 183,281 hours.\1631\ The total
initial outside cost for all respondents will be $365,800,\1632\ while
the total ongoing outside cost for all respondents will be $40,900 per
year.\1633\
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\1630\ 36,935 hours (estimated initial burden for Form MA and
MA-I) + 54 hours (estimated initial burden for Form MA-NR filers) +
2,035 hours (estimated initial burden for all municipal advisory
firms to obtain written consents to service of process from each
natural person engaged in municipal advisory activities on their
behalf) + 2,613 hours (estimated initial burden for exemption when a
municipal entity or obligated person is represented by an
independent registered municipal advisor) + 2,855 (estimated initial
burden for exception for reasonable reliance on representations
related to municipal escrow investments) + 7,235 (estimated initial
burden for exception for reasonable reliance on representations
related to proceeds of municipal securities) = 51,727 hours.
\1631\ 3,200 hours (estimated annual burden for new Form MA and
Form MA-I) + 12,053 hours (estimated annual burden for Form MA and
Form MA-I amendments) + 15 hours (estimated annual burden for Form
MA withdrawal) + 5 hours (estimated annual burden for Form MA-NR
filers) + 165,620 hours (estimated annual burden for books and
records requirement) + 195 hours (estimated ongoing burden for all
municipal advisory firms to obtain written consents to service of
process from each natural person engaged in municipal advisory
activities on their behalf) + 2,193 (estimated annual burden for
exemption when a municipal entity or obligated person is represented
by an independent registered municipal advisor) = 183,281 hours.
\1632\ $1,800 (estimated initial cost to hire outside counsel
for providing opinion of counsel) + $364,000 (estimated initial cost
for review by outside counsel) = $365,800.
\1633\ $900 (estimated ongoing cost to hire outside counsel for
providing opinion of counsel) + $40,000 (estimated ongoing cost for
all municipal advisory firms to hire outside counsel to review their
compliance with the requirements of the proposed rules and forms) =
$40,900.
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VIII. Economic Analysis
A. Overview
The Commission is sensitive to the costs and benefits of its rules.
When engaging in rulemaking that requires the Commission to consider or
determine whether an action is necessary or appropriate in the public
interest, Section 3(f) of the Exchange Act requires the Commission to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation.\1634\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the effects on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\1635\
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\1634\ 15 U.S.C. 78c(f).
\1635\ 15 U.S.C. 78w(a)(2).
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In the Proposal, the Commission solicited comment on the costs and
benefits of the proposed rule, including the proposed definition of
``municipal advisor'' and related terms; exclusions and exemptions of
certain persons from the definition of municipal advisor; registration
forms; and recordkeeping requirements.\1636\ The Commission also
requested comment on the competitive or anticompetitive effects, as
well as efficiency and capital formation effects, of the proposed rules
and forms on any market participants.\1637\ The Commission further
encouraged commenters to provide specific data and analysis in support
of their views.\1638\
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\1636\ See Proposal, 76 FR 862-863, 878. An economic analysis
was included in the proposing release. See id. at 872-78.
\1637\ See id. at 878.
\1638\ See id. at 863.
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The Commission received approximately 38 letters that addressed the
Commission's estimates of the costs and benefits of the proposed
rule.\1639\
[[Page 67601]]
Several commenters opined generally that municipal advisor registration
as proposed would be overly burdensome and would impose costs that
would be detrimental to the commenters. Further, some commenters
criticized the Proposal's economic analysis generally, stating that the
expected costs of the permanent registration regime were greatly
underestimated.\1640\ Other commenters asserted that the economic
analysis was ``superficial'' in that it related ``almost entirely to
filling out paperwork and hardly scratches the surface of the true
regulatory burden'' \1641\ and that the cost-benefit analysis was
flawed because it only addressed the labor costs directly associated
with registration and recordkeeping.\1642\ One commenter stated that
the Commission did not appear to consider adequately the costs of the
proposed rules, particularly implementation costs and costs incurred by
municipal entities and obligated persons as a result of increases in
the price of advisory services.\1643\
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\1639\ See, e.g., City of St. Petersburg Letter; Dan A. Gray,
President, Industrial Development Authority, City of Yuma, AZ;
Vosburg Letter; Bill Longley, Texas Municipal League, Austin, TX;
Rick Platt, President and CEO, Heath-Newark-Licking County Port
Authority, Heath, OH; Nancy K. Kopp, State Treasurer and Board
Chair, College Savings Plans of Maryland; Wayne County Airport
Authority Letter; Larry E. Naake, Executive Director, National
Association of Counties, Washington, DC; Laurie D. Grabow, Executive
Vice President/CFO, Old Point National Bank (``Old Point Bank
Letter''); National Association of Health & Educational Facilities
Finance Authorities Letter; Ranson Financial Consultants Letter;
Union Bank Letter; Texas Bankers Association Letter; Harlan Spiroff,
Spiroff & Gosselar, Ltd.; Joy Howard WM Financial Strategies Letter;
California State Treasurer's Office Letter; NAIPFA Letter;
Specialized Public Finance Letter; State of Texas Letter;
Pennsylvania Public School Employees' Retirement Board Letter;
Ismael Guerrero, Housing Authority of the City and County of Denver;
Jean Marie Buckley, President, Tamalpais Advisors, Inc. (``Tamalpais
Advisors Letter''); SIFMA Letter I; ACLI Letter; MSRB Letter I;
Public FA Letter; Financial Services Roundtable Letter; BMO Capital
Markets Letter; Susan Gaffney, Government Finance Officers
Association; Fieldman Rolapp Letter; UFS Bancorp Letter; John
Sullivan (``John Sullivan Letter''); Bradley Payne Letter; William
J. Caraway, President, Chancellor Financial Associates (``Chancellor
Financial Associates Letter''); Committee of Annuity Insurers Letter
I; NAESCO Letter; Solar Energy Industries Association Letter;
Cristeena Naser, Senior Counsel, Center for Securities, Trust &
Investment, American Bankers Association (``American Bankers
Association Letter II'').
\1640\ See, e.g., American Counsel of Life Insurers Letter
(stating that ``the Commission has significantly underestimated the
complexity and costs associated with the proposed rule''); BMO
Capital Markets Letter (stating that ``the costs analysis is not
even remotely close to reality''); Bradley Payne Letter (stating
that ``cost estimates published in the proposed regulations are wild
guesses and were obviously generated by analysts who know absolutely
nothing about my business'').
\1641\ See Mintz Levin Letter; and State of California Letter.
\1642\ See letter from Terry E. Singer, Executive Director,
National Association of Energy Service Companies, dated September
26, 2011 (``NAESCO Letter II'').
\1643\ See SIFMA Letter I. In addition, the Commission's Office
of Inspector General prepared a report analyzing the economic
analysis of several rule proposals and suggested that the Commission
could have provided additional quantitative analyses to derive
certain qualitative predictions in connection with the Proposal. See
Office of Inspector General, Commission, Report of Review of
Economic Analyses Performed by the Securities and Exchange
Commission in Connection with Dodd-Frank Act Rulemakings, June 13,
2011, available at http://www.sec-oig.gov/Reports/AuditsInspections/2011/Report_6_13_11.pdf.
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The Commission does not agree that the economic analysis in the
Proposal was ``superficial'' or that it focused solely on the
registration and recordkeeping burdens. In developing the proposed
rules and forms, the Commission considered the costs and benefits of
requiring persons to register as municipal advisors, including the
costs-benefit tradeoffs implicated in interpreting the definition of
``municipal advisor'' and related terms, interpreting the statutory
exclusions, and proposing additional exemptions from the definition of
municipal advisor. As stated in the Proposal, in addition to the
direct, out-of-pocket costs estimated for PRA purposes, the Commission
considered the economic costs of the proposed permanent registration
regime.\1644\ The Commission also stated its belief that few, if any,
of the costs would be passed on to municipal entities or obligated
persons in the form of higher fees.\1645\
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\1644\ See Proposal, 76 FR 876. See also supra note 1643 and
accompanying text (discussing comments related to increased prices
for municipal entities and obligated persons).
\1645\ See id.
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Similarly, in light of the purposes of the Dodd-Frank Act to
regulate persons that engage in municipal advisory activities and data
currently available to the Commission, in determining the appropriate
scope of the final rules and forms the Commission considered the types
of persons that should be regulated as municipal advisors under Section
15B of the Exchange Act. The Commission has sought to tailor these
rules so as not to impose unnecessary or inappropriate costs and
burdens on municipal advisors. As discussed throughout this release,
partly in response to comments, the Commission has modified the rules
to minimize compliance burdens where consistent with investor
protection. In addition, as discussed below, where commenters
identified costs the Commission did not consider, the Commission has
revised its economic analysis of the final rules to take these costs
into account.
As discussed above in Section II.A.2.b, prior to the enactment of
the Dodd-Frank Act, municipal advisors were largely unregulated as to
their municipal advisory activities. Section 975 of the Dodd-Frank Act
amended the Exchange Act to establish a federal regulatory regime that
requires municipal advisors to register with the Commission,\1646\
grants the MSRB regulatory authority over municipal advisors,\1647\ and
imposes, among other things, a fiduciary duty on municipal advisors
when advising municipal entities.\1648\ The Commission recognizes that
while the final rules, which define municipal advisor and related terms
as well as prescribe the exclusions and exemptions therefrom, are
integral in determining which persons will be subject to the regulatory
requirements established by Section 975 of the Dodd-Frank Act, the
definitions, exclusions, and exemptions do not themselves establish the
scope or nature of those substantive requirements or their related
costs and benefits. For example, although a municipal advisor is
subject to a fiduciary duty when advising a municipal entity
client,\1649\ the Commission is not interpreting the scope or nature of
such duty in this rulemaking. Instead, the Commission notes that the
Exchange Act provides that the MSRB shall prescribe means reasonably
designed to prevent acts, practices, and courses of business as are not
consistent with a municipal advisor's fiduciary duty to its
clients.\1650\
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\1646\ See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C.
78o-4(a)(1)(B).
\1647\ See 15 U.S.C. 78o-4(b).
\1648\ See 15 U.S.C. 78o-4(c)(1).
\1649\ See 15 U.S.C. 78o-4(c)(1).
\1650\ See 15 U.S.C. 78o-4(b)(2)(L)(i).
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The Commission anticipates that any additional rules that the
Commission adopts to implement the substantive requirements under
Section 15B of the Exchange Act will be subject to their own economic
analysis. In addition, the Commission has direct oversight authority
over the MSRB, including the ability to approve or disapprove the
MSRB's rules.\1651\
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\1651\ Section 19(b) of the Exchange Act requires an SRO to file
with the Commission any proposed rule change, and provides that a
proposed rule change may not take effect unless it is approved by
the Commission or becomes immediately effective upon filing pursuant
to Section 19(b)(3)(A) of the Exchange Act. See 15 U.S.C. 78s(b).
Section 3 of the Exchange Act defines the term ``self-regulatory
organization'' to include the MSRB. See 15 U.S.C. 78c(a)(26).
Section 15B(b)(2)(C) of the Exchange Act requires, among other
things, that the rules of the MSRB not be designed to impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. See 15 U.S.C. 78o-4(b)(2)(C). In
addition, with respect to municipal advisors, MSRB rules shall not
impose a regulatory burden on small municipal advisors that is not
necessary or appropriate in the public interest and for the
protection of investors, municipal entities, and obligated persons,
provided that there is robust protection of investors against fraud.
See 15 U.S.C. 78o-4(b)(2)(L)(iv).
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In adopting the final rules and forms, the Commission has
considered the costs and benefits that accrue from subjecting municipal
advisors and municipal advisory activities to the regulatory regime
created by Section 975 of the Dodd-Frank Act. The Commission refers to
those costs and benefits as ``programmatic'' costs and benefits.\1652\
The programmatic costs
[[Page 67602]]
and benefits have informed the Commission's decisions and actions in
defining municipal advisor and related terms, its interpretations of
the statutory exclusions, and its decision to provide further
exemptions from the definition of municipal advisor as described
throughout the release. The Commission has also considered the costs
that persons will incur to assess whether registration as a municipal
advisor is required (i.e., ``assessment'' costs), as well as the costs
and benefits that will accrue from the requirement that municipal
advisors register with the Commission (i.e., ``registration'' costs and
benefits) and maintain the books and records as required by Rule 15Ba1-
8 (i.e., ``recordkeeping'' costs and benefits).
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\1652\ The Commission expects that the costs and benefits
resulting from the municipal advisory regulatory regime will likely
accrue primarily at the programmatic level. See infra Sections
VIII.C.1 and VIII.D.2. To the extent appropriate given the purposes
of Section 975 of the Dodd-Frank Act to regulate persons that engage
in municipal advisory activities and data currently available to the
Commission, the Commission has sought to mitigate the costs entities
will incur in connection with the registration and recordkeeping
requirements.
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In the discussion below, the Commission begins by identifying its
motivation for adopting the rules and forms and the baseline against
which the Commission considers both the costs and benefits, as well as
the effects on efficiency, competition, and capital formation, of the
final rules and forms. Next, the Commission discusses broad economic
considerations that stem from the final rules and forms, including the
assessment costs. The Commission then discusses the potential
programmatic, registration, and recordkeeping costs and benefits that
the final rules and forms implicate, as well as the effects of the
final rules and forms on efficiency, competition, and capital
formation. The discussion focuses on the Commission's reasons for
adopting the rules and forms, the affected parties, and the costs and
benefits of the rules and forms compared to the baseline (i.e., the
temporary registration regime and the requirements imposed by the Dodd-
Frank Act) and to alternative courses of action the Commission has
considered.
B. Motivation for Rules and Forms
The rules and forms adopted today are designed to enhance the
Commission's oversight of municipal advisors.\1653\ The Commission
believes the information provided pursuant to the final rules and forms
may aid municipal entities and obligated persons in choosing municipal
advisors that help municipal entities and obligated persons engage in
issuances of municipal securities as well as investments in municipal
financial products. The motivation for the rules and forms, which are
discussed throughout this release, are summarized below.
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\1653\ See supra notes 101-103 and accompanying text. According
to a Senate Report related to the Dodd-Frank Act, ``[t]he $3
trillion municipal securities market is subject to less supervision
than corporate securities markets, and market participants generally
have less information upon which to base investment decisions.
During the [financial] crisis, a number of municipalities suffered
losses from complex derivatives products that were marketed by
unregulated financial intermediaries.'' See S. Rep. No. 111-176, at
38 (2010). Accordingly, in response to the financial crisis that
began in 2008, the Dodd-Frank Act amended the Exchange Act to
require ``a range of municipal financial advisors to register with
the [Commission] and comply with regulations issued by the [MSRB].''
See id.
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First, the rules are designed to provide guidance related to the
definition of municipal advisor and exclusions therefrom, as well as to
provide exemptions from the municipal advisor regulatory regime. The
statutory definition of municipal advisors is broad and includes
persons that have not previously been considered municipal financial
advisors.\1654\ There are also relevant exclusions from the definition
of municipal advisor that limit the scope of persons included in the
municipal advisor regulatory regime. The statute, however, leaves
undefined or ambiguous certain terms that are critical for market
participants to discern who is or is not a municipal advisor.
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\1654\ See supra text accompanying notes 129-131.
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Second, the final rules and forms establish a permanent mechanism
for municipal advisors to register with the Commission. Effective
October 1, 2010, the Dodd-Frank Act requires the establishment of a
registration regime for municipal advisors.\1655\ As discussed above,
the Commission adopted a temporary registration regime to allow
municipal advisors to satisfy temporarily the statutory registration
requirement by submitting certain information electronically through
the Commission's public Web site on Form MA-T.\1656\ However, as that
registration regime was intended to be temporary, the Commission is now
establishing a permanent registration regime.
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\1655\ See Section 975(i) of the Dodd-Frank Act.
\1656\ See supra notes 107-110 and accompanying text.
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Third, the final rules and forms will expand the amount of publicly
available information about municipal advisors, including conflicts of
interest and disciplinary history. Because municipal advisors had been
largely unregulated as to their municipal advisory activities prior to
the Dodd-Frank Act,\1657\ apart from information gathered through Form
MA-T, there is little publicly and centrally available information
about municipal advisors. In addition, although the information
submitted on Form MA-T is publicly available on the Commission's Web
site, the final rules and forms will require municipal advisors to
disclose a greater amount of information, including conflicts of
interest and more information pertaining to disciplinary history.\1658\
In addition, the final rules and forms will increase the ability of
municipal entities and obligated persons to become more fully informed
about municipal advisors in a more efficient manner, and thereby, at a
lower cost.\1659\
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\1657\ See supra notes 93-96 and accompanying text.
\1658\ See infra Section VIII.D.1.a.
\1659\ Investors could also benefit to the extent they consider
whether a municipal advisor was involved in negotiating a municipal
bond offering.
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Fourth, the permanent registration regime is designed to enhance
the ability of securities regulators to oversee municipal advisors,
which could increase the willingness of market participants,
specifically municipal entities and obligated persons, to utilize
municipal advisors. The Commission staff will review applications for
registration and by order grant registration or the Commission will
institute proceedings to determine whether registration should be
denied.\1660\ Requiring municipal advisors to register with the
Commission under the permanent registration regime will allow the
Commission to collect additional information about municipal advisors
that can be used to facilitate examination and enforcement efforts. The
Commission believes that its authority to examine and sanction
municipal advisors for false and misleading statements submitted by
municipal advisors on Form MA or Form MA-I under the permanent
registration regime, including the additional information on Form MA
that is not required on Form MA-I, may result in increased reliability
of the information, which could increase the willingness of municipal
entities and obligated persons to utilize municipal advisors. Municipal
advisors, knowing that additional information about their disciplinary
histories must be disclosed pursuant to the final rules, may be further
incentivized to avoid engaging in misconduct.
---------------------------------------------------------------------------
\1660\ See 78 U.S.C. 78o-4(a)(2).
---------------------------------------------------------------------------
Finally, the permanent registration regime will require municipal
advisors to maintain books and records regarding their municipal
advisory activities. Recordkeeping requirements are a familiar and
important element of the Commission's approach to investment adviser
and broker-dealer regulation and
[[Page 67603]]
are designed to maintain the efficiency and effectiveness of the
Commission's examination program for regulated entities. Rule 15Ba1-8
will assist the Commission in evaluating a municipal advisor's
compliance with Section 15B of the Exchange Act, the rules and
regulations thereunder, and MSRB rules.
C. Economic Baseline
The rules and forms adopted today establish a permanent
registration regime for municipal advisors. The temporary registration
regime, as described below,\1661\ serves as the economic baseline
against which the costs and benefits, as well as the impact on
efficiency, competition, and capital formation, of the final rules and
forms are measured. The discussion below includes a description of the
costs and benefits of the temporary registration regime (i.e., the
programmatic and registration costs and benefits) as well as
approximate numbers of municipal advisors that would be affected by the
final rules and forms adopted today.
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\1661\ See infra notes 1662-1669 and accompanying text.
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By enacting Section 975 of the Dodd-Frank Act, Congress created a
federal regulatory regime for municipal advisors that previously did
not exist. In determining the economic baseline, the Commission
recognizes that, effective October 1, 2010, any person that meets the
statutory definition of municipal advisor \1662\ is currently required
to register with the Commission, unless a statutory exclusion
applies.\1663\ As discussed above, the Commission adopted a temporary
registration regime to allow municipal advisors to satisfy temporarily
the statutory registration requirement by submitting certain
information, including disciplinary history of associated municipal
advisor professionals, electronically through the Commission's public
Web site on Form MA-T.\1664\ The Commission does not impose
registration or filing fees in connection with municipal advisor
registration, either under the temporary registration regime or the
permanent registration regime.
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\1662\ Section 15B(e)(4) of the Exchange Act defines ``municipal
advisor'' as a person (who is not a municipal entity or an employee
of a municipal entity) that (i) 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 (ii) undertakes a solicitation of a municipal entity. See 15
U.S.C. 78o-4(e)(4)(A). As discussed above, the statutory definition
of municipal advisor is broad and includes persons that
traditionally have not been considered to be municipal financial
advisors. See supra text accompanying notes 129-131. Specifically,
the definition of municipal advisor includes ``financial advisors,
guaranteed investment contract brokers, third-party marketers,
placement agents, solicitors, finders, and swap advisors'' that
engage in municipal advisory activities. See 15 U.S.C. 78o-
4(e)(4)(B).
\1663\ See 15 U.S.C. 78o-4(a)(1)(B); 15 U.S.C. 78o-4(e)(4)(C).
\1664\ See supra notes 107-110 and accompanying text. See also
Form MA-T, Glossary of Terms (defining ``associated municipal
advisory professional''). Today, in a separate release, the
Commission is extending the expiration date of the temporary
registration regime to December 31, 2014. See supra note 115 and
accompanying text.
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In addition to registering with the Commission, every municipal
advisor is required to comply with the requirements imposed by Section
15B of the Exchange Act as well as rules established by the MSRB. For
example, Section 15B(a)(5) prohibits a municipal advisor from engaging
in any fraudulent, deceptive, or manipulative acts or practices when
providing advice to or on behalf of a municipal entity or obligated
person with respect to municipal financial products or the issuance of
municipal securities, or when undertaking a solicitation of a municipal
entity or obligated person.\1665\ A municipal advisor is also deemed to
have a fiduciary duty to its municipal entity clients.\1666\
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\1665\ See 15 U.S.C. 78o-4(a)(5).
\1666\ See 15 U.S.C. 78o-4(c)(1). Section 975 of the Dodd-Frank
Act did not define the contours of a municipal advisor's fiduciary
duty to its municipal entity clients. Pursuant to Section
15B(b)(2)(L)(i) of the Exchange Act, the MSRB is authorized to
prescribe means reasonably designed to prevent acts, practices, and
courses of business as are not consistent with a municipal advisor's
fiduciary duty to its clients. See 15 U.S.C. 78o-4(b)(2)(L)(i). As
discussed above, the Commission has direct oversight authority over
the MSRB, including the ability to approve or disapprove the MSRB's
rules. See supra note 1651 and accompanying text. For purposes of
this economic analysis, Congress's imposition of a fiduciary duty on
municipal advisors under Section 975 of the Dodd-Frank Act is part
of the baseline.
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The Dodd-Frank Act also provided the MSRB with authority to propose
and adopt rules related to municipal advisors.\1667\ The MSRB has
already adopted some rules for municipal advisors.\1668\ For example,
MSRB Rule G-17 requires municipal advisors to deal fairly with all
persons and not engage in any deceptive, dishonest, or unfair practice.
In addition, prior to engaging in municipal advisory activities, a
municipal advisor must register with the MSRB and pay a $100 initial
fee and a $500 annual fee.\1669\
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\1667\ See 15 U.S.C. 78o-4(b).
\1668\ Although the MSRB has adopted some rules for municipal
advisors, the MSRB has yet to detail many of the requirements that
will apply to municipal advisors. For example, the MSRB has yet to
establish standards of training, experience, competence, and other
qualifications (see 15 U.S.C. 78o-4(b)(2)(A)); prescribe
recordkeeping requirements (see 15 U.S.C. 78o-4(b)(2)(G)); provide
continuing education requirements (see 15 U.S.C. 78o-
4(b)(2)(L)(ii)); or provide professional standards (see 15 U.S.C.
78o-4(b)(2)(L)(iii)).
\1669\ See MSRB Rule A-12 and MSRB Rule A-14. Section
15B(b)(2)(J) of the Exchange Act permits the MSRB to require
municipal advisors to pay reasonable fees and charges. See 15 U.S.C.
78o-4(b)(2)(J). Other MSRB rules applicable to municipal advisors
include MSRB Rules G-5 (Disciplinary Actions by Appropriate
Regulatory Agencies; Remedial Notices by Registered Securities
Associations), G-40 (Electronic Mail Contacts), and A-15 (requiring
that a municipal advisor notify the MSRB if it ceases operations).
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1. Programmatic Costs and Benefits of the Temporary Registration Regime
Subjecting municipal advisors to the requirements of the temporary
registration regime has a number of programmatic costs and benefits.
Municipal advisors may have incurred, and would continue to incur,
costs to comply with the standards and rules discussed above that are
currently applicable to municipal advisors by statute or MSRB
rules.\1670\ In addition, as discussed above, municipal advisors that
have registered with the MSRB have incurred fees assessed by the MSRB
and would continue to incur fees in each year registered with the
MSRB.\1671\
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\1670\ See supra notes 1665-1669 and accompanying text.
\1671\ See supra note 1669 and accompanying text.
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Municipal advisors may also have incurred, and would continue to
incur, costs in association with examinations by Commission staff.
Section 15B of the Exchange Act authorizes the Commission, or its
designee, to conduct periodic examinations of municipal advisors for
compliance with the Exchange Act, the rules and regulations thereunder,
and the rules of the MSRB.\1672\ Since the beginning of fiscal year
2012 through fiscal year 2013, OCIE completed 19 examinations of
municipal advisors. The time and cost involved in an examination varies
depending on the size of the municipal advisor; whether the municipal
advisor was also registered with the Commission as a broker-dealer and/
or investment adviser; and whether Commission staff identified
additional risks posed by the municipal advisor while onsite.\1673\
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\1672\ See 15 U.S.C. 78o-4(b)(2)(E); 15 U.S.C. 78o-
4(c)(7)(A)(iii). See also supra note 1386 and accompanying text.
\1673\ The onsite portion of an examination lasts approximately
three business days.
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Municipal advisors, faced with the costs imposed by the temporary
registration regime, may have responded in a number of ways. Municipal
advisors that viewed the costs as too burdensome, or those with
extensive disciplinary histories, may have decided to discontinue
engaging in activities that
[[Page 67604]]
would require them to register as municipal advisors (hereinafter
referred to as ``exiting the market''). Other municipal advisors may
have determined to consolidate with other municipal advisory firms to
better manage the costs associated with the regulatory regime. Still
others may have passed the additional costs of being a registered
municipal advisor on to municipal entities and obligated persons in the
form of higher fees.\1674\ In addition, some persons that may have
otherwise newly entered the municipal advisor market may have decided
not to enter the market.
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\1674\ The Commission recognized in the Proposal that the cost
of becoming subject to registration for the first time could lead
some municipal advisors that are not particularly active to leave
the business. See Proposal, 76 FR 876. The Commission received
several comment letters that asserted the costs of the regulatory
regime could cause municipal advisors to exit the market,
consolidate with other firms, or pass the costs incurred to comply
with the regime on to clients. See, e.g., Public FA Letter (``The
regulations imposed on small firms like ours could be time consuming
and costly enough to either put us out of business or cause small
firms to merge with larger firms or to create larger firms.'');
Fieldman Rolapp Letter (``Most firms, regardless of revenue amount,
are small businesses with insufficient margins to bear excessive
regulatory burden''); Ranson Financial Consultants Letter (``Our
options [in relation to compliance costs] may include joining
another firm or simply go out of business''); UFS Bancorp Letter
(``[T]he Proposed Rules will have economic costs. These will either
come out of the bottom lines of firms or be passed along to
municipal clients in the form of fee increases.'').
The Commission is unable to estimate the number of persons who
may have decided not to enter the municipal advisor market because
such data is not currently available to the Commission or otherwise
publicly available. However, the Commission notes that, as discussed
above, approximately 205 municipal advisers filed an initial Form
MA-T in 2011 and approximately 115 filed an initial Form MA-T in
2012. See supra Section VII.C.
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The Commission, however, is unable to estimate the number of
municipal advisors that may have exited the market or consolidated with
other municipal advisory firms as a result of the temporary
registration regime because Form MA-T does not require a municipal
advisor withdrawing from registration on Form MA-T to indicate the
reasons for the withdrawal.\1675\ Further, the Commission does not have
the information necessary to estimate how many municipal advisors may
have chosen to exit the market after the enactment of the Dodd-Frank
Act but prior to the commencement of the temporary registration regime
because such data is not currently available to the Commission or
otherwise publicly available. Similarly, the Commission is unable to
estimate the extent to which municipal advisors may have passed on to
their clients the costs incurred to comply with the temporary
registration regime because such data is not currently available to the
Commission or otherwise publicly available. Although commenters
asserted that such costs could be passed on to clients,\1676\
commenters did not provide specific figures in this regard, making it
difficult to evaluate these assertions.
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\1675\ As discussed above, approximately 22 municipal advisors
withdrew from registration on Form MA-T in 2011 and 24 withdrew from
registration in 2012. See supra Section VII.D.4.
\1676\ See supra note 1674.
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Section 975 of the Dodd-Frank Act includes new investor
protections, including protections for municipal entities and obligated
persons when issuing, or investing the proceeds of, municipal
securities.\1677\ For example, municipal advisors are now subject to,
among other things, a fiduciary duty to any municipal entity clients
and are prohibited from engaging in any act, practice, or course of
business which is not consistent with that fiduciary duty.\1678\ These
investor protections may have incentivized municipal advisors not to
engage in misconduct. As discussed above, Section 15B provides the
Commission with explicit authority to oversee the activities of
municipal advisors, and since the beginning of fiscal year 2012 through
fiscal year 2013, OCIE completed 19 examinations of municipal
advisors.\1679\ Similarly, Section 15B enhances municipal entity and
obligated person protections by providing the Commission with explicit
authority to bring disciplinary actions against municipal advisors for
misconduct, including the ability to censure, place limitations on the
activities, functions, or operations, suspend for a period not
exceeding twelve months, or revoke the registration of any municipal
advisor.\1680\
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\1677\ See supra note 1653 and accompanying text.
\1678\ See 15 U.S.C. 78o-4(c)(1).
\1679\ See supra notes 1672-1673 and accompanying text. The
onsite portion of an examination lasts approximately three business
days.
\1680\ See 15 U.S.C. 78o-4(c)(2). The Commission also has the
authority to censure or place limitations on the activities or
functions of any person associated with a municipal advisor or to
suspend or bar any such person from being associated with a
municipal advisor. See 15 U.S.C. 78o-4(c)(4); Rule 15Bc4-1.
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2. Registration Costs and Benefits of the Temporary Registration Regime
In the Temporary Registration Rule Release, the Commission
identified certain costs and benefits of the temporary registration
regime. Municipal advisors that have registered with the Commission on
Form MA-T have incurred costs to gather the information required to
complete the form and submit that information through the Commission's
Web site, as well as to amend Form MA-T as necessary. In the Temporary
Registration Rule Release, the Commission estimated that the total
labor cost for all municipal advisors to complete Form MA-T would be
approximately $735,000.\1681\ The Commission also estimated that the
total annual labor cost for all municipal advisors to amend Form MA-T
would be approximately $147,000.\1682\ In addition, the Commission
estimated that the total cost for all municipal advisors to hire
outside counsel to review their compliance with the requirements of
Rule 15Ba2-6T and Form MA-T would be approximately $400,000.\1683\
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\1681\ See Temporary Registration Rule Release, 75 FR 54474
(calculating the estimated total labor cost for all municipal
advisors to complete Form MA-T). This estimate includes all of the
time necessary to research, evaluate, and gather all of the
information requested in Form MA-T and all of the time necessary to
complete and submit the form. See id. at 54473.
\1682\ See id. at 54474 (calculating the estimated total labor
cost for all municipal advisors to amend Form MA-T).
\1683\ See id. (calculating the estimated total cost for all
municipal advisors to hire outside counsel to review their
compliance with the requirements of Rule 15Ba2-6T and Form MA-T).
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In the Temporary Registration Rule Release, the Commission
recognized the possibility that the cost of registering could be passed
on to municipal entities in the form of higher fees. However, the
Commission anticipated that any increase in municipal advisory fees
attributable to the temporary registration regime would be minimal
given the relatively small magnitude of these costs and the large
number of municipal entity issuers.\1684\
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\1684\ See id.
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Subjecting municipal advisors to the requirements of the temporary
registration regime may have had a number of benefits. The temporary
registration regime may have enabled municipal entities and obligated
persons to become better informed about a municipal advisor, including
disciplinary history of associated municipal advisor
professionals,\1685\ by accessing and reviewing the municipal advisor's
Form MA-T on the Commission's Web site. In addition, because
information submitted on Form MA-T is consolidated in a single online
location, municipal entities and obligated persons may have been able
to access this information more efficiently, and thereby, at a lower
cost.\1686\ In
[[Page 67605]]
addition, under the temporary registration regime, municipal advisors
are required to disclose disciplinary history on Form MA-T, which
disclosure may further deter municipal advisors from engaging in
misconduct. As discussed in the Proposal, the information currently
required by Form MA-T is not reviewed by the Commission or its staff
prior to registration, although the Commission retains full authority
to review such information and examine any registered municipal advisor
at any time.\1687\
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\1685\ See id. at 54469. See also supra note 1664 and
accompanying text.
\1686\ See Temporary Registration Rule Release, 75 FR 54474. The
Commission is unable to estimate the amount of time and money
municipal entities may have saved by reviewing Form MA-T rather than
engaging in an RFP process or searching other regulatory documents
because such data is not currently available to the Commission or
otherwise publicly available. The Commission believes that the
ability to access information, including disciplinary history, on
municipal advisors in a single location benefits municipal entities
and obligated persons by reducing the need to search for other
regulatory documents of those municipal advisors that are
registered, or have associated persons that are registered, in
another capacity. In addition, information submitted on Form MA-T
may be the only source of information about some municipal advisors.
\1687\ See Proposal, 76 FR 860. See also infra note 1705 and
accompanying text.
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3. Municipal Advisor Market
The discussion below includes approximate numbers of municipal
advisors that would be affected by the final rules and forms adopted
today. As discussed above, according to MA-T data as of December 31,
2012, there were approximately 1,110 Form MA-T registrants. Of these
Form MA-T registrants, as of December 31, 2012, approximately 901 were
also registered as municipal advisors with the MSRB, as they are
required to do prior to engaging in municipal advisory
activities.\1688\ For the reasons discussed below, the Commission
believes that the number of Form MA-T registrants may not be an
accurate representation of the number of municipal advisors and that
MSRB data represents a better basis on which to estimate the number of
municipal advisors active in the market.
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\1688\ The Commission obtained this estimate by comparing the
list of MSRB registrants to the Commission's list of Form MA-T
registrants as of December 31, 2012.
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The Commission believes that a number of persons, recognizing that
the Commission does not impose any fees for registration, may have
registered with the Commission as municipal advisors out of an initial
overabundance of caution.\1689\ Although some current Form MA-T
registrants may not have registered with the MSRB because of
uncertainty regarding the scope of the temporary registration regime,
others may have determined in the intervening time after October 1,
2010, that registration with the MSRB was not required because they
were not engaging in municipal advisory activities. The Commission
staff understands based on discussions with market participants that
these Form MA-T registrants may have retained Commission registration
because there are no associated fees to maintain such
registration.\1690\ Accordingly, based on the MSRB registration data,
the Commission now estimates that 910 municipal advisors are currently
active in the municipal advisor market.\1691\
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\1689\ As discussed above, prior to engaging in municipal
advisory activities, a municipal advisor must register with the MSRB
and pay a $100 initial fee and a $500 annual fee. See supra note
1669 and accompanying text.
\1690\ The Commission staff understands that some municipal
advisors may have maintained Form MA-T registration instead of
withdrawing to wait and see whether registration would be required
under the permanent registration regime, while others may not have
realized they could withdraw or may have determined not to withdraw
for other reasons.
\1691\ This estimate rounds to the nearest higher multiple of
ten the number of municipal advisors that are registered with the
MSRB to engage in municipal advisory activities.
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MSRB data and MA-T data also provide information regarding the
types of services provided by registered municipal advisors.\1692\
According to MSRB data,\1693\ as of December 31, 2012, 682 municipal
advisors identified themselves as financial advisors; 192 identified
themselves as guaranteed investment contract brokers or advisors; 272
identified themselves as placement agents; 159 identified themselves as
solicitors or finders; 246 identified themselves as swap or derivative
advisors; 135 identified themselves as third-party marketers; and 201
indicated they provide other services.\1694\ In addition, according to
MA-T data, as of December 31, 2012, 226 municipal advisors were also
registered with the Commission as broker-dealers; 39 were also
registered with the Commission as investment advisers; and 65 were
registered with the Commission as both broker-dealers and investment
advisers. As discussed above, Form MA-T requires municipal advisors to
disclose any disciplinary history of associated municipal advisor
professionals.\1695\ According to MA-T data, as of December 31, 2012,
169 registered municipal advisors had disclosed prior disciplinary
history.
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\1692\ The three principal types of municipal advisors are: (1)
Financial advisors, including, but not limited to, brokers, dealers,
and municipal securities dealers already registered with the
Commission, that provide advice to municipal entities with respect
to their issuance of municipal securities and their use of municipal
financial products (``municipal financial advisors''); (2)
investment advisers that advise municipal entities on the investment
of public monies, including the proceeds of municipal securities
(``municipal investment advisers''); and (3) third-party marketers
and solicitors (``solicitors''). For purposes of this economic
analysis, the Commission uses these terms to describe these distinct
types of professionals separately, while using the term ``municipal
advisor'' to describe all municipal advisors generally. As discussed
above, for clarity, the Commission notes that financial advisors as
referred to herein also include swap advisors, including some that
are registered with the CFTC or the SEC in other capacities, that
provide advice to municipal entities on their use of municipal
financial products.
\1693\ Although municipal advisors registering with the MSRB
identify the types of services they provide, the Commission staff
understands that the MSRB does not validate this information.
\1694\ Some municipal advisors registered with the MSRB provide
more than one type of service. According to MA-T data, as of
December 31, 2012, 733 municipal advisors provided advice concerning
the issuance of municipal securities; 496 provided advice concerning
the investment of the proceeds of municipal securities; 322 provided
advice concerning guaranteed investment contracts; 365 provided the
recommendation and/or brokerage of municipal escrow investments; 365
provided advice concerning the use of municipal derivatives (e.g.,
swaps); 383 were third-party marketers, placement agents,
solicitors, or finders; 470 provided the preparation of feasibility
studies, tax or revenue projections, or similar products in
connection with offerings or potential offerings of municipal
securities; and 253 provided other services. The Commission staff
has not validated the information provided on Form MA-T.
\1695\ See supra note 1664 and accompanying text.
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The Commission and the MSRB do not capture data regarding the
concentration \1696\ of the municipal advisor market. The Commission
staff has evaluated data available in Thomson Reuters' SDC Platinum
database (``SDC Platinum Database'') \1697\ to analyze concentration.
To determine the number of issue offerings in 2012, the Commission
staff assumed that bonds issued on the same day by the same issuer were
part of the same issue.\1698\ Under this assumption, and removing any
deals for which SDC Platinum Database did not record a CUSIP, the
Commission staff found that, in 2012, there were 13,288 municipal bond
deals, of which approximately 8,237 used a financial advisor and 3,074
did not use a financial advisor. SDC Platinum Database was not able to
provide information regarding the use of a financial advisor for the
other 1,977 municipal bond deals. The 8,237 municipal bond deals that
used a financial advisor were advised by approximately 318 different
financial advisors, with the 50 most-active advisors advising
approximately 80% of
[[Page 67606]]
the advised deals, or approximately 74% by dollar volume issued of
advised deals.
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\1696\ Concentration refers to how many municipal advisors
handle a significant percentage of municipal advisory business.
\1697\ SDC Platinum is a database that tracks, among other
things, information on municipal bond issues, including new
municipal bond issues, municipal private placements, and municipal
reoffering issues, but not remarketing issues.
\1698\ This excludes deals where SDC does not record a CUSIP or
an offering date.
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D. Analysis of Final Rules and Forms
Below, the Commission addresses the costs and benefits of the final
rules and forms against the context of the economic baseline defined
above, both in terms of the specific changes from the baseline as well
as in terms of overall impact on the municipal advisor market. The
Commission also addresses the costs and benefits of the requirements
that municipal advisors register with the Commission and maintain the
books and records required by Rule 15Ba1-8. In considering these costs,
benefits, and impacts, the Commission addresses, among other things,
comments received, modifications made to the proposed rules and forms,
and reasonable alternatives, where applicable.
At the outset, the Commission notes that, where possible, it has
attempted to quantify the costs, benefits, and effects on efficiency,
competition, and capital formation expected to result from adopting
these rules and forms. In many cases, however, the Commission is unable
to quantify the economic effects because it lacks the information
necessary to provide a reasonable estimate. For example, the Commission
does not have the information necessary to provide a reasonable
estimate of the willingness of municipal entities and obligated persons
to utilize municipal advisors and improvements in investor protection.
In general, secondary data regarding the municipal advisory market that
would assist the Commission in producing quantitative analyses are
largely unavailable, and, other than the academic papers cited in the
Proposal and this release, few studies on municipal securities have
attempted to undertake the efforts to collect such secondary data.
Additionally, the costs incurred by a municipal advisor to comply with
the final rules and forms generally will depend on its size and the
complexity of its business activities. Because the size and complexity
of municipal advisors vary significantly,\1699\ their costs to comply
with the final rules and forms could also vary significantly.
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\1699\ See supra note 1694 and accompanying text.
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The Commission received many comments on the proposed rules and
forms, and has incorporated many of the suggested alternatives into the
final rules and forms and rejected, after careful consideration, other
suggested alternatives, as fully discussed in Section III. The policy
choices made to accept or reject the alternatives suggested by the
commenters have been informed by the costs and benefit considerations.
In particular, as stated above, the Commission is mindful of the
programmatic, assessment, registration, and recordkeeping costs
associated with the municipal advisor regulatory regime.
1. Broad Economic Considerations
a. Benefits of the Final Rules and Forms
The Commission believes that the final rules and forms should
result in a number of benefits, including those discussed throughout
this economic analysis. As discussed below, the Commission has sought
to subject to the municipal advisor regulatory regime those persons
that should be regulated as municipal advisors in light of the purposes
of the Dodd-Frank Act to regulate those persons that engage in
municipal advisory activities. The final rules and forms should
increase the amount of publicly available information about municipal
advisors and enhance the ability of securities regulators to oversee
municipal advisors.
The permanent registration regime will increase the amount of
information available about municipal advisors relevant to the
baseline.\1700\ The forms will require municipal advisors to provide
information about their businesses, including disciplinary histories
and potential conflicts of interest (as well as information that may be
useful in assessing conflicts of interest), beyond what is required to
be disclosed on Form MA-T. Although much of the additional information
required by Form MA is already publicly available with respect to
municipal advisors that are already registered with the Commission as
investment advisers or broker-dealers, many municipal advisors that are
not registered with the Commission will make this type of information
publicly available for the first time.\1701\ In addition, while
municipal advisors are required to disclose disciplinary history for
some associated persons on Form MA-T, municipal advisors will be
required to disclose on Form MA disciplinary history for all associated
persons.\1702\
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\1700\ As discussed below, the permanent registration regime
will also impose registration and recordkeeping costs on municipal
advisors. See infra Section VIII.D.3-4.
\1701\ For example, little is currently known about solicitors,
and disciplinary histories and conflicts of interest about many
solicitors will be disclosed for the first time.
\1702\ Form MA-T requires disclosure of disciplinary information
of a subgroup of associated persons who are closely associated with
a municipal advisor's municipal advisory activities (i.e., those who
are primarily engaged in a municipal advisor's municipal advisory
activities, have supervisory responsibilities over those primarily
engaged in municipal advisory activities, are engaged in day-to-day
management of the conduct of a municipal advisor's municipal
advisory activities, or are responsible for executive management of
the municipal advisor).
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To the extent municipal entities and obligated persons consider
disciplinary history and conflict of interest information important in
selecting a municipal advisor, the permanent registration regime may
reduce selection of municipal advisors that have been the subject of
disciplinary actions or whose activities or affiliations create, or
have the potential to create, conflicts of interest. Moreover,
municipal advisors, knowing that more-detailed disciplinary history
must now be disclosed, may be further incentivized to avoid engaging in
misconduct (or may exit the market).\1703\ In addition, municipal
advisors, knowing that conflicts of interest must now be disclosed, may
also be more likely to avoid associations that create conflicts of
interest or may be more likely to avoid recommending financial
intermediaries or investments for which conflicts of interest might be
present. The increased dissemination of information regarding
disciplinary history and conflicts of interest may lead to improved
quality-based competition among municipal advisors to the extent
municipal advisors rely on this information in the municipal advisor
selection process.
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\1703\ As discussed below, the Commission is unable to estimate
the number of municipal advisors that have exited the market due to
the temporary registration regime or that will exit the market due
the permanent registration regime because Form MA-T does not require
a municipal advisor withdrawing from registration from Form MA-T to
indicate the reasons for withdrawal. See infra Section VIII.D.1.b.
As a result of the requirement that municipal advisors disclose
disciplinary histories, those municipal advisors that may
discontinue activity in the market may include disproportionately
more municipal advisors with disciplinary records. Further, such
public disclosure may deter municipal advisors that have significant
disciplinary histories from entering the market.
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The Commission also believes that the permanent registration regime
will enhance the ability of the Commission and other regulators to
oversee the conduct of municipal advisors, as contemplated by the Dodd-
Frank Act, which could increase the willingness of municipal entities
and obligated persons to utilize municipal advisors.\1704\ The
Commission staff will review applications for registration and by order
grant registration or the Commission will institute proceedings
[[Page 67607]]
to determine whether registration should be denied.\1705\ Because Rule
15Ba1-2 provides that both Form MA and Form MA-I constitute a
``report'' within the meaning of Sections 15B(c), 17(a), 18(a), 32(a)
(15 U.S.C. 78o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable
provisions of the Exchange Act, it is unlawful for a municipal advisor
to willfully make or cause to be made, a false or misleading statement
of material fact or omit to state a material fact in Form MA and Form
MA-I. The Commission believes that a municipal advisor's knowledge of
the Commission's authority to examine the municipal advisor and to
sanction the municipal advisor for false and misleading statements
could help ensure the reliability of the information submitted by
municipal advisors under the permanent registration regime, which could
increase the willingness of municipal entities and obligated persons to
utilize municipal advisors.
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\1704\ See also infra notes 1758-1759 and accompanying text.
\1705\ See 78 U.S.C. 78o-4(a)(2).
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In addition, the Commission's examination staff will be able to use
the information provided in Form MA and Form MA-I as a tool to
prioritize and plan examinations. By securing information regarding
municipal advisors through EDGAR, relative to the baseline, Commission
staff should be able to more efficiently retrieve and analyze the data
it needs to carry out its mission with respect to municipal advisory
activities effectively, such as by identifying potentially violative
activities and risky municipal advisory firms.\1706\ Moreover, Rule
15Ba1-8 will assist the Commission in evaluating a municipal advisory
firm's compliance with Section 15B of the Exchange Act,\1707\ rules and
regulations promulgated thereunder, and MSRB rules. By requiring that
municipal advisory firms maintain specific types of information, the
final rules will enhance the ability of regulators to perform more-
efficient inspections and examinations and increase the likelihood of
identifying improper conduct at earlier stages in an inspection or
examination. In addition, municipal advisory firms may benefit from
recordkeeping practices developed pursuant to the requirements of Rule
15Ba1-8 by having their operations interrupted for shorter time periods
in response to inspections or examinations.
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\1706\ In addition, municipal entities, obligated persons, and
other market participants will be able to perform their own analyses
using EDGAR and provide some market monitoring. Information
submitted on Form MA and Form MA-I will be tagged in XML format,
which may improve the Commission staff's ability to retrieve and
analyze data. In addition, tagging information in XML format could
allow municipal entities and obligated persons to perform better
research into municipal advisors, which could help improve
efficiency if this increased monitoring results in greater market
discipline of municipal advisors.
\1707\ 15 U.S.C. 78o-4.
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The requirement that a non-resident municipal advisor file Form MA-
NR and obtain an opinion of counsel in connection with the municipal
advisor's initial application, as well as annual updates to Form MA-NR
and the opinion of counsel, will also help to enhance the Commission's
oversight of non-resident municipal advisors, which may promote the
willingness of municipal entities and obligated persons to utilize
municipal advisors. The Commission believes that requiring Form MA-NR
and an opinion of counsel could improve the Commission's oversight of
municipal advisors by: minimizing any legal or logistical obstacles
that the Commission may encounter when attempting to effect service;
conserving Commission resources; and avoiding potential conflicts of
law. The requirement that a non-resident municipal advisory firm obtain
an opinion of counsel that it can provide access to books and records
and can be subject to inspection and examination will allow the
Commission to better evaluate and monitor a municipal advisory firm's
ability to meet the requirements of registration. These benefits will
be the same across all types of municipal advisor--municipal financial
advisors, municipal investment advisers, and solicitors.
To the extent that the registration and recordkeeping requirements
result in more-effective examinations, the enhanced ability to monitor
municipal advisors could lead to increased efficiency relative to the
baseline. Enhanced oversight of municipal advisors due to the
registration and recordkeeping requirements could improve capital
formation relative to the baseline to the extent enhanced oversight
increases the willingness of municipal entities and obligated persons
to utilize municipal advisors, and municipal entities and obligated
persons, in turn, issue more debt or debt with better terms.\1708\ To
the extent that investors decide to make greater investments in the
municipal securities market, efficiency could increase as capital is
put to a more-efficient use.
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\1708\ See infra notes 1830-1831 and accompanying text. Investor
willingness to invest in municipal bond offerings may increase to
the extent that the municipal entity issuing bonds used a municipal
advisor and investors understand and consider the benefits of
municipal advisor registration.
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b. Potential Changes to the Municipal Advisor Market
The Commission recognizes that the final rules and forms may result
in changes to the municipal advisor market. As discussed below,
municipal advisors will incur programmatic costs as a result of the
statutory municipal advisor regulatory regime.\1709\ In addition,
municipal advisors will incur the registration and recordkeeping costs
that result from the final rules and forms.\1710\ The Commission
recognizes that, as a result of these costs, municipal advisors may
decide to exit the market, consolidate with other firms, or pass the
costs on to municipal entities and obligated persons in the form of
higher fees.
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\1709\ See infra Section VIII.D.2. The Commission expects that
the costs and benefits resulting from the statutory municipal
advisory regulatory regime will likely accrue primarily at the
programmatic level, and that many of these costs are accounted for
in the baseline. See supra Sections VIII.C.1.
\1710\ See infra Section VIII.D.3-4.
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Some municipal advisors currently registered with the Commission
may decide to exit the market or reduce services provided to municipal
entities or obligated persons because of the costs associated with the
final rules and forms. One commenter believed that the Commission did
not address in the Proposal potential public costs from a reduction of
services to municipal entities.\1711\ While the Commission recognizes
that some municipal advisors may exit the market as a result of the
costs associated with the final rules and forms relative to the
baseline, the Commission believes municipal advisors may exit the
market for a number of reasons, including business reasons separate
from reasons involving the costs associated with the final rules and
forms. The Commission anticipates that some exits will result from
municipal advisors' unwillingness to disclose required information to
the Commission. The Commission believes that municipal advisors that
have been subject to past disciplinary actions may decide to exit the
market rather than disclose that information, and that the departure of
such ``bad actors'' could improve the quality of the market for
municipal advisory services and,
[[Page 67608]]
therefore, benefit municipal entities and obligated persons.\1712\
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\1711\ See Financial Services Roundtable Letter (``Given the
burden of registering as a municipal advisor, particularly for a
small bank, we believe that there is a likelihood that smaller banks
that offer a few products to a small number of municipal entities
providing services in their communities would elect to discontinue
serving municipal entities.''). See also Public FA Letter; Ranson
Financial Consultants Letter.
\1712\ The Commission recognizes that municipal advisors that
exit the market would lose any revenue that would have accrued from
providing municipal advisory services. Municipal entities and
obligated persons could benefit, however, from not having municipal
advisors who do not want to comply with the regulatory regime or
other bad actors in the market.
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In addition, the costs associated with the final rules and forms
relative to the baseline may lead some municipal advisors to
consolidate with other municipal advisors, rather than exit the
market.\1713\ For example, some municipal advisors may determine to
consolidate with other municipal advisors in order to benefit from
economies of scale (e.g., by leveraging existing compliance resources
of a larger firm) rather than to incur separately the costs associated
with the final rules and forms.
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\1713\ See, e.g., Public FA Letter (``The regulations imposed on
small firms like ours could be time consuming and costly enough to
either put us out of business or cause small firms to merge with
larger firms or to create larger firms.''); Ranson Financial
Consultants Letter (``Our options [in relation to compliance costs]
may include joining another firm or simply go out of business'').
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The Commission, however, is unable to estimate the number of
municipal advisors that have exited the market or consolidated with
other firms as a result of the temporary registration regime because
Form MA-T does not require a municipal advisor withdrawing from
registration on Form MA-T to indicate the reasons for withdrawal.
Similarly, the Commission is unable to estimate the number of municipal
advisors that will exit the market or consolidate with other firms as a
result of the final rules and forms. In addition, the Commission is not
aware of any municipal advisors exiting the market or consolidating
with other firms as a result of the temporary registration regime.
The Commission recognizes that some of the municipal advisors that
may exit the market could be small entity municipal advisors that exit
the market for financial reasons and that such exits from the market
may lead to a reduced pool of municipal advisors. In the Final
Regulatory Flexibility Analysis below, after comparing the estimated
registration costs with a small municipal advisory firm's annual
revenue, the Commission discusses alternatives considered to accomplish
the objectives of the permanent registration regime while minimizing
any significant adverse impact on small municipal advisors.\1714\ As
discussed in the Final Regulatory Flexibility Analysis, the
requirements under the final rules and forms are designed to impose
only those burdens necessary to accomplish the objectives of the Dodd-
Frank Act. In addition, as discussed below, the Commission believes
that the market for municipal advisory services is likely to remain
competitive despite the potential exit of municipal advisors, including
small entity municipal advisors.\1715\
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\1714\ See infra Section IX.D.
\1715\ See infra notes 1718-1723 and accompanying text.
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Some municipal advisors may pass the costs associated with the
rules and forms on to municipal entities and obligated persons in the
form of higher fees. For example, one commenter argued that the rules
will have economic costs that will either come out of the bottom lines
of firms or be passed along to municipal clients in the form of fee
increases.\1716\ Although commenters asserted that such costs could be
passed on to clients,\1717\ commenters did not provide specific
estimates, and the Commission does not have the information necessary
to provide a reasonable estimate of the extent to which municipal
advisors may pass costs on to clients given the lack of publicly
available information on municipal advisory fees.
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\1716\ See UFS Bancorp Letter. See also SIFMA Letter I.
\1717\ See, e.g., SIFMA Letter I; UFS Bancorp Letter.
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The Commission believes that the market for municipal advisory
services is likely to remain competitive despite the potential exit of
municipal advisors, consolidation of municipal advisors, or lack of new
entrants into the market.\1718\ As discussed above, the Commission
estimates that approximately 100 new entrants to the market will
register on Form MA each year \1719\ and that approximately 30
municipal advisors will withdraw from Form MA registration each
year.\1720\ Because the Commission expects that new entrants to the
municipal advisor market will exceed departures therefrom, the
Commission does not expect exits from the market or consolidation of
municipal advisors to result in reduced competition.\1721\ In addition,
the level of competition in the existing markets for each type of
municipal advisor--municipal financial advisors, municipal investment
advisers, and solicitors--suggests, based on data available to the
Commission,\1722\ that exits from the market, consolidation, or lack of
new entrants into the market are unlikely to lead to market
concentration levels at which the remaining municipal advisors are able
to increase prices significantly.\1723\ Accordingly, the Commission
does not expect the departure of municipal advisors from the market to
result in a significant increase in the cost of municipal advisory
services.
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\1718\ The Commission recognizes that the requirements to
register with the Commission and maintain certain books and records,
and the associated costs, will increase the burdens on those seeking
to enter the municipal advisor market, which may negatively impact
competition in the municipal advisor market.
\1719\ See supra note 1470 and accompanying text.
\1720\ See supra note 1531 and accompanying text.
\1721\ The Commission does not expect an effect on capital
formation due to new entrants to the municipal advisor market or
from exits from the market.
\1722\ As indicated above, as of December 31, 2012,
approximately 901 municipal advisors registered with the Commission
on Form MA-T were also registered with the MSRB, as they are
required prior to engaging in municipal advisory activities. See
supra note 1688 and accompanying text. With respect to municipal
advisors registered with the MSRB, approximately 682 were financial
advisors; 192 were guaranteed investment contract brokers or
advisors; 272 were placement agents; 159 were solicitors or finders;
246 were swap or derivative advisors; 135 were third-party
marketers; and 201 provided other services. See supra note 1694 and
accompanying text (discussing this data as well as similar MA-T
data).
\1723\ As discussed above in the economic baseline, the
municipal advisor market is not highly concentrated. See supra
Section VIII.C.3. See also supra note 1694 and accompanying text
(discussing MSRB and MA-T data regarding services provided by
municipal advisors registered with the MSRB and the Commission).
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In addition, the registration and recordkeeping costs should not
impact efficiency or capital formation because those costs are unlikely
to reduce the utilization of municipal advisors by municipal entities
and obligated persons. The Commission believes that any increase in
municipal advisory fees attributable to the registration and
recordkeeping costs of the permanent registration regime will be
minimal given the average cost per municipal advisory firm \1724\ and
the relatively small magnitude of these costs compared to the large
number of municipal entity issuers per municipal advisory firm. The
Commission recognizes, however, that for smaller municipal advisors
with fewer clients the registration and recordkeeping costs may
represent a greater percentage of annual revenues, and thus, such
advisors may be more likely to pass those costs along to clients.\1725\
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\1724\ As discussed above, the Commission estimates that the
average cost per municipal advisory firm to register with the
Commission will be approximately $8,092. See infra note 1813 and
accompanying text.
\1725\ See infra notes 1991-1998 and accompanying text.
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c. Assessment Costs
Under the temporary registration regime, market participants may
have incurred costs to determine whether their business activities meet
the definition of municipal advisor or if a
[[Page 67609]]
statutory exclusion applies, and thus, whether registration with the
Commission as a municipal advisor and compliance with the requirements
imposed by Section 15B of the Exchange Act as well as rules established
by the MSRB was required.\1726\ Prior to the enactment of the Dodd-
Frank Act and the Commission's adoption of the temporary registration
regime, there were no assessment costs with respect to municipal
advisor regulation. The Commission received a number of comments in
connection with the 2010 interim temporary final rule seeking guidance
regarding the scope of the statutory definition of municipal advisor
and the statutory exclusions therefrom.\1727\
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\1726\ See supra notes 1662-1669 and accompanying text.
\1727\ See letters from Brad R. Jacobson, dated September 7,
2010; John J. Wagner, Kutak Rock LLP, dated September 28, 2010; Joy
A. Howard, Principal, WM Financial Strategies, received October 5,
2010; Steve Apfelbacher, President, National Association of
Independent Public Finance Advisors, received October 8, 2010; Amy
Natterson Kroll & W. Hardy Callcott, Bingham McCutchen LLP, on
behalf of the National Association of Energy Service Companies,
dated October 13, 2010; Carolyn Walsh, Vice-President and Senior
Counsel, Center for Securities, Trust and Investments, American
Bankers Association, Deputy General Counsel, ABA Securities
Association, dated October 13, 2010; and Leslie M. Norwood, Managing
Director and Associate General Counsel, Securities Industry and
Financial Markets Association, dated November 15, 2010.
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In the Proposal, the Commission stated its belief that the direct
costs for respondents to read and apply the definitions in proposed
Rule 15Ba1-1(d) would be minimal.\1728\ The Commission received several
comments regarding the costs to interpret the proposed definition of
municipal advisor, proposed interpretations of the statutory
exclusions, and proposed exemptions.\1729\ One commenter asserted that
``given that Form MA and the related rules are new, . . . outside legal
fees could easily exceed $25,000 for a financial institution that
provides a variety of services to municipal clients.'' \1730\
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\1728\ See Proposal, 76 FR 873.
\1729\ See, e.g., SIFMA Letter I; ACLI Letter; Financial
Services Roundtable Letter.
\1730\ See Financial Services Roundtable Letter.
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Although the above comment appears to be directed at the
Commission's estimate of the costs to engage outside counsel in
connection with completing Form MA, the Commission recognizes that many
persons will incur assessment costs to determine whether registration
as a municipal advisor is required under the final rules. The
Commission, therefore, has reconsidered the direct costs for
respondents to read and apply the definitions in Rule 15Ba1-1(d). The
Commission recognizes that some market participants are likely to seek
legal counsel for interpretation of various aspects of the rule,
particularly to determine whether the market participant's business
activities meet the definition of municipal advisor or whether an
exclusion or exemption from the definition of municipal advisor is
available. The Commission believes that the assessment costs may vary
depending on the relevant facts and circumstances, including the
complexity of the market participant's business activities. The
Commission also now believes that for larger financial institutions
with more complex businesses the assessment costs could range up to
$25,500, as indicated by a commenter.\1731\
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\1731\ See supra note 1730. The Commission believes that
different market participants will need to undertake different
analyses in relation to the definition of municipal advisor and
exclusions and exemptions therefrom. The estimate of assessment
costs is intended to include analysis of the exclusions and
exemptions, although the Commission separately discusses the impacts
of the interpretations of the exclusions and exemptions on
assessment costs below. See infra Section VIII.D.5-6 (discussing the
exclusions and exemptions).
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The Commission does not have the information necessary to provide a
point estimate of the potential assessment costs because the Commission
believes the assessment costs associated with determining whether a
market participant is a municipal advisor under Section 15B of the
Exchange Act will vary. However, based on the Commission staff's
understanding of the industry and comments received,\1732\ the
Commission estimates that the costs associated with undertaking this
determination may range from $379 to $25,500.\1733\ The Commission
believes that many entities are clearly municipal advisors and that an
in-house attorney, without the assistance of outside counsel, could
make such a determination in one hour. If an entity's business is more
complex, the Commission estimates the assessment could require
approximately 25 hours of in-house counsel time and 40 hours of outside
counsel time.
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\1732\ See supra note 1730.
\1733\ The average cost incurred by market participants is based
on the estimated amount of time that the staff believes would be
required for both in-house counsel and outside counsel to assess
whether a market participant is a municipal advisor, as that term is
defined in Section 15B of the Exchange Act (15 U.S.C. 78o-4(e)(4))
and the final rules. For the calculation of the hourly rate for an
in-house attorney, see infra note 1779. The Commission estimates the
costs for outside legal services to be $400 per hour. For an
explanation of the outside counsel cost estimate, see supra note
1538. Accordingly, the Commission estimates the cost on the high end
of the range to be $25,475 ($9,475 (based on 25 hours of in-house
counsel time x $379) + $16,000 (based on 40 hours of outside counsel
time x $400). This estimate is rounded by two significant digits to
avoid the impression of false precision of the estimate. In
addition, as discussed below, the Commission estimates that the
average cost per municipal advisory firm to register with the
Commission will be $8,092. See infra note 1813.
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The Commission believes that the assessment costs associated with
determining whether a person would be required to register as a
municipal advisor would be greater in the absence of the rules the
Commission is adopting today. The Commission believes the rules adopted
today provide extensive guidance to market participants and should
reduce the number of requests for no-action relief and other guidance
from the Commission or Commission staff, which, in turn, should lead to
lower assessment costs for many firms.
In particular, to further facilitate market participants' analysis
of whether their activities would require them to register as a
municipal advisor, the Commission has adopted several definitions that
are consistent with existing regulatory definitions. For example, the
Commission is adopting a definition of obligated person \1734\ that is
generally consistent with Rule 15c2-12. This definition will provide
further protections for certain entities that participate in borrowing
in the municipal securities market, ensure uniformity among rules
relating to that market, and provide clearer guidance to market
participants. In addition, the consistency with Rule 15c2-12 will
likely reduce any confusion and, thus, may reduce the cost of
compliance by allowing advisors to more quickly and accurately
determine whether their clients are obligated persons. The Commission
also believes that the materiality standard for secondary market
disclosure in Rule 15c2-12 is an appropriate standard to identify those
obligated persons that should have the protections afforded by Section
15B of the Exchange Act.\1735\
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\1734\ See supra Section III.A.1.b.iii.
\1735\ Similarly, in response to commenters, the Commission is
providing exemptions from the definition of municipal advisor for
swap dealers that will apply the safe harbor requirements applicable
to the parties to such transactions under the existing CFTC
regulatory regime and, therefore, will apply consistent and
comparable protections to municipal entities and obligated persons
as under that regime. See Rule 15Ba1-1(d)(3)(v); supra Section
III.A.1.c.vi.
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Similarly, as discussed above, the Commission is adopting a
definition of ``proceeds of municipal securities'' that is similar to
the definition of proceeds for purposes of the arbitrage rules, except
that it applies to both taxable and tax-exempt municipal securities,
which should lead to lower assessment costs
[[Page 67610]]
for many firms.\1736\ Because the arbitrage rules are central to tax-
exempt municipal securities, the Commission believes that market
participants will be familiar with and able to understand easily the
scope of ``proceeds of municipal securities.'' \1737\ Further, the
Commission believes that the definition appropriately limits the time
and cost of compliance for a person to determine whether it must
register as a municipal advisor because if a person makes a reasonable
inquiry of a knowledgeable municipal entity or obligated person
official and is informed in writing that monies are not proceeds of
municipal securities, then absent reason to know otherwise, they are
not proceeds of municipal securities.\1738\ While municipal entities
and obligated persons generally already track proceeds of tax-exempt
municipal securities,\1739\ and thus, should not incur additional costs
in tracking such monies, municipal entities and obligated persons may
incur additional costs in tracking proceeds of taxable municipal
securities. However, the Commission believes that these costs will not
be substantial because municipal entities currently trace proceeds of
taxable bonds for non-tax purposes, such as for compliance with a bond
indenture or resolution.
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\1736\ See supra text accompanying note 1733.
\1737\ The Commission recognizes that some entities may not be
familiar with the arbitrage rules and, thus, that any benefits
recognized from the Commission's reliance on the arbitrage rules may
be reduced.
\1738\ Similarly, the Commission is including a reasonable
inquiry qualification in the definition of ``municipal escrow
investments.'' See Rule 15Ba1-1(h)(2). See also notes 383-384 and
accompanying text.
\1739\ See supra notes 361-362 and accompanying text.
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The Commission also believes the interpretations of the statutory
exclusions adopted today should reduce assessment costs. For example,
the Commission has provided examples of activities outside the scope of
serving as an underwriter of municipal securities for purposes of the
underwriter exclusion.\1740\ Similarly, the Commission has clarified
the types of activities that would fall outside of the other statutory
exclusions.\1741\
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\1740\ See supra Section III.A.1.c.iv.
\1741\ For example, an investment adviser that provides advice
concerning whether and how to issue municipal securities; advice
concerning the structure, timing, and terms of issuances of
municipal securities and other similar matters; advice concerning
municipal derivatives; or a solicitation would need to register as a
municipal advisor. See Rule 15Ba1-1(d)(2)(ii); supra Section
III.A.1.c.v.
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2. Definition of Municipal Advisor and Related Terms
a. Programmatic, Registration, and Recordkeeping Costs and Benefits
As discussed above, there are programmatic costs and benefits that
flow from the statutory municipal advisor regulatory regime. Given the
limitations on the Commission's ability to conduct a quantitative
assessment of the programmatic costs and benefits associated with the
definition of municipal advisor,\1742\ the Commission has considered
these costs and benefits primarily in qualitative terms.\1743\ In
addition, as discussed below, the Commission has quantified many of the
registration and recordkeeping costs that result from the final rules
and forms. Relying on the programmatic, registration, and recordkeeping
costs and benefits, the Commission believes it is possible to identify
those persons that, because of the activities in which they engage,
appear to be the types of persons for which the statutory requirements
of Section 975 of the Dodd-Frank Act were created.\1744\
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\1742\ The Commission does not have the information necessary to
provide a reasonable estimate for many of the programmatic costs and
benefits, in particular when discussing increases in the willingness
of municipal entities and obligated persons to utilize municipal
advisors and improvements in investor protection. In general,
secondary data regarding the municipal advisory market that would
assist the Commission in producing quantitative analyses are largely
unavailable. Other than the academic papers cited in the Proposal
and this release, few studies on municipal securities have attempted
to undertake the efforts to collect such secondary data.
\1743\ While commenters criticized this qualitative approach,
none provided or suggested sources of data that would facilitate a
quantitative analysis.
\1744\ As indicated throughout this release, and as discussed
further below, the Commission is mindful of the programmatic,
registration, and recordkeeping costs and has adopted a definition
of municipal advisor intended to help minimize compliance burdens
consistent with the statutory objectives.
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As previously stated, the statutory definition of municipal advisor
is broad and includes persons that traditionally have not been
considered to be municipal financial advisors.\1745\ The definition of
municipal advisor the Commission is adopting today is designed to
provide guidance that parties can use in determining whether
registration as a municipal advisor is required. In determining the
appropriate scope of the definition of municipal advisor, the
Commission considered what types of persons should be regulated as
municipal advisors in light of the purposes of the Dodd-Frank Act to
regulate persons that engage in municipal advisory activities, the
overall regulatory framework, and information currently available. The
Commission has therefore sought to adopt a definition of municipal
advisor that would capture those persons without imposing programmatic,
registration, and recordkeeping costs on persons for which regulation
currently may not be justified in light of the purposes of the Dodd-
Frank Act. The Commission believes that this approach should help
maximize the benefits provided by the municipal advisor regulatory
regime while minimizing costs imposed on market participants where
consistent with investor protection. Further, because the definition of
municipal advisor and related terms adopted today are consistent with
the definitions in Section 15B(e) of the Exchange Act and the purposes
of the Dodd-Frank Act,\1746\ the Commission believes that those persons
that currently meet the definition of municipal advisor under the final
rules and for which a statutory exclusion is not available should
already be registered with the Commission and the MSRB under the
temporary registration regime.
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\1745\ See supra note 1662.
\1746\ With regard to terms that are not defined in Section
15B(e) of the Exchange Act, the Commission is defining those terms
in a manner consistent with the purposes of the Dodd-Frank Act to
regulate persons that engage in municipal advisory activities. See
15 U.S.C. 78o-4(e).
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As discussed in the PRA, the Commission estimates that
approximately 910 municipal advisory firms, including sole proprietors,
will register with the Commission under the permanent registration
regime.\1747\ In addition, the Commission anticipates that the
exemption for persons providing advice with respect to investment
strategies that are not plans or programs for the investment of
proceeds of municipal securities or the recommendation of and brokerage
of municipal escrow investments \1748\ could reduce the estimated
number of initial Form MA applicants. Likewise, the Commission
anticipates the additional exemptions adopted today could also reduce
the estimated number of initial Form MA applicants.\1749\
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\1747\ See supra note 1446 and accompanying text.
\1748\ See Rule 15Ba1-1(d)(3)(vii).
\1749\ See supra Section III.A.1.c.
---------------------------------------------------------------------------
Because the Commission has interpreted the definition of municipal
advisor consistent with the statute, it believes that any differences
from the baseline with regard to the number of municipal advisors
required to register with the Commission should be minimal as those
persons should have already registered under the temporary registration
regime. In addition, any
[[Page 67611]]
differences from the baseline with regard to the programmatic costs and
benefits related to the statutory requirements and MSRB rules that are
currently operative should be minimal because they would have already
been incurred under the temporary registration regime.\1750\ Similarly,
the definition of municipal advisor adopted today should not impact
efficiency, competition, or capital formation relative to the baseline
because those market participants required to register under the
permanent registration regime should already be registered with the
Commission and the MSRB under the temporary registration regime and
complying with the requirements of Section 15B of the Exchange Act and
MSRB rules.\1751\
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\1750\ To the extent that the final rules provide guidance to
certain market participants that their activities do not cause them
to be municipal advisors, those persons would not incur the
programmatic costs that flow from the regulatory regime.
\1751\ See supra Section VIII.C.
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As discussed above, a person that meets the statutory definition of
municipal advisor, and for which a statutory exclusion is not
available, is already required to register with the Commission on Form
MA-T and is subject to a series of programmatic costs.\1752\ These
programmatic costs include, among other things, those incurred to
comply with applicable provisions of Section 15B of the Exchange Act
and MSRB rules. Municipal advisors will continue to be subject to a
fiduciary duty to any municipal entity client and be prohibited from
engaging in any fraudulent, deceptive, or manipulative acts or
practices when providing advice to or on behalf of a municipal entity
or obligated person with respect to municipal financial products or the
issuance of municipal securities, or when undertaking a solicitation of
a municipal entity or obligated person.\1753\ Municipal advisors will
also continue to be subject to MSRB Rule G-17, which requires municipal
advisors to deal fairly with all persons and not engage in any
deceptive, dishonest, or unfair practice. In addition, municipal
advisors will still need to register with the MSRB and pay a $100
initial fee and a $500 annual fee.\1754\ Because the Commission is
adopting a definition of municipal advisor that is consistent with
Section 15B(e) of the Exchange Act,\1755\ the Commission believes
registered municipal advisors would have already incurred these costs
under the temporary registration regime. The Commission recognizes,
however, that municipal advisors may incur costs to meet standards of
training, experience, competence, and other qualifications, as well as
continuing education requirements, that the MSRB may establish in the
future.\1756\
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\1752\ As discussed below, the Commission is providing
exemptions from the definition of municipal advisor for persons
engaged in certain activities.
\1753\ See 15 U.S.C. 78o-4(c)(1). See also supra note 1666 and
accompanying text.
\1754\ See MSRB Rule A-12; and MSRB Rule A-14.
\1755\ With regard to terms that are not defined in Section
15B(e) of the Exchange Act, the Commission is defining those terms
in a manner consistent with the purposes of the Dodd-Frank Act to
regulate persons that engage in municipal advisory activities. See
15 U.S.C. 78o-4(e).
\1756\ See supra note 1668. In addition, as discussed below, the
final rules and forms will require every municipal advisor to
register with the Commission and satisfy new recordkeeping
requirements according to Rule 15Ba1-8.
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The Commission believes the municipal advisor regulatory regime
should continue to enhance municipal entity and obligated person
protections and incentivize municipal advisors not to engage in
misconduct.\1757\ Municipal advisors will continue to be subject to
Commission oversight, including periodic examinations, and may be
subject to disciplinary action for misconduct.\1758\ In addition,
certain municipal advisors will now be subject to periodic examinations
by FINRA to evaluate compliance with the Exchange Act, the rules and
regulations thereunder, and MSRB rules.\1759\
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\1757\ See infra Section VIII.D.3.b.
\1758\ See supra note 1680 and accompanying text.
\1759\ See 15 U.S.C. 78o-4(b)(2)(E); 15 U.S.C. 78o-
4(c)(7)(A)(iii). See also supra notes 1672-1673 and accompanying
text.
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Market participants will need to interpret a number of related
terms to determine whether they are municipal advisors. Market
participants will need to determine whether they provide ``advice to or
on behalf of a municipal entity or obligated person with respect to
municipal financial products.'' \1760\ The term ``municipal financial
product'' is defined as ``municipal derivatives, guaranteed investment
contracts, and investment strategies.'' \1761\ As discussed below,
although the Exchange Act defines the terms ``guaranteed investment
contract'' and ``investment strategies,'' it does not define the term
``municipal derivatives.'' In addition, certain terms important to
interpreting the term ``investment strategies'' are undefined (i.e.,
proceeds of municipal securities and guaranteed investment contracts).
As discussed below, the Commission is adopting definitions of these
terms that are consistent with the purposes of the Dodd-Frank Act to
regulate persons that engage in municipal advisory activities. The
Commission has adopted several definitions of other related terms that
are effectively identical to the statute (i.e., municipal entity,
obligated person, and solicitation).\1762\
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\1760\ See 15 U.S.C. 78o-4(e)(4).
\1761\ See 15 U.S.C. 78o-4(e)(5).
\1762\ Because the definitions of municipal entity, obligated
person, and solicitation are consistent with the statute, the
Commission believes that these definitions will not result in a
significant change from the baseline (i.e., the number of municipal
advisors registered with the MSRB) in the number of registered
municipal advisors or in the programmatic costs or benefits. See
supra text accompanying notes 1750-1751.
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The Commission is adopting a definition of guaranteed investment
contract that applies only to contracts related to investments of
proceeds of municipal securities or municipal escrow investments.\1763\
The Commission believes that persons that provide advice concerning
guaranteed investment contracts should have already registered with the
Commission and the MSRB under the temporary registration regime.\1764\
The Commission staff understands that most persons that provide advice
about guaranteed investment contracts specialize in public finance
issues and are unlikely to provide advice only about guaranteed
investment contracts that do not relate to investments of proceeds of
municipal securities or municipal escrow investments. In addition, a
review of MA-T and MSRB data indicates that no municipal advisor
registered with the Commission or the MSRB has indicated that it
provides advice only about guaranteed investment contracts and not
another service that would likely require registration with the
Commission under the final rules and forms. Accordingly, the Commission
does not believe that the definition of guaranteed investment contract
adopted today will result in a significant change from the baseline
(i.e., the number of municipal advisors registered with the MSRB) in
the number of municipal advisors that will register under the permanent
registration regime. Similarly, the Commission does not believe there
will be a significant change from the baseline with regard to the
programmatic costs and benefits due to the definition of ``guaranteed
investment contract.''
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\1763\ See Rule 15Ba1-1(a).
\1764\ As of December 31, 2012, approximately 320 municipal
advisors registered on Form MA-T and approximately 185 municipal
advisors registered with the MSRB indicated that they provide advice
concerning guaranteed investment contracts.
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Although Section 15B of the Exchange Act does not define the term
``municipal derivatives,'' the Commission is adopting a definition that
is consistent with the purposes of the Dodd-Frank
[[Page 67612]]
Act to regulate persons that engage in municipal advisory activities.
As discussed above, with respect to municipal entities, the Commission
has determined not to qualify the definition of municipal derivatives
as being limited to those entered into in connection with, or pledged
as security or a source of payment for, existing or contemplated
municipal securities.\1765\ Accordingly, the Commission does not
believe that this definition of municipal derivatives will result in a
significant change from the baseline (i.e., the number of municipal
advisors registered with the MSRB) of the number of municipal advisors
that will register under the permanent registration regime.\1766\ The
Commission is clarifying the application of the definition of municipal
derivatives with respect to obligated persons to advice that relates to
derivatives entered into in connection with, or pledged as security or
a source of payment for, existing or contemplated municipal securities
or another municipal derivative. The Commission expects that any
persons that provide advice about derivatives outside this context
would not register with the Commission under the permanent registration
regime. The Commission does not believe, however, that this
clarification will result in fewer persons registering as municipal
advisors because the clarification is limited to instances that would
cause a person to be an obligated person as defined in Section
15B(e)(10) of the Exchange Act.\1767\
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\1765\ See supra Section III.A.1.c.
\1766\ The Commission believes that persons that provide advice
about municipal derivatives to municipal entities should have
already registered with the Commission and the MSRB under the
temporary registration regime. As of December 31, 2012, more than
350 municipal advisors registered on Form MA-T and more than 230
municipal advisors registered with the MSRB indicated that they
provide advice concerning the use of municipal derivatives. See also
infra VIII.D.6 (discussing the exemption for swap dealers).
\1767\ 15 U.S.C. 78o-4(e)(10).
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The Commission recognizes that persons that are required to
register as municipal advisors because they provide advice about
municipal derivatives will incur the programmatic costs of the
municipal advisor regulatory regime. However, the Commission believes
that any differences from the baseline with regard to the programmatic
costs and benefits due to the definition of ``municipal derivatives''
would be minimal since such advisors would have already incurred these
costs under the temporary registration regime.\1768\ The Commission
believes that municipal entities and obligated persons that receive
advice about municipal derivatives should receive the protections of
the municipal advisor regulatory regime.\1769\ As discussed above, the
permanent registration regime will increase the amount of information
available about municipal advisors.\1770\ The Commission believes that
the increased availability of information relative to the baseline
about municipal advisors that provide advice about municipal
derivatives, including disciplinary history and conflicts of interest,
may lead to an improvement in the selection of municipal advisors that
provide advice related to municipal derivatives because municipal
entities and obligated persons will be able to consult registration
information when choosing municipal advisors that specialize in
municipal derivatives.\1771\ In addition, as discussed above, the
Commission believes that the increased public availability of
information about municipal advisors who engage in municipal advisory
activities pertaining to municipal derivatives may reduce from the
baseline instances of misconduct to the extent the increased amount of
information disclosed on Form MA as compared to Form MA-T acts as a
deterrent against misconduct related to derivatives.\1772\
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\1768\ See supra text accompanying note 1766.
\1769\ See supra notes 1752-1756 and accompanying text.
\1770\ See infra Section VIII.D.1.a.
\1771\ See infra Section VIII.D.3.b.
\1772\ The Commission recognizes, however, that municipal
entities and obligated persons will not have registration
information for advisors to obligated persons that invest in
derivative transactions not connected with municipal securities or
other municipal derivatives.
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The Commission has determined not to adopt a separate definition of
``investment strategies,'' which is defined in Section 15B(e)(3) of the
Exchange Act to include ``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.'' \1773\ The Commission,
however, is adopting definitions of proceeds of municipal securities
and municipal escrow investments that are consistent with the purposes
of the Dodd-Frank Act to regulate persons that engage in municipal
advisory activities. The Commission believes that persons that provide
advice with regard to proceeds of municipal securities and municipal
escrow investments should have already registered with the Commission
and the MSRB under the temporary registration regime.\1774\ In
addition, the exemption in Rule 15Ba1-1(d)(3)(vii) for any person that
provides advice to a municipal entity or obligated person with respect
to municipal financial products to the extent that such person provides
advice with respect to investment strategies that are not plans or
programs for the investment of the proceeds of municipal securities or
the recommendation of and brokerage of municipal escrow investments
will provide greater certainty regarding the types of persons who are
required to register with the Commission. Accordingly, the Commission
believes that the definitions of ``proceeds of municipal securities''
and ``municipal escrow investments'' will not result in a significant
change from the baseline (i.e., the number of municipal advisors
registered with the MSRB) with regard to the number of municipal
advisors that register under the permanent registration regime.
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\1773\ See 15 U.S.C. 78o-4(e)(3).
\1774\ As of December 31, 2012, nearly 500 municipal advisors
registered on Form MA-T indicated that they provide advice
concerning the investment of the proceeds of municipal securities
and 360 indicated that they provide advice regarding the
recommendation and/or brokerage of municipal escrow investments.
MSRB data does not separately identify municipal advisors that
provide these activities.
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In addition, the Commission believes that any differences from the
baseline with regard to the programmatic costs due to the adoption of
the definitions of ``proceeds of municipal securities'' and ``municipal
escrow investments'' should be minimal since such costs would have been
incurred under the temporary registration regime. The Commission
believes that municipal entities and obligated persons that receive
advice concerning proceeds of municipal securities and municipal escrow
investments should receive the protections of the municipal advisor
regulatory regime, and that the Commission's approach tailors
protection to those activities related to the investment of the
proceeds of municipal securities and related escrow investments, which
have been subject to widespread enforcement activity.\1775\
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\1775\ See supra note 287.
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The Commission also believes the increased public availability of
information relative to the baseline about municipal advisors who
engage in municipal advisory activities pertaining to proceeds of
municipal securities and municipal escrow investments may reduce
instances of misconduct to the extent the increased amount of
information disclosed on Form MA as compared to Form MA-T acts as a
[[Page 67613]]
deterrent against misconduct related to investment strategies.
Persons may incur costs to rely on the provisions regarding
reasonable reliance on representations related to proceeds of municipal
securities \1776\ and municipal escrow investments.\1777\ The
Commission estimates that the PRA costs \1778\ for persons to rely on
Rule 15Ba1-1(m)(3) for reasonable reliance on representations related
to proceeds of municipal securities will be $733,885.\1779\ In
addition, the Commission estimates that the PRA costs for persons to
rely on Rule 15Ba1-1(h)(2) for reasonable reliance on representations
related to municipal escrow investments will be $401,065.\1780\ The
Commission notes that no entity is required to utilize Rule 15Ba1-
1(m)(3) or Rule 15Ba1-1(h)(2) and that any efforts to do so are
voluntary.
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\1776\ See Rule 15Ba1-1(m).
\1777\ See Rule 15Ba1-1(h)(2).
\1778\ See text accompanying infra note 1797.
\1779\ (880 hours (estimated burden to draft a template to use
in obtaining the written representation) x $379 (hourly rate for an
in-house attorney)) + (6,355 hours (estimated burden to obtain the
written representation) x $63 (hourly rate for a Compliance Clerk))
= $733,885. See supra notes 1622-1624 and accompanying text. Staff
estimates that the average national hourly rate for an in-house
attorney is $379 based on data from SIFMA's Management &
Professional Earnings in the Securities Industry 2012 (modified by
Commission staff to account for an 1800-hour-work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead). The $63-per-hour figure for a Compliance
Clerk is from SIFMA's Office Salaries in the Securities Industry
2012, as modified by Commission staff to account for an 1,800-hour
work-year and multiplied by 2.93 to account for bonuses, firm size,
employee benefits, and overhead.
\1780\ (700 hours (estimated burden to draft a template to use
in obtaining the written representation) x $379 (hourly rate for an
attorney)) + (2,155 hours (estimated burden to obtain the written
representation) x $63 (hourly rate for a Compliance Clerk)) =
$401,065. See supra notes 1616-1618 and accompanying text. See supra
note 1779 (calculating the hourly rate for an in-house attorney and
a Compliance Clerk).
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b. Alternatives
One alternative to the rules the Commission is adopting today
relates to the types of monies covered under the final rules. The
Commission considered whether the final rules should only apply to the
proceeds of municipal securities or whether they should also apply to
funds held by, or on behalf of, a municipal entity that do not
constitute the proceeds of municipal securities. As discussed above,
because the definition of ``investment strategies'' in Section
15B(e)(3) of the Exchange Act \1781\ provides that it ``includes''
plans or programs for the investment of the proceeds of municipal
securities, the Commission proposed to interpret the term to mean that
it includes, without limitation, the investment of proceeds of
municipal securities, as well as plans, programs, or pools of assets
that invest funds held by, or on behalf of, a municipal entity.
Commenters generally opposed the proposed interpretation of investment
strategies.\1782\
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\1781\ 15 U.S.C. 78o-4(e)(3).
\1782\ See supra notes 300-324 and accompanying text.
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As noted above, the Commission continues to believe that the term
``includes'' is not limiting, but is persuaded by commenters.
Accordingly, the Commission has determined to adopt a definition of
``investment strategies'' that focuses more narrowly on the statutorily
identified categories of ``proceeds of municipal securities'' and
``municipal escrow investments.'' \1783\ The Commission believes this
approach related to investment strategies focuses the protections of
the municipal advisor regulatory regime on those activities related to
the investment of the proceeds of municipal securities and related
escrow investments, which have been subject to widespread enforcement
activity.\1784\ The Commission believes that a broader approach would
likely result in a greater number of persons registering as municipal
advisors, which may not be necessary or appropriate in the protection
of investors at this time.\1785\ In addition, because persons that
provide advice with respect to investment strategies that are not plans
or programs for the investment of the proceeds of municipal securities
or the recommendation of and brokerage of municipal escrow investments
will not have to register as municipal advisors, the Commission
recognizes that such persons will not be subject to the programmatic,
registration, and recordkeeping costs of the permanent registration
regime.
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\1783\ See Rule 15Ba1-1(b). The Commission is also persuaded by
commenters that, at this time, it is appropriate to apply the
definition of guaranteed investment contract more narrowly. This
approach is consistent with the Commission's decision to limit the
application of ``investment strategies'' to plans or programs for
the investment of proceeds of municipal securities. The Commission
expects that most providers of guaranteed investment contracts will
not be considered municipal advisors as long as they do not engage
in municipal advisory activities.
\1784\ See supra note 287.
\1785\ The Commission is unable to estimate the number of
persons who would otherwise need to register as municipal advisors
under this alternative approach because it does not have the data
necessary to conduct this analysis and the information is not
otherwise publicly available.
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Another alternative to the rules the Commission is adopting today
is for the Commission not to define further ``municipal advisor'' and
related terms. The Commission did not estimate the assessment costs
market participants would incur to determine whether registration is
required under the temporary registration regime and initially believed
that the direct costs for respondents to read and apply the definitions
in proposed Rule 15Ba1-1(d) would be minimal.\1786\ As discussed above,
however, in light of comments received,\1787\ the Commission now
believes that persons may incur costs of up to $25,500 to determine
whether their activities require them to register as municipal advisors
under the final rules. Nonetheless, the Commission believes that the
assessment costs associated with determining whether a person would be
required to register as a municipal advisor would be greater in the
absence of the rules the Commission is adopting today.\1788\ Without
these rules, market participants would still need to analyze whether
their activities fall within the definition of municipal advisor in
Section 15B(e)(4) of the Exchange Act and would likely need to request
no-action relief and other guidance from the Commission or Commission
staff, or risk failing to register with the Commission as
required.\1789\ As discussed above, the Commission estimates that the
costs associated with determining whether a market participant is a
municipal advisor under Section 15B of the Exchange Act may range from
$379 to $25,500, with the high end of the range reflecting the cost for
entities with more complex business activities.\1790\ Thus, the
Commission believes the rules adopted today provide extensive guidance
to market participants and should reduce the number of requests for no-
action relief and other guidance from the Commission or Commission
staff, which, in turn, should lead to lower assessment costs for many
firms.
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\1786\ See Proposal, 76 FR 873.
\1787\ See supra note 1730.
\1788\ For example, one commenter on the Proposal stated that it
lacked a clear line between permissible and impermissible conduct
that will drive up municipal advisory costs due to cautious efforts
to ``over-comply'' and not risk an inadvertent violation. See
American Council of Life Insurers Letter.
\1789\ In addition, without this guidance, a greater number of
market participants would likely decide to register as municipal
advisors unnecessarily and thereby incur the programmatic,
registration, and recordkeeping costs of the municipal advisor
registration regime.
\1790\ See supra note 1733 and accompanying text.
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3. Rules and Forms Related to Registration of Municipal Advisors
The final rules and forms will create a permanent registration
regime for municipal advisors consisting of the
[[Page 67614]]
following forms: Form MA, Form MA-I, Form MA-NR, and Form MA-W.\1791\
Under Rule 15Ba1-2(a), each person applying for registration with the
Commission as a municipal advisor is required to complete Form MA and
file the form electronically with the Commission. In addition, each
person applying for registration or registered with the Commission as a
municipal advisor must complete Form MA-I with respect to each natural
person who is a person associated with the municipal advisor and
engages in municipal advisory activities on its behalf and file the
form electronically with the Commission.\1792\ Each Form MA shall be
considered filed with the Commission upon submission of a completed
Form MA, together with all additional required documents, including all
required filings of Form MA-Is, to the Commission's EDGAR system.\1793\
A sole proprietor will have to complete both Form MA and Form MA-
I.\1794\
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\1791\ The Commission is establishing additional requirements
for non-resident municipal advisors. See supra Section III.A.6.
\1792\ See Rule 15Ba1-2(b)(1). As discussed above, natural
person municipal advisors who are not sole proprietors no longer
need to register with the Commission. However, the Commission is
retaining Form MA-I to obtain information about individuals
associated with municipal advisory firms engaged in municipal
advisory activities on behalf of such firms, which will assist in
the Commission's oversight functions. See supra Section VIII.D.1.a
(discussing the benefits of the permanent registration regime to
Commission oversight of municipal advisors). The Commission notes,
moreover, that it is the municipal advisory firms, not the
individuals, that will be required to file Form MA-I with the
Commission.
\1793\ See Rule 15Ba1-2(c).
\1794\ See Rule 15Ba1-2(b)(2). The Commission has developed an
online filing system to permit municipal advisors to file a
completed Form MA and Form MA-I through the EDGAR system. The
information filed will be publicly available once registration has
been granted.
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Pursuant to Rule 15Ba1-5(a), a municipal advisory firm that
registers on Form MA must amend its Form MA at least annually, within
90 days of the end of the municipal advisor's fiscal year in the case
of firms or within 90 days of the end of the calendar year for sole
proprietors, and more frequently as required by the General
Instructions. In addition, a registered municipal advisor must promptly
amend Form MA-I whenever any information previously provided in Form
MA-I becomes inaccurate for any reason.\1795\ With respect to Form MA-
I, all municipal advisory firms will be required to amend Form MA-I to
indicate that an individual is no longer an associated person of the
municipal advisory firm filing the form or no longer engages in
municipal advisory activities on its behalf. Registered municipal
advisors will also report successions of registration on Form MA.\1796\
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\1795\ See Rule 15Ba1-5(b).
\1796\ See Rule 15Ba1-7.
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Pursuant to Rule 15Ba1-4, all registered municipal advisors are
required to file Form MA-W to withdraw from registration with the
Commission as a municipal advisor. As will be the case with both Form
MA and Form MA-I, a municipal advisor must file Form MA-W
electronically with the Commission.
In adopting these rules, the Commission sought to design a
registration process that is similar to other registration processes
administered by the Commission. The rules are based on rules applicable
to broker-dealers and investment advisers; similarly, Form MA is based
on Form ADV and Form BD, and Form MA-I is based on Form U4. To the
extent market participants are familiar with these existing
registration processes, the Commission believes that using similar
processes to register municipal advisors will create efficiencies for
market participants.
The Commission also has sought to ensure that the Commission staff
has information sufficient to make a determination as to whether
registration should be granted or denied. Thus, Form MA differs from
Form ADV and Form BD because it requests information specific to the
municipal advisory business. The Commission also has sought to assure
that the rules, forms, and process generally are as clear as possible
so as to minimize confusion. In addition, the Commission has sought to
minimize, to the extent possible, duplication and costs that the rules
may impose on firms. Finally, burdens and costs that have been
estimated for PRA purposes are included in the broader costs and
benefits discussion that follows because the Commission believes, as
the registration process would largely be forms-based, it is
appropriate to include them.\1797\
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\1797\ See supra Section VII.
---------------------------------------------------------------------------
a. Registration Costs
The Commission acknowledges that the establishment of a permanent
registration regime will impose costs on persons registering as
municipal advisors on Form MA. As discussed above, persons meeting the
statutory definition of municipal advisor and for whom a statutory
exclusion is not available should currently be registered with the
Commission on Form MA-T as well as with the MSRB. Thus, such persons
would have incurred costs in connection with such registration.\1798\
Because of this, the quantitative costs discussed below related to
registration on Form MA represent additional costs separate from those
incurred to register on Form MA-T. However, for the reasons discussed
below, the Commission believes that municipal advisors that have
already gathered relevant information to complete Form MA-T or to
register with the Commission in another capacity may incur lower
permanent registration costs than those that have not registered on
Form MA-T (i.e., new entrants to the market) or that have not
registered with the Commission in another capacity.
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\1798\ See supra Section VIII.C.2.
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The Commission expects municipal advisors will incur one-time costs
to familiarize themselves with the rules and the relevant forms. The
paperwork burden of gathering information for the purpose of completing
the forms will be reduced to the extent municipal advisors have already
gathered some of the information required by the forms in order to
register with the Commission on Form MA-T or in another capacity.\1799\
In comparison, municipal advisors not otherwise registered with the
Commission and solicitors that are not brokers, dealers, or investment
advisers, to the extent they need to gather the required information
for the first time, may incur higher one-time costs to familiarize
themselves with the rules and relevant forms.\1800\ In addition, some
municipal advisors may incur one-time costs to establish new internal
controls, such as procedures for obtaining the information required by
the forms, as applicable. These potential one-time burdens are included
in the Commission's estimate below.\1801\ The Commission believes that
these costs will be limited for municipal advisors that are registered
with the Commission as investment advisers and/or broker-dealers or
that have voluntarily adopted such practices, but will likely be higher
for municipal advisors not otherwise registered with the Commission and
solicitors to the extent they have not voluntarily adopted such
practices.\1802\
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\1799\ See supra Section VII.D.1.
\1800\ See supra Section VII.D.1.
\1801\ See supra Section VII.D.1.
\1802\ Some unregulated entities that engage in municipal
advisory activities have formed professional associations that have
implemented their own voluntary best practices with respect to
conflicts of interest, educational standards, and other disclosure
of note to their clients. See, e.g., National Association of
Independent Public Finance Advisors, http://www.naipfa.com/.
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The Commission received one comment letter that questioned the need
for the proposed self-certification
[[Page 67615]]
requirement.\1803\ As discussed above, after careful consideration of
comments received, the Commission is not requiring self-certification
in Form MA.\1804\
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\1803\ See, e.g., Costanzo Letter.
\1804\ See supra Section III.A.2.b.
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In the Proposal, the Commission estimated that the total initial
cost for all municipal advisory firms and all natural person municipal
advisors to register with the Commission would be approximately
$12,623,000.\1805\ Although the Commission received comments suggesting
that the Proposal underestimated the hourly burden,\1806\ the
Commission is not changing its estimate of the time required to
register with the Commission (other than to reflect its decision not to
adopt a self-certification requirement).\1807\ The Commission notes
that commenters did not provide specific figures by which to
recalculate the Commission's estimate.\1808\ As discussed above,\1809\
the Commission is making some revisions to clarify the questions asked
in Form MA and Form MA-I and to elicit additional information. Because
some revisions will increase the hourly burden for municipal advisors
to complete the relevant forms, while others will decrease the burden,
and because most of the changes to Form MA and Form MA-I are
clarifications not requiring additional information, the Commission
does not believe the additional information requirements will impose
significant additional burdens on municipal advisors and is retaining
its original hourly burden estimates as proposed. As discussed above,
the Commission estimates that the total average initial burden to
complete a single Form MA will be 3.5 hours per applicant,\1810\ while
the average amount of time for a municipal advisory firm to complete
Form MA-I with respect to a natural person municipal advisor will be
3.0 hours.\1811\ The Commission now estimates that the total initial
PRA cost for all municipal advisory firms to register with the
Commission will be approximately $6,910,975,\1812\ for an average cost
per firm of $7,595.\1813\ The Commission believes that the reduction in
cost from the Proposal is primarily attributable to a reduction in the
estimated number of municipal advisory firms that will initially
register with the Commission; a reduction in the estimated number of
natural person municipal advisors for which municipal advisory firms
and sole proprietors will need to complete Form MA-I; \1814\ and the
Commission's decision not to adopt a self-certification requirement.
The Commission notes that this estimate represents the aggregate cost
to the industry. The costs incurred by a specific municipal advisor to
register with the Commission will depend on its size and the complexity
of its business activity.
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\1805\ $1,105,000 (estimated initial cost for all municipal
advisory firms to complete Form MA) + $11,118,000 (estimated initial
cost for all natural person municipal advisors to complete Form MA-
I) + $400,000 (estimated cost for all municipal advisory firms to
hire outside counsel) = $12,623,000. See Proposal, 76 FR 871, 875.
\1806\ See Financial Services Roundtable Letter (asserting that
``initial preparation of Form MA would require significantly greater
hours and much higher costs''). See also supra Section VII.D.1
(discussing comments regarding the hourly burden estimate from the
Proposal).
\1807\ See supra notes 1486-1487 and accompanying text.
\1808\ The Commission received several comment letters that
specifically addressed the costs of registration on Form MA and Form
MA-I. These commenters generally criticized the cost of municipal
advisor registration with both the Commission and the MSRB,
including the MSRB's $100 initial fee and $500 annual fee. See,
e.g., Texas Bankers Association Letter; State of Texas Letter; John
Sullivan Letter. The Commission notes that it does not charge
municipal advisors a fee to register with the Commission. For
purposes of the economic analysis, the fees imposed by the MSRB are
part of the economic baseline. Although the Dodd-Frank Act permits
the MSRB to require municipal advisors to pay such reasonable fees
and charges as may be necessary or appropriate to defray the costs
and expenses of operating and administering the MSRB (see 15 U.S.C.
78o-4(b)(2)(J)), the Commission does not set or approve fees charged
by the MSRB. Instead, the Exchange Act provides that certain
designated SRO rules, including fees charged by the MSRB, take
effect upon filing with the Commission and may thereafter be
enforced by the SRO to the extent not inconsistent with the Exchange
Act, the rules and regulations thereunder, and applicable Federal
and State law. See 15 U.S.C. 78s(b)(3)(A), (C). The Commission has
sixty days from the date of filing, however, during which it
``summarily may temporarily suspend'' the fees ``if it appears to
the Commission that such action is necessary or appropriate in the
public interest, for the protection of investors, or otherwise in
furtherance of the purposes of'' the Exchange Act. See 15 U.S.C.
78s(b)(3)(C). If the Commission takes such action, the Commission
shall institute proceedings to determine whether the proposed rule
should be approved or disapproved. See id. In addition, Section
19(c) of the Exchange Act authorizes the Commission, by rule, to
abrogate, add to, and delete from the rules of an SRO (other than a
registered clearing agency) as the Commission deems necessary or
appropriate to insure the fair administration of the SRO, to conform
its rules to requirements of the Exchange Act and the rules and
regulations thereunder applicable to such organization, or otherwise
in furtherance of the purposes of the Exchange Act. See 15 U.S.C.
78s(c).
\1809\ See supra Section VII.D.1.a-b.
\1810\ See supra Section VII.D.1.a.
\1811\ See supra Section VII.D.1.b.
\1812\ (36,935 hours (total estimated hourly burden under the
rules for all municipal advisors to complete Form MA and required
number of Form MA-I) x $166 (combined hourly rate for a Compliance
Manager and Compliance Clerk)) + $364,000 (estimated cost for all
municipal advisors to hire outside counsel to assist in completing
Form MA) + ((910 hours (estimated one-time burden for all municipal
advisory firms to draft a template to use in obtaining the written
consents to service of process) x $379 (hourly rate for an
attorney)) + (1,125 hours (estimated one-time burden for all
municipal advisory firms to obtain the written consents to service
of process) x $63 (hourly rate for a Compliance Clerk))) =
$6,910,975. See supra note 1501 and accompanying text (calculating
the total estimated hourly burden under the rules for all municipal
advisors to complete Form MA and required number of Form MA-I);
supra note 1567 and accompanying text (estimating the total cost for
all municipal advisory firms to hire outside counsel to review their
compliance with the final rules and forms); supra notes 1579-1581
and accompanying text (estimating the one-time burden to obtain
written consents to service of process); supra note 1779
(calculating the hourly rate for an in-house attorney and the hourly
rate for a Compliance Clerk). The Commission expects that completion
of Form MA and Form MA-I will most likely be performed equally by
compliance managers and compliance clerks. Dividing the hourly rate
evenly between a compliance manager ($269 per hour) and a compliance
clerk ($63 per hour) results in a cost per hour of $166. ($269 x
0.5) + ($63 x 0.5) = $166. The $269-per-hour figure for a Compliance
Manager is from SIFMA's Management & Professional Earnings in the
Securities Industry 2012, as modified by Commission staff to account
for an 1,800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead. In the
Proposal, the combined hourly rate was $170. See Proposal, 76 FR 875
n.398. The combined hourly rate for a Compliance Manager and
Compliance Clerk is lower than in the Proposal because of a
reduction in the rate for a Compliance Manager from $273 per hour to
$269 per hour and a reduction in the rate for a Compliance Clerk
from $67 per hour to $63 per hour.
\1813\ $6,910,975 (estimated total initial labor cost for all
municipal advisory firms to register with the Commission) / 910
(estimated number of municipal advisors registered on Form MA) =
$7,594.48.
\1814\ See supra notes 1447-1464 and accompanying text.
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The Commission also anticipates that municipal advisors will incur
ongoing annual costs to monitor and/or maintain the information
required by the registration forms; \1815\ to provide updates to the
registration forms; and to withdraw from registration with the
Commission. In addition, municipal advisors that are new to the market
will incur costs to register with the Commission. In the Proposal, the
Commission estimated that these ongoing annual costs would be
approximately $5,292,100.\1816\
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\1815\ These costs are included in the Commission's estimate
below.
\1816\ $510,000 (estimated ongoing cost for all municipal
advisory firms to amend Form MA and complete the annual self-
certification) + $3,519,000 (estimated ongoing cost for all natural
person municipal advisors to amend Form MA-I and complete the annual
self-certification) + $110,500 (estimated ongoing cost for all new
municipal advisory firms to complete Form MA) + $918,000 (estimated
ongoing cost for all new natural person municipal advisors to
complete Form MA-I) + $5,100 (estimated ongoing annual labor cost
for all municipal advisory firms to complete Form MA-W) + $229,500
(estimated ongoing cost for all natural person municipal advisors to
withdraw from Form MA-I registration) = $5,292,100. See Proposal, 76
FR 875-76.
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Under the final rules and forms, municipal advisory firms will
incur a number of ongoing costs. Municipal
[[Page 67616]]
advisory firms that are new to the market will incur costs to register
with the Commission. In addition, municipal advisory firms will incur
costs to amend Form MA, amend Form MA-I, and withdraw from registration
with the Commission. The Commission now estimates that municipal
advisors will incur total ongoing annual PRA costs of approximately
$2,618,373.\1817\ The Commission notes that this estimate represents
the aggregate cost to the industry. The ongoing costs incurred by a
specific municipal advisor will depend on its size and the complexity
of its business activity. The reduction in cost from the Proposal is
primarily attributable to a reduction in the estimated number of
municipal advisory firms that will register with the Commission; \1818\
a reduction in the estimated number of natural person municipal
advisors for which municipal advisory firms and sole proprietors will
need to amend Form MA-I; \1819\ a reduction in the estimated number of
municipal advisory firms that will withdraw from registration; and the
Commission's decision not to adopt a self-certification
requirement.\1820\
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\1817\ ((3,200 hours (total estimated hourly burden under the
rules for new municipal advisors to complete an initial Form MA and
required number of Form MA-I) x $166 (combined hourly rate for a
Compliance Manager and Compliance Clerk)) + $40,000 (estimated costs
for new municipal advisors to hire outside counsel to assist in
completing Form MA)) + (12,053 hours (total estimated hourly burden
under the rules for all municipal advisors to complete amendments to
Form MA and Form MA-I) x $166 (combined hourly rate for a Compliance
Manager and Compliance Clerk)) + (15 hours (total estimated hourly
burden under the rules for all municipal advisors to withdraw from
Form MA registration) x $166 (combined hourly rate for a Compliance
Manager and Compliance Clerk)) + ((100 hours (estimated ongoing
burden for new municipal advisory firms to draft a template to use
in obtaining the written consents to service of process) x $379
(hourly rate for an attorney)) + (95 hours (estimated ongoing burden
for municipal advisory firms to obtain the written consents to
service of process) x $63 (hourly rate for a Compliance Clerk))) =
$2,618,373. See supra note 1506 and accompanying text (calculating
the total estimated hourly burden under the rules for new municipal
advisors to complete an initial Form MA and required number of Form
MA-I); supra note 1525 and accompanying text (calculating the total
estimated hourly burden under the rules for all municipal advisors
to complete amendments to Form MA and Form MA-I); supra note 1532
and accompanying text (calculating the total estimated hourly burden
under the rules for all municipal advisors to withdraw from Form MA
registration); supra notes 1584-1586 and accompanying text
(estimating the ongoing burden to obtain written consents to service
of process); supra note 1779 (calculating the hourly rate for an in-
house attorney and the hourly rate for a Compliance Clerk); supra
note 1812 (calculating the combined hourly rate).
\1818\ See supra notes 1442-1446 and accompanying text.
\1819\ See supra notes 1447-1464 and accompanying text. As
discussed above, the Commission is not revising the estimated time
to amend Form MA and Form MA-I. See supra Section VII.D.3.
\1820\ See supra Section VII.D.4. Several commenters stated that
the Commission did not address the potential liability costs
associated with a permanent registration regime. See SIFMA Letter I
(expressing concerns regarding the self-certification requirement);
NAESCO Letter (expressing concerns regarding fiduciary liability).
The Commission recognizes that some municipal advisors may incur
litigation costs as a result of the final rules and forms, and that
to the extent that there are such costs, some of them may be passed
on to municipal entities and obligated persons in the form of
increased fees. However, commenters did not provide estimates of
potential liability costs, and the Commission does not have the
information necessary to provide a reasonable estimate of the
litigation costs a municipal advisory firm may face because the
costs will depend on the facts and circumstances of each matter
litigated. In addition, the Commission notes that any litigation
costs incurred separate from the registration and recordkeeping
requirements are included in the economic baseline as a function of
the statutory municipal advisor regulatory regime. Further, the
Commission believes the potential liability costs are outweighed by
the benefits recognized by Congress in establishing the statutory
municipal advisor regulatory regime.
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b. Registration Benefits
The Commission believes that the requirements that municipal
advisors register with the Commission on Form MA, submit a Form MA-I
for each of its natural person municipal advisors, and update the
information provided at least annually (or more often as required by
the rules) will provide a number of benefits. In addition to the
benefits discussed above,\1821\ the final rules and forms could improve
the process through which municipal entities and obligated persons
select municipal advisors (referred to as the ``municipal advisor
selection process''), as the disclosures required under the permanent
registration regime should allow municipal entities and obligated
persons to become better informed about municipal advisors at a lower
cost, which could increase the use of municipal advisors. Further, the
final rules and forms could incentivize municipal advisors not to
engage in misconduct. In addition, Form MA, Form MA-I, and Form MA-NR
should enhance the ability of securities regulators to oversee
municipal advisors, which could increase the willingness of municipal
entities and obligated persons to utilize municipal advisors.\1822\
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\1821\ See supra Section VIII.D.1.a.
\1822\ See supra Section VIII.D.1.a.
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The Commission believes that a significant benefit of the final
rules and forms is that they could enhance the municipal advisor
selection process by increasing the amount of publicly available
information about municipal advisors. The rules and forms will allow
municipal entities and obligated persons to become better informed
about municipal advisors more efficiently, and thereby, at a lower
cost.\1823\ Municipal advisors will be required to submit, and
municipal entities, obligated persons, the general public, and others
will be able to access, information through the Commission's EDGAR
system. In addition, because municipal advisors that are registered
with the Commission as broker-dealers and/or investment advisers will
be required to provide their CRD Number and IARD Number, respectively,
on Form MA, interested parties will be able to access other publicly
available information about the municipal advisor.\1824\ As discussed
in the Proposal,\1825\ research has shown that most municipal entities
do not utilize a formalized selection process when selecting municipal
advisors.\1826\ Because there is little publicly available information
about many municipal advisors, municipal entities and obligated persons
that do not use a formalized selection process might not have
sufficient information when deciding among municipal advisors.\1827\ As
a result of the public availability of information disclosed in Form MA
and Form MA-I, municipal entities and obligated persons may be able to
more easily establish objective criteria to use in selecting municipal
advisors. In addition, the availability of information required by Form
MA and Form MA-I in a uniform, standardized format will likely reduce
from the baseline the costs of collecting information and comparing it
across municipal advisors. The ease of establishing and verifying
compliance
[[Page 67617]]
with such criteria may increase the likelihood that municipal advisors
are hired because of their qualifications rather than for other reasons
such as political or personal connections to decision-making officials.
Further, to the extent that municipal entities and obligated persons
have been deterred from engaging a municipal advisor because they were
not familiar with the pool of municipal advisors, the permanent
registration regime may increase the use of municipal advisors from the
baseline.\1828\ The reduced information search costs for municipal
entities may have an incremental effect of increasing informational
efficiency. In addition, an improved municipal advisor selection
process may lead to fewer municipal defaults and an increased
likelihood that municipal entities issue debt, which could improve
efficiency and capital formation.\1829\
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\1823\ The Commission is unable to estimate the amount of time
and money municipal entities may save by reviewing Form MA and Form
MA-I rather than engaging in an RFP process or searching for other
regulatory documents. The Commission believes that the ability to
access information, including disciplinary history and conflicts of
interest, on municipal advisors in a single location benefits
municipal entities by reducing the need to search for other
regulatory documents of those municipal advisors that are
registered, or have associated persons that are registered, in
another capacity.
\1824\ Although EDGAR will not automatically provide an
electronic link to the information on the CRD and IARD systems,
these systems are nevertheless readily accessible, and with the
identifying numbers of the relevant filings provided, interested
parties should be able to find the desired information easily.
\1825\ See Proposal, 76 FR 874.
\1826\ According to Mark D. Robbins and Bill Simonsen, 2003,
Financial Advisor Independence and the Choice of Municipal Bond Sale
Type, Municipal Finance Journal 24: 42 (``Robbins and Simonsen''),
an RFP had been used only 22.6% of the time by governments in
selecting the financial advisor for their last bond sale. See also
Allen and Dudney, supra note 38.
\1827\ See supra Section VIII.D.1.a.
\1828\ Moreover, public disclosure of the registration
information of municipal advisors and their associated persons will
make this information available not only to municipal entities and
regulators, but also to the general public. Even if a municipal
entity or obligated person does not otherwise seek to obtain this
information as part of its selection process, the information will
be available to interested persons (e.g., the press and concerned
citizens) that might directly or indirectly influence the selection
of the municipal advisor.
\1829\ See infra notes 1830-1832 and accompanying text. The
final rules and forms could also increase investor willingness to
invest in municipal bond offerings to the extent that the municipal
entity issuing bonds used a municipal advisor and investors
understand and consider the benefits of municipal advisor
registration, including disclosure of conflicts of interest and
disciplinary history.
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With respect to the issuance of municipal securities, the increased
likelihood of using a municipal advisor could lead to reduced issuance
costs and better financing terms for municipal entity clients, which
could improve capital formation and indirectly have a positive impact
on taxpayers. As discussed in the Proposal, one empirical study
suggests that the use of municipal advisors is associated with better
borrowing terms, lower reoffering yields, and narrower underwriter
gross spreads,\1830\ particularly in instances where the advisors are
of a higher quality.\1831\ Municipal advisors can play an important
role in the issuance process by successfully negotiating to lower these
costs. As these studies did not include advisory fees in calculating
the cost savings, it is possible that some of these savings may be
offset by the fees municipal entities and obligated persons pay to
municipal advisors.\1832\ Therefore, the Commission believes that the
final rules and forms could incentivize municipal entities and
obligated persons to use municipal advisors, which could encourage
municipal entities to issue debt (as opposed to pursuing other
financial options), thereby increasing capital formation.
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\1830\ See generally Vijayakumar and Daniels, supra note 34. See
also Proposal, 76 FR 874.
\1831\ See generally Allen and Dudney, supra note 38 (``For the
$16.8 million mean issue size in our sample, the present value
benefits of choosing a high-quality advisor for negotiated issues
are estimated to be $63,193 to $116,511 for 20-year term issues
($40,136 to $74,001 for ten-year term issues), depending on the
measure of advisor quality used, and $84,915 to $171,805 for revenue
issues ($53,933 to $109,121 for ten-year term issues).''). See also
Proposal, 76 FR 874.
\1832\ But see Allen and Dudney, supra note 38
(``[C]onversations with financial advisors lead us to believe that
fee differences between low and high advisors would not be large
enough to offset the interest savings from using a quality
advisor.'').
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c. Non-Resident Municipal Advisors
Rule 15Ba1-6 sets forth the general procedures for serving non-
residents on Form MA-NR. Pursuant to Rule 15Ba1-6 and the instructions
to Form MA-NR, each non-resident municipal advisor applying for
registration, at the time of filing of the municipal advisor's
application on Form MA, must file with the Commission a written
irrevocable consent and power of attorney on Form MA-NR to appoint an
agent in the United States upon whom may be served any process,
pleadings, or other papers in any action brought against the non-
resident person. In addition, each municipal advisor applying for
registration shall, at the time of filing the relevant Form MA-I, file
with the Commission a written irrevocable consent and power of attorney
on Form MA-NR for each non-resident general partner, non-resident
managing agent, and non-resident natural person who is a person
associated with the municipal advisor and engages in municipal advisory
activities on its behalf.\1833\ Rule 15Ba1-6(d) will require each non-
resident municipal advisor to provide an opinion of counsel that the
municipal advisor can, as a matter of law, provide the Commission with
access to the books and records of the municipal advisor and submit to
inspection and examination by the Commission.
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\1833\ See Rule 15Ba1-6(a)(2).
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Pursuant to Rule 15Ba1-6(b), any change to the name or address of
each agent for service of process must be communicated promptly to the
Commission by filing a new Form MA-NR. Rule 15Ba1-6(c) requires each
non-resident municipal advisor, general partner and managing agent of a
registered municipal advisor, and each natural person associated with a
registered municipal advisor that engages in municipal advisory
activities on its behalf to promptly appoint a successor agent for
service of process and file a new Form MA-NR if the non-resident
municipal advisor, general partner, managing agent, or associated
person discharges its identified agent for service of process or if its
agent for service of process is unwilling or unable to accept service
on behalf of the non-resident municipal advisor, general partner,
managing agent, or associated person. Rule 15Ba1-6(d) requires each
non-resident municipal advisory firm to provide an opinion of counsel
that the non-resident municipal advisory firm can, as a matter of law,
provide the Commission with access to its books and records and can, as
a matter of law, submit to inspection and examination by the
Commission.
Non-resident municipal advisors will incur costs to complete Form
MA-NR and obtain an opinion of counsel.\1834\ Non-resident municipal
advisory firms may incur one-time costs to establish new internal
controls, such as procedures for obtaining the information required by
Form MA-NR. These one-time costs are included in the estimates below.
In the Proposal, the Commission estimated that the initial cost for
non-resident municipal advisory firms, non-resident general partners,
and non-resident managing agents to complete Form MA-NR and for non-
resident municipal advisory firms to obtain an opinion of counsel that
the municipal advisory firm can provide prompt access to its books and
records and can be subject to onsite inspection and examination would
be approximately $8,300.\1835\ The Commission did not receive any
comments on this estimate. The Commission now estimates the initial PRA
cost to complete Form MA-NR and obtain opinions of counsel will be
approximately $12,042.\1836\ The
[[Page 67618]]
anticipated costs are higher than those estimated in the Proposal
because Commission staff is including certain associated persons in
this estimate.\1837\
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\1834\ See supra Section VII.D.5 (estimating the number of
persons required to complete Form MA-NR).
\1835\ $5,100 (estimated cost for non-resident municipal
advisory firms, non-resident general partners, and non-resident
managing agents to complete Form MA-NR) + $3,200 (estimated cost for
non-resident municipal advisory firms to obtain an opinion of
counsel) = $8,300. See Proposal, 76 FR 877.
\1836\ (48 hours (estimated initial hourly burden under the
rules for all respondents to complete a Form MA-NR) x $166 (combined
hourly rate for a Compliance Manager and Compliance Clerk)) + ((6
hours (estimated initial hourly burden under the rules for all
respondents to obtain opinion of counsel) x $379 (hourly rate for an
in-house attorney)) + (2 (non-resident municipal advisory firms
expected to provide opinion of counsel) x $900 (average estimated
cost to hire outside counsel for providing an opinion of counsel)))
= $12,042. See supra notes 1544-1548 and accompanying text
(estimating the initial hourly burden under the rules for all
respondents to complete a Form MA-NR and the initial hourly burden
under the rules for all respondents to obtain opinion of counsel);
supra note 1779 (discussing the hourly rate for an in-house
attorney); supra note 1812 (calculating the combined hourly rate).
\1837\ See supra Section III.A.6.a. The estimated costs are also
higher due to an increase in the hourly rate of an in-house attorney
and inclusion of the cost non-resident municipal advisory firms will
incur to hire outside counsel to provide an opinion of counsel.
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In addition, as discussed below, the Commission anticipates there
will be ongoing costs related to filing Form MA-NR.\1838\ In the
Proposal, the Commission estimated that the ongoing annual costs for
non-resident municipal advisory firms, non-resident general partners,
and non-resident managing agents to complete Form MA-NR and for non-
resident municipal advisory firms to obtain an opinion of counsel that
the municipal advisory firm can provide prompt access to its books and
records and can be subject to onsite inspection and examination would
be approximately $1,440.\1839\ The Commission did not receive any
comments on this estimate. The Commission now estimates that the
ongoing annual PRA cost for non-resident municipal advisory firms to
update Form MA-NR and/or file a new Form MA-NR and for non-resident
municipal advisory firms to obtain new opinions of counsel, as
described above, will be approximately $2,369.\1840\ The anticipated
costs are higher than those estimated in the Proposal due to an
increase in the hourly rate of an in-house attorney and inclusion of
the cost non-resident municipal advisory firms will incur to hire
outside counsel to provide an opinion of counsel.
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\1838\ Non-resident municipal advisors will incur recurring
costs to monitor and maintain the information required by Form MA-
NR. These costs are included in the estimates below.
\1839\ $340 (estimated ongoing annual cost for non-resident
municipal advisory firms, non-resident general partners, and non-
resident managing agents to complete Form MA-NR) + $1,100 (estimated
ongoing annual cost for non-resident municipal advisory firms to
obtain an opinion of counsel) = $1,440. See Proposal, 76 FR 877.
\1840\ (2 hours (estimated ongoing annual hourly burden under
the rules for respondents to complete a Form MA-NR) x $166 (combined
hourly rate for a Compliance Manager and Compliance Clerk)) + ((3
hours (estimated ongoing annual hourly burden under the rules for
all respondents to obtain opinion of counsel) x $379 (hourly rate
for an in-house attorney)) + (1 (non-resident municipal advisory
firms expected to provide opinion of counsel) x $900 (average
estimated cost to hire outside counsel for providing an opinion of
counsel))) = $2,369. See supra note 1556-1558 (estimating the
ongoing annual hourly burden under the rules for respondents to
complete a Form MA-NR and estimating the ongoing burden to provide
an opinion of counsel); supra note 1779 (discussing the hourly rate
for an in-house attorney); supra note 1812 (calculating the combined
hourly rate). This estimate is lower than the estimate in the
Proposal due to a reduction in the combined hourly rate. See supra
note 1812 (discussing the reduction in the combined hourly rate).
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d. Alternatives
One alternative to the rules and forms adopted today would be for
the Commission to make the temporary registration regime permanent. In
this alternative, municipal advisors currently registered under the
temporary registration regime would not incur the new costs to register
with the Commission.\1841\ Similarly, new entrants to the municipal
advisor market would incur the comparatively lower costs to register
under the temporary registration regime.\1842\ In establishing the
temporary registration regime, however, the Commission intended to
adopt a permanent registration regime that would, among other things,
require municipal advisors to provide more information on Form MA than
that required by Form MA-T, including information regarding conflicts
of interest and increased information regarding disciplinary history.
By requiring this additional information and requiring submission
through the Commission's EDGAR system, Commission staff will be able to
retrieve and analyze the data it needs more efficiently, which should
enhance the Commission's ability to carry out its mission with respect
to municipal advisory activities effectively. In addition, as discussed
above, the permanent registration regime could improve the municipal
advisor selection process and incentivize municipal advisors not to
engage in misconduct.\1843\
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\1841\ See supra Section VIII.D.3.b.
\1842\ See supra Section VIII.C.2.
\1843\ See supra Section VIII.D.3.b.
---------------------------------------------------------------------------
Similarly, the Commission believes that to make the temporary
registration regime permanent rather than to establish the permanent
registration regime adopted today may not enhance competition in the
market. As discussed above, the Commission believes that requiring
municipal advisors to disclose the information required by the final
rules and forms will lead to a number of benefits beyond the temporary
registration regime. For example, municipal entities, obligated
persons, the general public, and others will be able to access
information about municipal advisors electronically through the
Commission's EDGAR system and easily cross-reference information
submitted through IARD and CRD. Enhancing the ability of municipal
entities and obligated persons to compare and consider municipal
advisors in the municipal advisor selection process could result in
increased quality-based competition relative to the baseline, which
could, in turn, lead to reduced issuance costs and better financing
terms.\1844\
---------------------------------------------------------------------------
\1844\ See supra notes 1830-1832 and accompanying text.
---------------------------------------------------------------------------
The Commission also considered whether to provide an alternative
registration program for persons that are already registered with the
Commission in another capacity. Some commenters indicated that Form MA
is largely duplicative of other registration forms (e.g., Form BD, Form
ADV) required for other persons (e.g., broker-dealers, investment
advisers).\1845\ One commenter suggested persons already registered
with the Commission could check an additional box on their primary
registration forms, or the Commission could provide a short-form
registration process.\1846\
---------------------------------------------------------------------------
\1845\ See, e.g., SIFMA Letter I; Financial Services Roundtable
Letter; NASAA Letter.
\1846\ See SIFMA Letter I.
---------------------------------------------------------------------------
As discussed above, the Commission has determined not to create a
separate registration program for entities that are already registered
with the Commission in another capacity. The Commission does not
believe that such an approach would achieve the goal of creating a
registration system specific to municipal advisors. Form MA, while
modeled primarily on Form ADV and Form BD, is designed to capture
information regarding the activities of municipal advisors and the
markets that they serve that would not otherwise be captured in other
forms. This information will permit the Commission to decide whether to
grant or deny an application for registration; to manage the
Commission's regulatory and examination programs; and to make such
information available to the MSRB to better inform its regulation of
municipal advisors. In addition, having information about municipal
advisors in a single location could improve the municipal advisor
selection process.\1847\
---------------------------------------------------------------------------
\1847\ See supra Section VIII.D.3.b.
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Further, the Commission believes that, based on the expertise and
experience of its enforcement and examinations staff, for purposes of
regulation, it is appropriate to collect information regarding the
financial industry and other activities of associated persons involved
in the municipal securities market, including swap dealers, major swap
participants,
[[Page 67619]]
and engineers and engineering firms. The Commission believes that to
allow investment advisers to register as municipal advisors using Form
ADV would not provide comparable information about certain associated
persons of municipal advisors.
In addition, requiring municipal advisors to file a registration
form specifically tailored to their municipal advisory activities is
consistent with the broader public interest to make available to the
public information about municipal advisors. Absent a form specific to
municipal advisors, a municipal entity or obligated person seeking
information about a municipal advisor may not realize that the data was
available on Form BD or Form ADV. The Commission believes that persons
seeking to compile, compare, and analyze data pertaining to the entire
universe of registered municipal advisors, and regulators overseeing
compliance with the rules and regulations applicable to municipal
advisors, should be able to access relevant information easily within
one system.\1848\
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\1848\ The ability to incorporate by reference any required
information about the disciplinary history of an applicant or
associated person from a DRP or other disclosure that already has
been filed relieves the regulatory burden on applicants who can do
so. However, the Commission recognizes that such incorporation by
reference may make it somewhat more difficult for regulators and
other market participants to compile, compare, and analyze data
regarding municipal advisors within one system.
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As proposed and adopted, Form MA will permit municipal advisors, to
the extent that the disclosures required on Form MA have been disclosed
on Form ADV or BD, to incorporate such information by reference.\1849\
Specifically, each of the DRPs of Form MA permits incorporation by
reference to DRPs with similar disclosure requirements that are already
on file with regulators. The disclosures required on the DRPs are
generally the disclosures where the most significant amount of detail
is requested on Form MA and on which applicants will likely need to
expend the most time and effort.\1850\ The Commission believes allowing
incorporation by reference is appropriate because it will reduce
redundancy and costs that some municipal advisors will incur in
completing Form MA.\1851\
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\1849\ See supra Section III.A.2.
\1850\ See supra Section III.A.2.b.
\1851\ As discussed above, the Commission's estimates of the
time required to complete Form MA and Form MA-I represent averages.
The Commission emphasizes that, depending on the specific
circumstances of the municipal advisory firm, the initial burden to
complete Form MA and Form MA-I will vary greatly from respondent to
respondent given uncertainty about the number of municipal advisors
that will incorporate by reference and the extent of information
that will be incorporated by reference. Accordingly, although Form
MA and Form MA-I generally allow incorporation by reference of
certain information, the Commission does not have the information
necessary to provide a reasonable estimate of the extent to which
the ability to incorporate by reference will reduce the burden
estimates for Form MA and MA-I for a particular firm.
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Another alternative to the rules and forms adopted today would be
to require, as the Commission proposed, each natural person municipal
advisor to register with the Commission on Form MA-I separately. The
Commission received several comments objecting to this requirement.
Some commenters argued that there was no statutory justification to
register natural persons as municipal advisors separately.\1852\
Commenters also stated that registering individuals would be
excessively burdensome,\1853\ including on small municipal
advisors.\1854\ Another commenter stated that dual reporting on Form MA
and Form MA-I could lead to confusion and inadvertent inconsistencies
in the information.\1855\ As discussed above, the Commission has
decided not to require natural person municipal advisors (other than
sole proprietors) to register as municipal advisors (although such
persons will be subject to the other requirements of the municipal
advisor regulatory regime).\1856\ Had the Commission required natural
person municipal advisors to register with the Commission, these
persons would have incurred aggregate costs of approximately
$5,602,500.\1857\ The Commission recognizes, however, that municipal
advisory firms will now bear this cost to submit Form MA-I for natural
person municipal advisors, which as discussed above will be
$5,602,500.\1858\
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\1852\ See, e.g., SIFMA Letter I; MSRB Letter.
\1853\ See, e.g., SIFMA Letter I; Deloitte Letter.
\1854\ See, e.g., Acacia Financial Group Letter.
\1855\ See Deloitte Letter.
\1856\ See supra Section III.A.2.a.
\1857\ 33,750 (estimated initial burden for completion and
submission of Form MA-I during the first year) x $166 (combined
hourly rate for a Compliance Manager and Compliance Clerk) =
$5,602,500. See supra note 1495 and accompanying text; supra note
1812 (calculating the combined hourly rate).
\1858\ See supra note 1857 and accompanying text.
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4. Books and Records To Be Made and Maintained by Municipal Advisors
(Rule 15Ba1-8)
As part of the permanent registration regime mandated by the Dodd-
Frank Act, Rule 15Ba1-8 sets forth requirements for books and records
relating to the business of municipal advisors. Among other things, the
rule requires that municipal advisory firms maintain and preserve all
books and records required to be made and kept under the rule for a
period of not less than five years, the first two years in an easily
accessible place.\1859\
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\1859\ See supra Section III.C.
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a. Recordkeeping Costs and Benefits
Municipal advisors are likely to incur a number of costs in
connection with the recordkeeping requirements, including recurring
costs related to the maintenance and storage of books and records, as
required by the rule. Municipal advisory firms will also need to
provide applicable training to ensure compliance with the recordkeeping
requirements. In the Proposal, the Commission estimated that the
ongoing annual labor cost for all municipal advisory firms to comply
with the recordkeeping requirement would be approximately
$9,050,000.\1860\ The Commission now estimates that the annual labor
cost for all municipal advisory firms to comply with the recordkeeping
requirement will be approximately $8,777,860.\1861\
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\1860\ See Proposal, 76 FR 878.
\1861\ 910 (number of Form MA applicants) x 182 hours (estimated
average hourly burden for municipal advisory firms to comply with
the books and records requirement) x $53 (hourly rate for a General
Clerk) = $8,777,860. See supra notes 1688-1691 and accompanying
text. The $53 per hour figure for a General Clerk is from the
SIFMA's Office Salaries in the Securities Industry 2012, as modified
by Commission staff to account for an 1,800-hour work-year and
multiplied by 2.93 to account for bonuses, firm size, employee
benefits, and overhead. The Commission is updating the hourly rate
for a General Clerk from $50 to $53 to conform to SIFMA's Office
Salaries in the Securities Industry 2012. This estimate is lower
than the estimate in the Proposal because the Commission estimates
there will be fewer initial Form MA applicants than was estimated in
the Proposal. See supra notes 1442-1446 and accompanying text.
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Municipal advisors should already maintain books and records as
part of their day-to-day operations. The recordkeeping requirement,
however, provides specific parameters relating to the retention and
maintenance of certain books and records that may be more extensive
than current market practices. Nevertheless, the Commission does not
believe that currently operating municipal advisory firms that already
keep business records similar to those required by the rule will be
subject to significant additional recordkeeping costs as a result of
the rule. For example, municipal advisors already registered with the
Commission as broker-dealers and/or investment advisers likely already
retain this type of information.
As noted above, the Commission recognizes that these costs may
impact those municipal advisory firms that are not already registered
under another
[[Page 67620]]
regulatory regime to a greater degree than they would impact municipal
advisory firms that have previously registered as investment advisers
or brokers-dealers. With respect to the books and records requirements
of Rule 15Ba1-8, the Commission currently anticipates that municipal
advisory firms may incur one-time costs in establishing the new
internal controls and systems necessary to comply with the
recordkeeping requirements of the rule. The Commission believes that
the costs to establish new internal controls will be less for municipal
advisory firms that are currently regulated with respect to their other
activities because the final rule allows some records to be maintained
in compliance with those other regulations.\1862\ The Commission does
not have the information necessary to provide a reasonable estimate of
the difference in costs for firms that already have internal controls
and systems because these internal controls and systems vary from firm
to firm. The Commission believes that these costs may also be reduced
for municipal advisory firms that have voluntarily adopted similar
recordkeeping practices.\1863\ The Commission anticipates, however,
that these costs may be higher for solicitors and for other municipal
advisory firms that are not otherwise regulated or have not voluntarily
adopted similar recordkeeping practices.
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\1862\ See Rule 15Ba1-8(e)(1). The Commission's estimated
average burden to comply with the recordkeeping requirements
includes the costs to establish new internal controls and systems
necessary to comply with the recordkeeping requirements. However,
the Commission recognizes that those firms should realize reduced
costs by leveraging the existing internal controls and systems, as
well as familiarity with books and records requirements under other
regulatory regimes.
\1863\ The Commission does not have the information necessary to
provide a reasonable estimate of the difference in costs for firms
that already have voluntarily adopted similar recordkeeping
practices because these recordkeeping practices vary from firm to
firm. However, the Commission recognizes that to the extent these
recordkeeping practices are already in place, certain municipal
advisors should incur lower costs to comply than those that do not
have recordkeeping practices in place.
---------------------------------------------------------------------------
The Commission has made two substantive modifications to the
recordkeeping requirements since the Proposal. As discussed above, Rule
15Ba1-8(a)(2) will require municipal advisors to maintain general
ledgers, a requirement that was inadvertently left out of proposed Rule
15Ba1-7.\1864\ In addition, as discussed above, Rule 15Ba1-8(a)(8) will
require each municipal advisory firm to retain written consents to
service of process from each natural person who is a person associated
with the municipal advisor and engages in municipal advisory activities
solely on behalf of such registered municipal advisor.\1865\ In light
of these changes, the Commission now estimates that the average annual
burden for a municipal advisory firm to comply with the recordkeeping
requirements will be approximately 182 hours.
---------------------------------------------------------------------------
\1864\ See supra notes 1359-1360 and accompanying text.
\1865\ See supra Section VII.D.7.
---------------------------------------------------------------------------
One commenter argued that the information technology and storage
facilities required for all email or similar electronic communications
is expensive. The commenter believed that, regardless of whether a firm
were to develop a technology solution in-house or hire an IT
professional, the cost would be significant to firms, especially those
with limited revenue.\1866\ This commenter, however, did not provide
specific figures by which to recalculate the Commission's estimate,
making it difficult to evaluate these assertions.
---------------------------------------------------------------------------
\1866\ See NAIPFA Letter.
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As stated above, the books and records estimate, as proposed, was
meant to include storage costs and any needed technology refinements or
upgrades. The Commission staff understands based on discussions with
market participants that, although larger financial institutions may
generally need to invest in more expensive technology solutions to
manage their recordkeeping, smaller municipal advisory firms with
smaller clienteles may not require significant expenditures on storage
and technology to the extent they retain most of their records in their
existing email systems.\1867\ Furthermore, the Commission staff
understands that many of the smallest municipal advisory firms and sole
proprietors may use third-party electronic mail systems that offer free
and effectively unlimited cloud storage and would be less likely to
incur significant storage costs. For these reasons, the Commission
believes that the variety of technology and storage solutions, and
their resulting costs, are properly accounted for in the cost
estimates.
---------------------------------------------------------------------------
\1867\ Larger firms that already have technology solutions in
place would likely incur lower costs than those that need to develop
new technology solutions.
---------------------------------------------------------------------------
Another commenter asserted that the Commission used an hourly rate
for the books and records cost that was too low for small entity
municipal advisors. The commenter argued, ``[t]he figure [of 181 hours]
was based on record keeping by `General Clerks' at $50 per hour. If
similar rules are imposed on Small Entity Municipal Advisors (many of
whom are solo practitioners) that do not typically have `General
Clerks,' the correct hourly rate should be $170 per hour (a figure
frequently used by the Commission in the Release), which would equate
to $30,770 per advisor.'' \1868\
---------------------------------------------------------------------------
\1868\ See Joy Howard WM Financial Strategies Letter.
---------------------------------------------------------------------------
While the Commission acknowledges that small municipal advisors do
not typically employ General Clerks and that, in many cases, the
municipal advisory professional himself may be responsible for
maintaining the books and records of the firm, the Commission does not
believe that it should use a higher hourly rate to estimate the
recordkeeping burden for small municipal advisors for several reasons.
The 182-hour estimate is an average annual hourly burden across all
firms regardless of their size, and is based on the Commission's
experience with other regulatory regimes. The Commission anticipates
that larger municipal advisory firms that offer a variety of services
to municipal entities and have significantly greater volumes of books
and records will incur an annual burden greater than 182 hours, while
smaller municipal advisory firms that have significantly lower volumes
of books and records will incur an annual burden lower than 182 hours.
Similarly, the $53 figure is an average hourly rate across all firms
regardless of their size and is inclusive of the variability of costs
across municipal advisors. The Commission does not have the information
necessary to provide reasonable estimates of the differences in hourly
burden among firms of various sizes, a separate average hourly burden
for small entity municipal advisors, or the differences in hourly rates
among firms of various sizes. The Commission is also unaware of any
such data being publicly available. The Commission staff also
understands that some small municipal advisors employ part-time staff
to perform certain business and clerical functions and that the costs
of such employees are less likely to reflect the costs for compliance
personnel at larger municipal advisory firms or the hourly rate
suggested by the commenter. The Commission assumes that municipal
advisors will use the most cost-effective approach available, depending
on their size and specific circumstances, to comply with the
recordkeeping requirement. Accordingly, the Commission does not believe
that it should use a higher hourly rate to estimate the
[[Page 67621]]
recordkeeping burden for small municipal advisors.
However, as stated above, the Commission believes that small
municipal advisory firms will likely incur lower annual costs for
maintaining books and records than larger firms. The Commission
recognizes that, although small municipal advisory firms and solo
practitioners may maintain their books and records without a general
clerk or additional staff assistance, such activity would not be
costless. The Commission believes that it is appropriate to assume
that, because small firms will utilize the most cost-effective approach
available, per-hour costs attributable to the books and records
requirements will be, at most, equivalent to the hourly rate for a
General Clerk. Therefore, the Commission uses the hourly rate for a
General Clerk to estimate the average cost across all municipal
advisory firms, regardless of size. The Commission also addresses the
burden for smaller municipal advisory firms in the Final Regulatory
Flexibility Analysis below.\1869\
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\1869\ See infra Section IX.
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Despite these costs, as discussed above, the recordkeeping
requirements will benefit the municipal securities market by enhancing
the Commission's ability to oversee municipal advisors.\1870\
Recordkeeping requirements are a familiar and important element of the
Commission's approach to investment adviser and broker-dealer
regulation, and are designed to maintain the efficiency and
effectiveness of the Commission's examination program for regulated
entities, which facilitates the Commission's review of their compliance
with statutory mandates and with Commission rules.
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\1870\ See supra Section VIII.D.1.a.
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b. Alternatives
As an alternative to the recordkeeping requirement adopted today,
the Commission considered creating a unique recordkeeping requirement
for municipal advisors different from the standard recordkeeping
practices under federal securities law. The Commission has determined
not to create a unique recordkeeping requirement because it expects
that many entities already registered with the Commission in another
capacity, such as investment advisers and broker-dealers, would likely
incur higher, and in many ways redundant, costs to comply with this
type of regime. As discussed above, the Commission estimates that the
average hourly burden for municipal advisory firms to comply with the
books and records requirement will be approximately 182 hours per
year.\1871\ The Commission anticipates that the average hourly burden
estimate would be higher to the extent the alternative recordkeeping
requirement did not allow entities to maintain books and records in a
manner consistent with other regulations under the securities laws. As
discussed above, with respect to the recordkeeping requirement adopted
today, the Commission believes costs may be reduced for firms that are
currently registered with the Commission with respect to their other
activities (because the final rule allows some records to be maintained
in compliance with those other regulations) and for firms that have
voluntarily adopted similar recordkeeping practices.\1872\ If the
Commission established a unique recordkeeping requirement for municipal
advisors, the Commission believes that many municipal advisors would
incur higher costs due to the inability to leverage experience,
systems, and practices developed to comply with the similar
recordkeeping practices under federal securities law.
---------------------------------------------------------------------------
\1871\ See supra Section VII.D.8.
\1872\ See supra note 1862-1863 and accompanying text.
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5. Exclusions From the Definition of Municipal Advisor
a. Programmatic, Registration, and Recordkeeping Costs and Benefits
As discussed above,\1873\ the Dodd-Frank Act included a number of
statutory exclusions from the definition of municipal advisor.\1874\
The Commission is adopting interpretations of these statutory
exclusions that are consistent with the Commission's understanding of
Congress's intent not to provide blanket exclusions from the municipal
advisor regulatory regime for underwriters, registered investment
advisers, commodity trading advisors, attorneys, and engineers,
regardless of the activities in which they are engaged. In adopting
these interpretations, the Commission has considered the programmatic,
registration, and recordkeeping costs that these persons would incur
absent an exclusion from the definition of municipal advisor.
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\1873\ See supra Section III.A.1.c.
\1874\ Section 15B(e)(4)(C) of the Exchange Act provides that
the term municipal advisor does not include (1) a broker, dealer, or
municipal securities dealer serving as an underwriter (as defined in
Section 2(a)(11) of the Securities Act); (2) any investment adviser
registered under the Investment Advisers Act, or persons associated
with such investment advisers who are providing investment advice;
(3) any commodity trading advisor registered under the CEA or
persons associated with a commodity trading advisor who are
providing advice related to swaps; (4) attorneys offering legal
advice or providing services that are of a traditional legal nature;
or (5) engineers providing engineering advice. See 15 U.S.C. 78o-
4(e)(4)(C).
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Given the limitations on the Commission's ability to conduct a
quantitative assessment of the programmatic costs and benefits
associated with interpreting the statutory exclusions,\1875\ the
Commission has considered the programmatic costs and benefits primarily
in qualitative terms. In addition, the Commission has quantified many
of the registration and recordkeeping costs that result from the final
rules and forms. Relying primarily on the programmatic, registration,
and recordkeeping costs and benefits, the Commission believes it is
possible to identify those persons that, because of the activities in
which they engage, appear to be the types of persons for which the
other statutory requirements of Section 975 of the Dodd-Frank Act were
not intended.
---------------------------------------------------------------------------
\1875\ See supra note 1742.
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As discussed above, persons subject to the municipal advisor
regulatory regime are subject to programmatic, registration, and
recordkeeping costs. As indicated throughout this release, and as
discussed further below, the Commission is mindful of these costs and
has interpreted the statutory exclusions in a manner that is consistent
with the purposes of Section 15B of the Exchange Act to regulate
persons that engage in municipal advisory activities and that is
intended to help minimize compliance burdens. The Commission's
interpretations of the statutory exclusions are designed to reduce
redundant regulation of entities engaged in activities related to
municipal entities that are appropriately regulated under another
regime. Accordingly, the Commission is adopting an interpretation of
the statutory exclusion for underwriters that applies only to those
underwriters that engage in municipal advisory activities that are
within the scope of an underwriting.\1876\ The Commission is also
adopting an interpretation of the statutory investment adviser
exclusion that would permit a registered investment adviser to provide
advice concerning the investment of proceeds of municipal securities,
but not advice concerning whether and how to issue municipal
securities, advice concerning the structure, timing, and terms of an
issuance of municipal securities and
[[Page 67622]]
other similar matters, advice concerning municipal derivatives, or a
solicitation of a municipal entity or obligated person, without
registering as a municipal advisor.\1877\ Similarly, the Commission is
adopting an interpretation of the statutory commodity trading advisor
exclusion that is limited to registered commodity trading advisors and
associated persons thereof providing advice related to swaps in the
capacity as a registered commodity trading advisor that is subject to
the Commodity Exchange Act.\1878\ The interpretations of the statutory
attorney exclusion and the statutory engineering exclusion the
Commission is adopting today are designed to permit attorneys to offer
legal advice or provide services that are of a traditional legal nature
\1879\ and engineers to provide engineering advice \1880\ without
having to register with the Commission as a municipal advisor. The
Commission does not believe that imposing an additional layer of
regulation, including the fiduciary duty imposed upon municipal
advisors when advising municipal entities, on the persons described
above would provide benefits that would justify the burden (i.e., the
programmatic, registration, and recordkeeping costs discussed
throughout the economic analysis) of municipal advisor regulation.
---------------------------------------------------------------------------
\1876\ See Rule 15Ba1-1(d)(2)(i). In response to comments, the
Commission is also providing lists of activities that the Commission
would consider to be within or outside the scope of an underwriting.
See supra Section III.A.1.c.iv.
\1877\ See Rule 15Ba1-1(d)(2)(ii).
\1878\ See Rule 15Ba1-1(d)(2)(iii). Under this exclusion, a
registered commodity trading advisor could provide advice relating
to swaps without registering as a municipal advisor.
\1879\ See Rule 15Ba1-1(d)(2)(iv).
\1880\ See Rule 15Ba1-1(d)(2)(v).
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Because the Commission's interpretations of the statutory
exclusions are consistent with Section 15B(e) of the Exchange Act, the
Commission believes that those persons that do not currently qualify
for a statutory exclusion should already be registered with the
Commission and the MSRB under the temporary registration regime.
Accordingly, because the Commission has interpreted the statutory
exclusions consistent with the statute, the number of persons for which
a statutory exclusion is available should not change significantly and
any differences from the baseline with regard to the number of
municipal advisors required to register with the Commission and the
MSRB should be minimal. The Commission also believes that any
differences from the baseline with regard to the programmatic costs and
benefits related to the statutory requirements and MSRB rules that are
currently operative should be minimal because they would have already
been incurred under the temporary registration regime. In addition,
there should be no significant impact on efficiency, competition, and
capital formation relative to the baseline because those market
participants for which an exclusion is not available should have
already registered with the Commission and the MSRB under the temporary
registration regime and be complying with the requirements of Section
15B of the Exchange Act and MSRB rules.
Those persons who provide municipal advisory services and are not
excluded from the definition of municipal advisor as described above,
however, will incur the programmatic, registration, and recordkeeping
costs of the municipal advisor regulatory regime. Accordingly,
underwriters that engage in municipal advisory activities outside the
scope of underwriting an issuance of municipal securities; investment
advisers that provide advice concerning whether and how to issue
municipal securities, advice concerning the structure, timing, and
terms of issuances of municipal securities and other similar matters,
advice concerning municipal derivatives, or a solicitation; commodity
trading advisors that are not a registered commodity trading advisor or
that provide advice with respect to an issuance of municipal securities
or any municipal financial product other than a swap; attorneys that
represent themselves as financial advisors or financial experts in
connection with the issuance of municipal securities or municipal
financial products and engage in municipal advisory activities; and
engineers that provide municipal advisory activities beyond engineering
advice, will incur the programmatic, registration, and recordkeeping
costs discussed throughout this release.
The Commission believes such persons should continue to be subject
to the municipal advisor regulatory regime, including a fiduciary duty
to municipal entity clients and the standards of conduct, training, and
testing as may be required by the Commission or the MSRB, and other
requirements as may be imposed by the MSRB.\1881\ As discussed above,
the Commission believes that the municipal advisor regulatory regime
could incentivize municipal advisors not to engage in misconduct
relative to the baseline because of the enhanced disclosure
requirements of the permanent registration regime.\1882\ Municipal
advisors will continue to be subject to Commission oversight, including
periodic examinations, and may be subject to disciplinary action for
misconduct.\1883\ In addition, certain municipal advisors will now be
subject to periodic examinations by FINRA to evaluate compliance with
the Exchange Act, the rules and regulations thereunder, and MSRB
rules.\1884\
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\1881\ While the underwriting activities of brokers, dealers,
and municipal securities dealers in connection with an issuance of
municipal securities are currently subject to MSRB rules, those
rules generally do not apply to municipal advisory activities that
are outside the scope of an underwriting.
\1882\ See supra Section VIII.D.1.a.
\1883\ See supra note 1680 and accompanying text.
\1884\ See 15 U.S.C. 78o-4(b)(2)(E); 15 U.S.C. 78o-
4(c)(7)(A)(iii).
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b. Alternatives
One alternative to the rules adopted today would be for the
Commission not to engage in additional rulemaking, and thus, not to
further clarify the statutory exclusions from the definition of
municipal advisor. As discussed above,\1885\ the Commission believes
that the assessment costs associated with determining whether a person
would be required to register as a municipal advisor would be greater
in the absence of the rules the Commission is adopting today. Without
these rules, market participants would still need to analyze whether
their activities fall within a statutory exclusion and would likely
need to seek no-action relief and other guidance from the Commission or
Commission staff, or risk failing to register with the Commission as
required.\1886\ The Commission believes that the final rules provide
extensive guidance to market participants that should reduce the number
of requests for no-action relief and other guidance from the Commission
or Commission staff, which, in turn, should lead to lower assessment
costs for many firms.\1887\
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\1885\ See supra Section VIII.D.1.c.
\1886\ In addition, without this guidance, a greater number of
market participants would likely decide to register as municipal
advisors unnecessarily and thereby incur the programmatic,
registration, and recordkeeping costs of the municipal advisor
regulatory regime.
\1887\ See supra Section VIII.D.1.c.
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The Commission also considered whether to interpret the statutory
exclusions using a status-based approach, as suggested by commenters,
rather than an activity-based approach. For example, some commenters
called for an exclusion for broker-dealers that would exclude broker-
dealers based on their status as a regulated entity.\1888\ Similarly,
some commenters argued that the statute excludes any registered
[[Page 67623]]
investment adviser, without limitation.\1889\
---------------------------------------------------------------------------
\1888\ See supra note 580 and accompanying text.
\1889\ See, e.g., Vanguard Letter; IAA Letter; ICI Letter.
---------------------------------------------------------------------------
Although persons excluded under a status-based approach would not
incur the programmatic, registration, and recordkeeping costs of the
regulatory regime, the Commission has determined that to provide
status-based exclusions would be inconsistent with the purposes of the
Dodd-Frank Act to regulate persons that engage in municipal advisory
activities. The Commission believes that a status-based approach would
permit many persons to provide municipal advisory services without
being subject to the regulatory regime, which could cause municipal
entities and obligated persons to receive municipal advice without the
protections of the regime and limit the Commission's ability to oversee
the municipal advisory activities of those excluded persons. The
Commission believes these other regimes are not designed to address
directly municipal advisory activities and may not provide similar
protections to municipal entities and obligated persons. In addition,
persons excluded under a status-based approach would not be required to
register with the Commission, which would reduce any benefits of the
permanent registration regime to the municipal advisor selection
process.\1890\ The Commission is also concerned that interpreting the
exclusions using a status-based approach could create inappropriate
competitive advantages for covered categories of market participants.
---------------------------------------------------------------------------
\1890\ See supra Section VIII.D.3.b.
---------------------------------------------------------------------------
Another alternative the Commission considered was to interpret some
of the statutory exclusions in a manner that would allow otherwise
regulated persons to engage in municipal advisory activities that are
solely incidental to their regulated activities. Some commenters stated
that the Commission should exclude from registration broker-dealers
that provide advice that is solely incidental to a transaction, similar
to the broker-dealer exclusion under Section 202(a)(11)(C) of the
Investment Advisers Act.\1891\ Another commenter expressed concern that
commodity trading advisers that provide ancillary services in
connection with advice related to swaps would need to register as
municipal advisors if the ancillary services fall within the scope of
municipal advisory activities and are not deemed to be the type of
advice described in the commodity trading advisor exclusion.\1892\
---------------------------------------------------------------------------
\1891\ See supra note 580 and accompanying text.
\1892\ See MFA Letter.
---------------------------------------------------------------------------
The Commission does not believe it is necessary to interpret the
statutory exclusions in a manner that would permit municipal advisory
activities that are solely incidental to other regulated activities,
and believes that the result would be substantially similar to a
status-based approach.\1893\ Interpreting the statutory exclusions in
this manner could result in a difficult facts-and-circumstances
analysis to determine whether the exclusions apply, which is unlikely
to result in any assessment savings. In addition, the Commission has
provided additional exemptions that would limit the circumstances under
which a person could be considered a municipal advisor and the range of
municipal financial products to which duplicative regulation could
apply.\1894\
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\1893\ See supra notes 1888-1890 and accompanying text.
\1894\ For example, the Commission is providing an exemption for
any person engaging in municipal advisory activities in a
circumstance in which a municipal entity or obligated person is
otherwise represented by an independent registered municipal
advisor. See Rule 15Ba1-1(d)(3)(vi). In addition, the Commission is
exempting from the definition of municipal advisor persons that
provide advice with respect to investment strategies that are not
plans or programs for the investment of the proceeds of municipal
securities or the recommendation of and brokerage of municipal
escrow investments. See Rule 15Ba1-1(d)(3)(vii).
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6. Exemptions From the Definition of Municipal Advisor
a. Programmatic, Registration, and Recordkeeping Costs and Benefits
As discussed above,\1895\ the Dodd-Frank Act granted the Commission
authority to conditionally or unconditionally exempt, by rule or order,
upon its own motion or upon application, any municipal advisor or class
of municipal advisors from any provision of Section 15B of the Exchange
Act or the rules or regulations thereunder, if the Commission finds
that such exemption is consistent with the public interest, the
protection of investors, and the purposes of Section 15B.\1896\ The
final rules provide exemptions from the definition of municipal
advisor, subject to specified conditions, for (1) public officials and
employees of municipal entities and obligated persons; (2) banks; (3)
swap dealers; (4) accountants; (5) persons engaging in municipal
advisory activities with a municipal entity or obligated person that is
represented by an independent registered municipal advisor; and (6)
persons responding to RFPs or RFQs. As discussed below, the Commission
believes that these exemptions are consistent with the public interest,
the protection of investors, and the purposes of Section 15B. In
providing these exemptions, the Commission has considered the
programmatic, registration, and recordkeeping costs, which are
discussed throughout the economic analysis, that these persons would
incur absent an exemption from the definition of municipal advisor. The
Commission has designed these exemptions to provide that municipal
entities and obligated persons receive municipal advisory services with
the protections of the municipal advisor regulatory regime.
---------------------------------------------------------------------------
\1895\ See supra Section III.A.1.c.
\1896\ See 15 U.S.C. 78o-4(a)(4).
---------------------------------------------------------------------------
Given the limitations on the Commission's ability to conduct a
quantitative assessment of the programmatic costs and benefits
associated with providing these exemptions,\1897\ the Commission has
considered these costs and benefits primarily in qualitative terms. In
addition, the Commission has quantified many of the registration and
recordkeeping costs that result from the final rules and forms. Relying
primarily on the programmatic, registration, and recordkeeping costs
and benefits, the Commission believes it is possible to identify those
persons that, because of the activities in which they engage, appear to
be the types of persons for which the other statutory requirements of
Section 975 of the Dodd-Frank Act were not intended.
---------------------------------------------------------------------------
\1897\ See supra note 1742.
---------------------------------------------------------------------------
The Commission is exempting from the definition of municipal
advisor: (1) Any 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 person is acting within the
scope of such person's official capacity; and (2) 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.\1898\ The
Commission believes that this exemption will significantly reduce the
number of individuals who would otherwise have needed to register as
municipal advisors. Some commenters
[[Page 67624]]
asserted that, as proposed, thousands of board members would be
required to register as municipal advisors.\1899\
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\1898\ See Rule 15Ba1-1(d)(3)(ii). See also supra note 507 and
accompanying text (discussing the Commission's interpretation of the
statutory exclusion from the definition of ``municipal advisor'' for
employees of municipal entities by exempting such employees ``to the
extent that such person is acting within the scope of such person's
employment'').
\1899\ See, e.g., Bachus Letter; Marchant Letter.
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The Commission believes the programmatic, registration, and
recordkeeping costs such board members would incur would not justify
the benefits of registration for a number of reasons. The Commission
believes that individuals who engage in deliberative and decision-
making functions with respect to municipal financial products or the
issuance of municipal securities as part of their duties as members of
a governing body should not have to register as municipal advisors
because they are agents of the municipal entity that is the intended
recipient of the protections of the municipal advisor regulatory
regime. Board members and other officials (appointed and elected alike,
as well as their duly appointed designees) may be subject to state and
local law, including fiduciary duties and ethics laws, and the
statutory qualifications for such members' board position may be
significant to the mission of the municipal entity. In addition, as
noted by commenters, there would be costs to municipal entities as the
requirement to register as a municipal advisor could reduce the number
of persons willing to volunteer for boards or could limit what
volunteers would say. The Commission believes this exemption
appropriately balances consideration of the need to protect municipal
entities with the preservation of volunteer services by not requiring
board members to register as municipal advisors.
The Commission is also providing exemptions from the definition of
municipal advisor for certain market participants: banks, accountants,
and swap dealers. As discussed above, persons subject to the municipal
advisory regulatory regime are subject to a series of programmatic,
registration, and recordkeeping costs. The Commission is exempting from
the definition of municipal advisor banks engaging in certain municipal
activities,\1900\ certain swap dealers, and certain accountants.\1901\
These exemptions are designed to reduce redundant regulation of
entities engaged in activities related to municipal entities that are
appropriately regulated under another regime. The Commission does not
have the information necessary to provide a reasonable estimate of the
number of persons who will rely on these exemptions because Form MA-T
does not collect data on banks, swap dealers, or accountants. To the
extent these entities are not required to register as municipal
advisors because of an exemption, they will not incur the programmatic,
registration, and recordkeeping costs discussed throughout the economic
analysis, and thus, will realize cost savings.
---------------------------------------------------------------------------
\1900\ See Rule 15Ba1-1(d)(3)(iii). Because the Commission is
exempting from the definition of municipal advisor persons that
provide advice with respect to ``investment strategies that are not
plans or programs for the investment of the proceeds of municipal
securities or the recommendation of and brokerage of municipal
escrow investments'' (see Rule 15a1-1(d)(2)(vii)), the Commission
believes that the performance of many of the bank activities and
services about which commenters were concerned will not require
banks to register as municipal advisors.
\1901\ The Commission is exempting from the definition of
municipal advisor any accountant 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. See Rule 15Ba1-
1(d)(3)(i).
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The Commission does not believe that imposing an additional layer
of regulation, including the fiduciary duty imposed upon municipal
advisors when advising municipal entities, on these persons would
provide benefits that would justify the burden (i.e., the programmatic,
registration, and recordkeeping costs discussed throughout the economic
analysis) of municipal advisor regulation.\1902\ Those persons that
provide municipal advisory services beyond the activities described
above, and thus, that do not qualify for one of the exemptions,
however, will incur the programmatic, registration, and recordkeeping
costs of the municipal advisor regulatory regime. The Commission
believes that the exemption for banks will help ensure that parties
engaging in key municipal advisory activities are registered, while
permitting banks to continue to provide banking services to municipal
entities and obligated persons for which they are currently subject to
regulation.\1903\ Similarly, the final rule provides exemptions for
registered swap dealers that are consistent with the exemptions
promulgated under Title VII of the Dodd-Frank Act.\1904\ The Commission
believes it is appropriate to provide an accountant exemption that
includes accountants providing audit or other attest services since
both audit and other attest services are generally subject to
regulation and professional standards (including independence
requirements) \1905\--requirements that could potentially conflict with
a municipal advisor's fiduciary duty to its municipal entity
clients.\1906\
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\1902\ The Commission received a number of comments about the
costs that would be imposed on banks under the Proposal. See, e.g.,
Old Point Bank Letter; Union Bank Letter; Texas Bankers Association
Letter; American Bankers Association Letter II. These comment
letters are discussed extensively earlier in this release.
\1903\ To the extent a bank provides advice with respect to a
municipal derivative or engages in any other non-exempted municipal
advisory activity through a SID, Rule 15Ba1-1(d)(4) will permit the
SID to register as a municipal advisor rather than the bank itself.
The Commission believes that permitting SIDs to register instead is
in the public interest in that it will ensure that municipal
entities and obligated persons receive the regulatory protection
intended by the statute while not imposing the burdens of the
municipal advisor regulatory regime (i.e., the programmatic,
registration, and recordkeeping costs discussed throughout the
economic analysis) on the bank as a whole.
\1904\ The final rule exempts any registered swap dealer to the
extent that such dealer recommends a municipal derivative or a
trading strategy that involves a municipal derivative for sale by
such dealer or an affiliated registered swap to a municipal entity
or obligated person, provided that the dealer meets any applicable
safe harbor requirements for parties to such transactions under the
CFTC's regulatory regime. See supra Section III.A.1.c.vi. The
Commission notes that swap dealers will incur costs to qualify for
the exemption under the applicable regulatory regime, and that these
costs will likely be lower than the programmatic, registration, and
recordkeeping costs of the municipal advisor regulatory regime.
\1905\ See AICPA Code of Professional Conduct ET 201.01, 202.01.
See also AICPA Attestation Standards AT Sec. 101.06 (providing that
``[a]ny professional service resulting in the expression of
assurance must be performed under AICPA professional standards that
provide for the expression of such assurance'').
\1906\ See AICPA Attestation Standards AT Sec. 101.35, 101.36.
Accountants providing attest services are also required to meet
general standards related to adequate technical training and
proficiency; adequate knowledge of subject matter; suitability and
availability of criteria; and the exercise of due professional care.
See AICPA Attestation Standards AT Sec. 101.19 to 101.41.
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The Commission is also exempting from the definition of municipal
advisor any persons engaging in municipal advisory activities in a
circumstance in which a municipal entity or obligated person is
otherwise represented by an independent registered municipal advisor
\1907\ with respect to the same aspects of a municipal financial
product or an issuance of municipal securities, subject to certain
requirements.\1908\ As long as a municipal entity is represented by an
independent registered municipal advisor, the Commission believes it is
desirable to allow municipal entities to receive as much advice and
information as possible from a variety of sources, even if the
providers of such advice are not subject to a fiduciary duty, because
such advice could lead to better
[[Page 67625]]
decision making where the municipal entity or obligated person also
receives the advice of an independent registered municipal
advisor.\1909\ The Commission, therefore, does not believe at this time
that imposing an additional layer of regulation, including the
fiduciary duty imposed upon municipal advisors when advising municipal
entities, on persons providing advice to a municipal entity that is
otherwise represented by an independent municipal advisor would provide
benefits that justify the burden (i.e., the programmatic, registration,
and recordkeeping costs discussed throughout the economic analysis) of
registration.
---------------------------------------------------------------------------
\1907\ The term ``independent registered municipal advisor''
means a municipal advisor registered pursuant to Section 15B of the
Exchange Act (15 U.S.C. 78o-4) and the rules and regulations
thereunder, and that is not, and within the past two years was not,
associated with the person seeking to rely on Rule 15Ba1-
1(d)(3)(vi). See Rule 15Ba1-1(d)(3)(vi)(A).
\1908\ See Rule 15Ba1-1(d)(3)(vi). See also supra notes 564-572
and accompanying text (discussing the requirements for the
exemption).
\1909\ The Commission staff understands based on discussions
with market participants that market participants and others,
including underwriters, often are aware of important facts and are
in a position to offer valuable advice and information to municipal
entities and obligated persons. The Commission does not want to
curtail the receipt of such advice and information so long as the
municipal entities and obligated persons are represented by
independent registered municipal advisors who are subject to a
fiduciary and other duties and who can help the municipal entities
and obligated persons evaluate the advice and identify potential
conflicts of interest.
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As discussed above, the Commission believes that underwriters in
negotiated deals are the persons most likely to rely on this
exemption.\1910\ The Commission estimates the total initial PRA burden
to rely on this exemption in the first year will be $297,339.\1911\ The
Commission estimates that the ongoing PRA burden to rely on this
exemption in each year after the first will be $138,159.\1912\ In
comparison to the registration and recordkeeping costs, estimated
above, the Commission believes that these costs will be minimal, and
that persons relying on this exemption will realize cost savings by not
being subject to the municipal advisor regulatory regime.
---------------------------------------------------------------------------
\1910\ See supra Section VII.D.9.
\1911\ ((210 hours (estimated burden to draft the written
representation) + 210 hours (estimated burden to draft the required
disclosure) x $379 (hourly rate for an in-house attorney)) + (2,193
hours (estimated burden to obtain the written representation) x $63
(hourly rate for a Compliance Clerk)) = $297,339. See supra note
1611 and accompanying text; supra note 1779 (calculating the hourly
rates for an in-house attorney and for a Compliance Clerk).
\1912\ 2,193 hours (estimated initial burden to rely on
exemption) x $63 (hourly rate for a Compliance Clerk) = $138,159.
See supra note 1612 and accompanying text; supra note 1779
(calculating the hourly rate for a Compliance Clerk).
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The Commission is also exempting from the definition of municipal
advisor any person providing a response in writing or orally to an RFP
or RFQ from a municipal entity or obligated person for services in
connection with a municipal financial product or the issuance of
municipal securities, provided that such person does not receive
separate direct or indirect compensation for advice provided as part of
such a response.\1913\ The Commission believes that responses to RFPs
and RFQs by themselves do not constitute municipal advisory activities,
and thus, that imposing an additional layer of regulation, including
the fiduciary duty imposed upon municipal advisors when advising
municipal entities, on persons responding to RFPs and RFQs would
provide benefits that justify the burden (i.e., the programmatic,
registration, and recordkeeping costs discussed throughout the economic
analysis) of registration. The Commission does not have the information
necessary to provide a reasonable estimate of the number of persons who
may rely on this exemption because the Commission does not have data
regarding the number of persons who respond to RFPs and RFQs, and is
unaware of such data being publicly available. The Commission staff
understands based on discussions with market participants, however,
that a significant number of persons respond to RFPs and RFQs, some of
which would be registered municipal advisors; others may be already-
regulated entities, such as Commission-registered investment advisers
and broker-dealers, whose responses may be subject to fair dealing,
suitability, fiduciary, or other standards.
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\1913\ See Rule 15Ba1-1(d)(3)(iv).
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The exemptions adopted today could allow for more-efficient use of
resources by persons that are no longer required to register with the
Commission as a municipal advisor pursuant to one of the exemptions in
the final rules because such persons will now be able to put to use the
resources that would otherwise have been spent registering. However, to
the extent that such persons were registered under the temporary
registration regime, the absence of current information about such
persons on Form MA and increased difficulty in finding information
about such persons could reduce informational efficiency relative to
the baseline. The exemptions could also improve competition relative to
the baseline among exempted persons engaging in those activities that
are consistent with the relevant exemption to the extent they remain in
their respective industry as a result of an exemption.\1914\
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\1914\ For example, if swap dealers were required to register as
municipal advisors, some might determine to no longer sell swaps to
municipal entities and obligated persons. The exemption may
incentivize such swap dealers to stay in the market and compete with
each other.
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b. Alternatives
One alternative to the rules adopted today would be for the
Commission not to engage in additional rulemaking, and thus, not to
provide any exemptions from the definition of municipal advisor. As
discussed above, the Commission does not believe that the benefits that
would accrue if the Commission did not provide the exemptions would
justify the costs that would accrue from subjecting certain market
participants to potentially conflicting and redundant obligations under
the municipal advisor regulatory regime. In addition, the Commission
believes the exemptions provide greater clarity to market participants
by delineating the types of activities that are not subject to the
municipal advisor regulatory regime. To the extent that a person can
determine that registration as a municipal advisor is not required
based solely on the availability of an exemption, the Commission
believes the exemptions adopted today should lead to lower assessment
costs for many firms. For example, board members should be able to
determine relatively easily whether registration as a municipal advisor
is required. Absent these rules, it is likely that market participants
would need to seek no-action relief and other guidance from the
Commission or Commission staff, or risk failing to register with the
Commission, if required. The Commission believes the final rules
provide greater clarity to market participants that should allow them
to make determinations without requesting interpretations from the
Commission or Commission staff, which, in turn, should lead to lower
assessment costs for many firms.
The Commission also considered whether to provide exemptions using
a status-based approach rather than an activity-based approach. For
example, some commenters called for a blanket exemption for swap
dealers, arguing that registration as a municipal advisor would be
duplicative.\1915\ Similarly, some commenters recommended that
municipal advisor regulation should not apply to banks since they are
already regulated.\1916\
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\1915\ See supra note 748 and accompanying text. Commenters also
requested an exemption for security-based swap dealers. The
Commission is not adopting an exemption for security-based swap
dealers at this time. See supra notes 763-765 and accompanying text.
\1916\ See supra notes 875-878 and accompanying text. Although
the Commission is providing exemptions for certain banking
activities, it has determined not to exempt banks entirely solely
because of their status as otherwise regulated entities.
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[[Page 67626]]
Although persons exempt under a status-based approach would not
incur the programmatic, registration, and recordkeeping costs of the
regulatory regime, the Commission believes that to provide status-based
exemptions would be inconsistent with Congress's intent to regulate
persons that engage in municipal advisory activities. The Commission
believes that since the exclusions for regulated entities in Section
975 of the Dodd-Frank Act are limited in scope to certain regulated
activity, any exemptions the Commission provides should be similarly
limited. For example, the Commission believes that a bank that provides
advice with respect to municipal derivatives or the issuance of
municipal securities should not be exempt unless the bank qualifies for
another exclusion or exemption. Similarly, the Commission believes that
a registered swap dealer should be exempt only if it meets the
requirements of Rule 15Ba1-1(d)(3)(v). The Commission believes that a
status-based approach would permit many persons to provide municipal
advisory services without being subject to the regulatory regime, which
could cause municipal entities and obligated persons to receive
municipal advice without the investor protections of the regime. The
Commission also believes such an approach could limit the Commission's
ability to oversee the municipal advisory activities of those exempt
persons. The Commission believes these other regimes are not designed
to address directly municipal advisory activities and may not provide
similar protections to municipal entities and obligated persons. In
addition, persons exempt under a status-based approach would not be
required to register with the Commission, which would reduce any
benefits of the regime to the municipal advisor selection
process.\1917\ The Commission is also concerned that providing status-
based exemptions could create inappropriate competitive advantages for
covered categories of market participants.
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\1917\ See supra notes 1823-1832 and accompanying text.
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IX. Final Regulatory Flexibility Analysis
The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA'') in accordance with Section 4(a) of the
Regulatory Flexibility Act (``RFA'').\1918\ This FRFA relates to Rules
240.15Ba1-1 through 240.15Ba1-8 under the Exchange Act, which set forth
the requirements for municipal advisors to register with the Commission
and the books and records that registered municipal advisory firms must
make and keep. The Commission prepared an Initial Regulatory
Flexibility Analysis (``IFRA'') in conjunction with the Proposal.\1919\
---------------------------------------------------------------------------
\1918\ 5 U.S.C. 604(a).
\1919\ See Proposal, 76 FR 878-81.
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A. Need for and Objectives of the Rules
The final rules and forms establish a permanent registration regime
for municipal advisors in accordance with Section 975 of the Dodd-Frank
Act. Section 15B of the Exchange Act, as amended by the Dodd-Frank Act,
is intended generally to strengthen oversight of the municipal
securities markets and to broaden current municipal securities market
protections to cover, among other things, previously unregulated market
activity. The rules and forms are designed to meet this mandate by
requiring each municipal advisor to provide basic identifying
information, a description of its activities, and facts regarding
disciplinary history and conflicts of interest, if any.
The Commission believes that the information provided pursuant to
these rules and forms will aid municipal entities, obligated persons,
and others in choosing municipal advisors or engaging in transactions
with municipal advisors, including participating in transactions of
municipal securities offerings in which a municipal advisor provided
municipal advisory services. In addition, the information disclosed
pursuant to the rules and forms will provide significant value to the
Commission in its oversight of municipal advisors and their activities
in the municipal securities markets.
B. Significant Issues Raised by Public Comment
In the Proposal, the Commission solicited comment on the IRFA. In
particular, the Commission sought comment on the number of small
entities that would be subject to the proposed rules and forms;
compliance burdens and how they would affect small entities; and
whether the proposed rules and forms would have any effects that have
not been discussed.\1920\ In addition, the Commission requested that
commenters describe the nature of any effects on small entities subject
to the rule and provide empirical data to support the nature and extent
of such effects.\1921\
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\1920\ See id. at 881.
\1921\ See id.
---------------------------------------------------------------------------
The Commission received approximately ten comment letters that
provided specific evaluative comments about the IRFA and the potential
effect of the rules on small businesses. Most of the commenters were
concerned that the requirements of the permanent registration regime
would be too costly and burdensome for small entity municipal
advisors.\1922\ Several commenters emphasized in particular that the
Small Business Act (``SBA'') threshold of $7 million in revenues that
the Commission estimated for small businesses was too high.\1923\
---------------------------------------------------------------------------
\1922\ See, e.g., Fieldman Rolapp Letter; MSRB Letter; NAIPFA
Letter; Public FA Letter; Ranson Financial Consultants Letter;
Tamalpais Advisors Letter.
\1923\ See, e.g., Chancellor Financial Associates Letter;
Fieldman Rolapp Letter; NAIPFA Letter; Public FA Letter; Ranson
Financial Consultants Letter; Tamalpais Advisors Letter; Joy Howard
WM Financial Strategies Letter (``[B]y establishing a threshold of
$7 million in annual receipts, the Commission is likely to determine
that there are few, if any, rules that would `impose a regulatory
burden on small entities.' Such a conclusion would likely be true
for firms that have millions of dollars in annual receipts; however,
most independent financial advisor firms have significantly lower
revenues.'').
---------------------------------------------------------------------------
Many commenters recommended that the Commission create exemptions
for small independent advisors.\1924\ Two commenters suggested
exempting from registration municipal advisors involved in transactions
below a debt financing limit.\1925\ One commenter suggested the
Commission allow small municipal advisors to convert their temporary
registration to permanent status by agreeing to observe a fiduciary
duty to clients and filing Form ADV (Part 1) with FINRA.\1926\ Another
commenter recommended small firms be allowed to pay lower registration
fees to the MSRB.\1927\ The Commission addresses these comments
below.\1928\
---------------------------------------------------------------------------
\1924\ See, e.g., Bradley Payne Letter; Chancellor Financial
Associates Letter; Ranson Financial Associates Letter; Specialized
Public Finance Letter; Sullivan Letter; Tamalpais Advisors Letter.
\1925\ See Chancellor Financial Associates Letter (suggesting
``a limit predicated on the Internal Revenue Code's $10 million
limit (during a calendar year) in order for an issuer's bonds to be
bank-qualified''); Ranson Financial Associates Letter (suggesting
``that if a debt financing does not exceed a certain size or is of a
certain nature, that a firm would not have to register'').
\1926\ See Specialized Public Finance Letter.
\1927\ See Sullivan Letter.
\1928\ See infra Section IX.C.3.
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The Commission recognizes that small municipal advisors are
concerned with the potential burdens that the permanent registration
regime may impose. The Commission recognizes that some municipal
advisory firms, including some smaller municipal advisory firms and
sole proprietors, may exit the market for various reasons, including
the costs related to the registration and recordkeeping
[[Page 67627]]
requirements in the final rules and forms. The requirements under the
final rules and forms were designed to impose only those burdens
necessary to accomplish the objectives of the Dodd-Frank Act. The
Commission continues to believe that the costs associated with
municipal advisor registration generally will not be overly burdensome
for small firms, and notes that small municipal advisory firms and sole
proprietors may exit the market for a number of reasons, including
business reasons separate from the costs incurred with respect to the
permanent registration regime.
C. Small Entities Subject to the Rule
In developing the final rules and forms, the Commission has
considered their potential impact on small entities to which they will
apply. The final rules and forms will affect municipal advisors
required to register with the Commission, including small municipal
advisors. Under Section 601(3) of the RFA, the term ``small business''
is defined as having ``the same meaning as the term `small business
concern' under section 3 of the Small Business Act, unless an agency,
after consultation with the Office of Advocacy of the Small Business
Administration and after opportunity for public comment, establishes
one or more definitions of such term which are appropriate to the
activities of the agency and publishes such definition(s) in the
Federal Register.'' \1929\ The Commission's rules do not define ``small
business'' or ``small organization'' for purposes of municipal
advisors. The SBA defines ``small business,'' for purposes of entities
that provide financial investments and related activities, as a
business that had annual receipts of less than $7 million during the
preceding fiscal year and is not affiliated with any person that is not
a small business or small organization.\1930\
---------------------------------------------------------------------------
\1929\ 5 U.S.C. 601(3).
\1930\ See 13 CFR 121.201.
---------------------------------------------------------------------------
As stated above, several commenters emphasized in particular that
the SBA threshold of $7 million in revenues that the Commission used
for purposes of estimating the number of small businesses was too
high.\1931\ For example, one commenter countered that the median annual
revenue of a four-person financial advisory firm was closer to
$800,000, and thus, that the majority of such small advisory firms
would earn annual revenue far below the $7 million threshold.\1932\
This commenter and two others recommended a $1 million threshold for
annual revenue as a more realistic number for small municipal
advisors.\1933\ Another commenter argued that, as a sole
proprietorship, his firm has never generated more than $1 million in
total revenue in any given year, and that for the past two years, his
firm's gross revenue has never been over $350,000.\1934\ This commenter
suggested that, as an alternative to using the SBA threshold of $7
million, municipal advisors involved in transactions below a debt
financing limit should be exempt from municipal advisor
regulation.\1935\
---------------------------------------------------------------------------
\1931\ See supra note 1923.
\1932\ See NAIPFA Letter.
\1933\ See id.; Tamalpais Advisors Letter; Fieldman Rolapp
Letter.
\1934\ See Chancellor Financial Associates Letter.
\1935\ See supra note 1925.
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The Commission has considered all public comments relating to the
IRFA included in the Proposal. After considering these comments, the
Commission has determined to continue to use the SBA threshold of $7
million in revenues to denote small businesses. The Commission did not
have sufficient data regarding municipal advisors to propose a
definition of ``small business'' or ``small entity'' for purposes of
the municipal advisor regulatory regime. The Commission believes that
it will benefit from analyzing data submitted on Form MA over time, as
well as data others may collect once the permanent registration regime
is in place, before deciding whether to establish a separate definition
of ``small business'' or ``small organization'' in Rule 0-10 under the
Exchange Act \1936\ for purposes of municipal advisors.\1937\ As the
Commission obtains additional information about municipal advisory
firms after the commencement of the permanent registration regime, the
Commission may reevaluate the appropriateness of the annual receipt
threshold. The Commission may then determine, if appropriate, to
promulgate a definition of ``small business'' or ``small entity'' for
purposes of municipal advisors, as it has done in other contexts.\1938\
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\1936\ 17 CFR 240.0-10.
\1937\ Form MA, Item 10, will ask municipal advisors to indicate
whether they meet the definition of ``small business'' or ``small
organization.'' In addition, the Commission will leverage data
collected by others (e.g., the MSRB) to determine whether it should
re-assess its determination of who is a small municipal advisor. As
a result, in the future the Commission will have information it can
use to reevaluate estimates of the number of small municipal
advisors subject to its rules.
\1938\ See 17 CFR 240.0-10.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that approximately 1,000
municipal advisory firms, including sole proprietors, would be required
to complete Form MA.\1939\ For purposes of the IRFA, the Commission
believed that the proportion of small municipal advisory firms subject
to the proposed rules compared to all Form MA applicants would be
similar to the proportion of small registered broker-dealers compared
to all registered broker-dealers.\1940\ The Commission had previously
estimated that approximately 17% of all broker-dealers are ``small''
for the purposes of the RFA.\1941\ Thus, the Commission estimated that
approximately 170 municipal advisory firms that would be required to
register with the Commission would be small entities subject to the
rules.\1942\
---------------------------------------------------------------------------
\1939\ See Proposal, 76 FR 864-65.
\1940\ See id. at 879.
\1941\ See Securities Exchange Act Release No. 61908 (April 14,
2010), 75 FR 21456, 21483 (April 23, 2010). See also Proposal, 76 FR
879.
\1942\ 1,000 (estimated number of municipal advisors subject to
the Rule) x 0.17 (Proposal's estimated percentage of municipal
advisors that are small entities) = 170 small entity municipal
advisors. See Proposal, 76 FR 879.
---------------------------------------------------------------------------
In connection with the Proposal, commenters did not provide
estimates of how many municipal advisory firms would be small
businesses or small organizations. One commenter asserted that ``the
large majority of [independent public finance advisory firms] would
fall within the definition of `small business' that the SEC has
proposed it adopt; indeed, a high percentage of [independent public
finance advisory] firms likely generate revenue in amounts
substantially less than $7 million per year.'' \1943\ Other commenters,
as noted above, also argued that most independent financial advisory
firms earn annual revenues far less than $7 million.\1944\
---------------------------------------------------------------------------
\1943\ See NAIPFA Letter I.
\1944\ See supra notes 1931-1934 and accompanying text.
---------------------------------------------------------------------------
With respect to municipal advisors registered with the Commission
as investment advisers and/or broker-dealers, commenters did not
provide, and the Commission is not aware of, any alternative reliable
estimates for the percentage of small entities. The Commission
continues to believe that the percentage of ``small'' broker-dealers
(i.e., 17%) is a reasonable estimate of the number of small entity
municipal advisors that are registered with the Commission as
investment advisers and/or broker-dealers. As discussed above, the
Commission estimates that approximately 273 Form MA registrants will be
municipal advisors registered with the Commission as investment
advisers and/or broker-dealers.\1945\ Thus, the Commission estimates
that approximately 46 municipal advisors registered with the Commission
as
[[Page 67628]]
investment advisers and/or broker-dealers will be small entities.\1946\
---------------------------------------------------------------------------
\1945\ See supra note 1456 and accompanying text.
\1946\ 273 (estimated number of municipal advisors registered
with the Commission as investment advisers and/or broker-dealers) x
0.17 (estimated percentage of municipal advisors registered with the
Commission as investment advisers and/or broker-dealers that are
small entities) = 46.41 small entity municipal advisors registered
with the Commission as investment advisers and/or broker-dealers.
---------------------------------------------------------------------------
The Commission recognizes, however, as suggested by commenters,
that a significant majority of municipal advisors not otherwise
registered with the Commission and solicitors that will be required to
register with the Commission may be small entities subject to the final
rules and forms. Therefore, the Commission is revising its estimate to
reflect its belief that approximately 90% of municipal advisors not
otherwise registered with the Commission and solicitors earn annual
revenue less than $7 million.\1947\
---------------------------------------------------------------------------
\1947\ See, e.g., NAIPFA Letter I (indicating that smaller
financial advisory firms' average revenue of approximately $200,000
per natural person municipal advisor). As discussed above, the
Commission estimates that firms not otherwise registered with the
Commission and solicitors will have, respectively, an average of ten
and five natural person employees who engage in municipal advisory
activities on the firm's behalf. See supra text accompanying notes
1458 and 1461. Assuming average revenues of $200,000 per natural
person municipal advisor, such entities would likely have revenues
far below $7 million. However, the Commission believes a small
number of such firms are likely to have revenues in excess of $7
million. For these reasons, the Commission estimates that
approximately 90% of municipal advisors not otherwise registered
with the Commission and solicitors earn annual revenue less than $7
million.
---------------------------------------------------------------------------
As discussed above, the Commission estimates that approximately 491
Form MA registrants will be municipal advisors not otherwise registered
with the Commission \1948\ and 146 will be solicitors.\1949\ Thus, the
Commission estimates that 573 municipal advisors not otherwise
registered with the Commission and solicitors will be small
entities.\1950\ In total, the Commission estimates that approximately
619 municipal advisory firms will be small entities.\1951\
---------------------------------------------------------------------------
\1948\ See supra note 1459 and accompanying text.
\1949\ See supra note 1463 and accompanying text.
\1950\ 637 (estimated number of municipal advisors not otherwise
registered with the Commission and solicitors) x 0.90 (estimated
percentage of municipal advisors not otherwise registered with the
Commission and solicitors that are small entities) = 573.3 small
entity municipal advisors not otherwise registered with the
Commission and small entity solicitors.
\1951\ 573 small entity municipal advisors not otherwise
registered with the Commission and small entity solicitors + 46
small entity municipal advisors registered with the Commission as
investment advisers and/or broker-dealers = 619 small entity
municipal advisory firms.
---------------------------------------------------------------------------
In the Proposal, the Commission also estimated that, with respect
to Form MA-I, only those that are sole proprietors and meet the annual
receipts threshold would be considered small entities subject to the
proposed rules.\1952\ The Commission stated in the Proposal that,
because all sole proprietors would be required to complete Form MA in
addition to Form MA-I, sole proprietors that would be small entities
subject to the proposed rules (i.e., that are under the ``small
entities'' annual receipts threshold) were already counted among the
original estimate of 170 small entities calculated in the
Proposal.\1953\
---------------------------------------------------------------------------
\1952\ In the proposal, the Commission noted that individuals
who are not sole proprietors (i.e., employees of municipal advisors)
and must register on Form MA-I do not fall within the definitions of
``small business'' or ``small organization'' because only those
businesses and organizations that are ``independently owned'' may
qualify as small entities pursuant to the definitions contained in
the RFA. See 5 U.S.C. 601(4) and 15 U.S.C. 632(a)(1). See also
Proposal, 76 FR 879. As discussed in this release, such individuals
will no longer be required to register as a municipal advisor.
\1953\ See Proposal, 76 FR 879.
---------------------------------------------------------------------------
Although, as discussed above, the Commission is revising its
estimate of the total number of municipal advisory firms that will be
considered to be small entities, the Commission did not receive comment
regarding, and is not revising its approach regarding, the estimate of
the number of small entities with respect to Form MA-I. The Commission
continues to believe that, because all sole proprietors must complete
both Form MA and Form MA-I, those sole proprietors that will be
considered small entities are already counted among the new estimate of
619 small entities. Thus, the Commission maintains that it will not be
necessary to further estimate the number of small entities with respect
to Form MA-I.
D. Reporting, Recordkeeping, and Other Compliance Requirements
The final rules and forms establish a permanent registration regime
for municipal advisors, including small municipal advisors, which
consists of Form MA, Form MA-I, Form MA-W, and Form MA-NR. The final
rules also establish recordkeeping requirements for registered
municipal advisors, including small municipal advisors.\1954\ These
requirements and the burdens on small municipal advisors are discussed
below. The Commission received several comment letters that addressed
the Commission's burden estimates.\1955\
---------------------------------------------------------------------------
\1954\ See Rule 15Ba1-8.
\1955\ See, e.g., Ranson Financial Consultants Letter; Joy
Howard WM Financial Strategies Letter; NAIPFA Letter I; Specialized
Public Finance Letter.
---------------------------------------------------------------------------
Rule 15Ba1-2 imposes costs on all municipal advisors, including
small municipal advisors, by requiring each person applying for
registration with the Commission as a municipal advisor to complete
Form MA and file the form electronically with the Commission. In
addition, a person applying for registration as a municipal advisor
must complete Form MA-I with respect to each natural person who is a
person associated with the municipal advisor and engages in municipal
advisory activities on its behalf and file each Form MA-I
electronically with the Commission.\1956\ Each Form MA will be
considered filed with the Commission upon acceptance of Form MA,
together with all additional required documents, including all required
Form MA-Is, by the Commission's EDGAR system.\1957\
---------------------------------------------------------------------------
\1956\ See Rule 15Ba1-2(b)(1).
\1957\ See Rule 15Ba1-2(c).
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that the average initial
cost per applicant to complete Form MA and the initial self-
certification would be approximately $1,110,\1958\ and the average
initial cost per applicant to complete Form MA-I and the initial self-
certification would be approximately $510.\1959\ The Commission
received comment letters that addressed the Commission's burden
estimates for Form MA \1960\ and Form MA-I.\1961\ The Commission now
estimates that the average initial PRA cost per applicant to complete
Form MA will be approximately $581.\1962\ The Commission also estimates
that the average initial PRA cost for a municipal advisory firm to
complete Form MA-I with respect to each natural person who is a person
associated with the municipal advisor and engages in municipal advisory
activities on its behalf will be approximately $498.\1963\ The total
initial cost incurred by a municipal advisor to register with the
Commission as a municipal advisor will depend on a number of factors,
[[Page 67629]]
including the size of the municipal advisory firm; the complexity of
its business activities; the amount and type of information to be
included on Form MA and Form MA-I; and the number of natural persons
municipal advisors for whom the municipal advisory firm will need to
submit Form MA-I. The Commission estimates that the average initial
registration burden across all firms will be approximately $7,595 per
applicant.\1964\
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\1958\ See Proposal, 76 FR 880 n. 426 and accompanying text.
\1959\ See id. at 880 n. 427 and accompanying text.
\1960\ See supra notes 1483-1485 and accompanying text.
\1961\ See supra notes 1496-1498 and accompanying text.
\1962\ 3.5 hours (estimated hourly burden for one municipal
advisor to complete a Form MA) x $166 (combined hourly rate for a
Compliance Manager and Compliance Clerk) = $581. This estimate is
lower than the estimate in the Proposal due to the Commission's
decision not to adopt a self-certification requirement and a
reduction in the combined hourly rate for a Compliance Manager and
Compliance Clerk from $170 to $166. See supra note 1812 (calculating
the combined hourly rate).
\1963\ 3.0 hours (estimated time required to complete Form MA-I)
x $166 (combined hourly rate for a Compliance Manager and Compliance
Clerk) = $498. This estimate is lower than the estimate in the
Proposal due to a reduction in the combined hourly rate for a
Compliance Manager and Compliance Clerk from $170 to $166. See supra
note 1812 (calculating the combined hourly rate).
\1964\ See supra note 1813.
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The Commission notes that the estimated $166 hourly rate for
compliance personnel that the Commission uses to estimate calculations
with respect to certain figures \1965\ will be less likely to apply to
small entities and solo practitioners because they will be less likely
than larger firms to employ highly compensated compliance
professionals. In the case of such entities, the Commission's per-
applicant cost estimates represent the upper range of potential
registration costs, and the Commission expects that the actual
registration costs for small entities will be significantly lower.
---------------------------------------------------------------------------
\1965\ See supra note 1812 (calculating the combined hourly
rate).
---------------------------------------------------------------------------
In addition, municipal advisors will use Form MA and Form MA-I to
amend information previously reported to the Commission.\1966\ Under
Rule 15Ba1-5 and the General Instructions, a registered municipal
advisor must amend Form MA at least annually and whenever a material
event has occurred that changes the information provided in the
form.\1967\ As a result of certain changes to the final rule, a
registered municipal advisor must also promptly amend the information
contained in Form MA-I by filing an amended Form MA-I whenever the
information contained in the form becomes inaccurate for any
reason.\1968\ Municipal advisors will also need to submit an amendment
to Form MA-I to indicate that an individual is no longer an associated
person of the municipal advisory firm filing the form or no longer
engaged in municipal advisory activities on its behalf.\1969\
---------------------------------------------------------------------------
\1966\ See Rule 15Ba1-5.
\1967\ Municipal advisors will also report successions of
registration on Form MA. See Rule 15Ba1-6.
\1968\ See Rule 15Ba1-5(b).
\1969\ See Instructions to Form MA-I.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that the average ongoing
annual cost per applicant to amend Form MA and complete a self-
certification would be approximately $510,\1970\ and the average
ongoing annual cost per applicant to amend Form MA-I and complete a
self-certification would be approximately $160.\1971\ The Commission
received one comment letter that addressed the Commission's burden
estimates for amendments to Form MA and Form MA-I.\1972\ The Commission
now estimates that the average annual PRA cost per registered municipal
advisor to amend Form MA will be approximately $332.\1973\ The
Commission also now estimates that the average annual PRA cost per
registered municipal advisor to prepare updating amendments to Form MA-
I for each of its natural person municipal advisors will be
approximately $141,\1974\ and that the average PRA cost per registered
municipal advisor to amend Form MA-I to indicate that an individual is
no longer an associated person of the municipal advisory firm filing
the form or no longer engaged in municipal advisory activities on its
behalf will be approximately $83.\1975\
---------------------------------------------------------------------------
\1970\ See Proposal, 76 FR 880 n. 428 and accompanying text.
\1971\ See id. at 880 n. 429 and accompanying text.
\1972\ See supra notes 1523-1524 and accompanying text.
\1973\ ((1.5 hours (average estimated time to prepare an annual
amendment to Form MA) x 1.0 hours (number of annual amendments per
year)) + (0.5 hours (average estimated time to prepare an interim
updating amendment to Form MA) x 1.0 (number of interim updating
amendments per year))) x $166 (combined hourly rate for a Compliance
Manager and Compliance Clerk) = $332. This estimate is lower than
the estimate in the Proposal due to the Commission's decision not to
adopt a self-certification requirement and a reduction in the
combined hourly rate for a Compliance Manager and Compliance Clerk
from $170 to $166. See supra note 1812 (calculating the combined
hourly rate).
\1974\ (0.5 hours (average estimated time to prepare an updating
amendment to Form MA-I) x 1.7 hours (average number of amendments
per year)) x $166 (combined hourly rate for a Compliance Manager and
Compliance Clerk) = $141.10. This estimate is lower than the
estimate in the Proposal because natural person municipal advisors
are not required to complete a self-certification under the final
rules and the combined hourly rate for a Compliance Manager and
Compliance Clerk has been reduced from $170 to $166. See supra note
1812 (calculating the combined hourly rate).
\1975\ 0.5 hours (average estimated time to prepare an updating
amendment to Form MA-I) x $166 (combined hourly rate for a
Compliance Manager and Compliance Clerk) = $83. See supra note 1812
(calculating the combined hourly rate).
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Municipal advisors will also file a notice of withdrawal from
registration as a municipal advisor on Form MA-W.\1976\ In the
Proposal, the Commission estimated that the average cost per registrant
to complete Form MA-W would be approximately $85.\1977\ The Commission
now estimates that the average PRA cost per registered municipal
advisor to complete Form MA-W will be approximately $83.\1978\
---------------------------------------------------------------------------
\1976\ See Rule 15Ba1-4.
\1977\ See Proposal, 76 FR 880 n. 430 and accompanying text.
\1978\ 0.5 hours (average estimated time to complete Form MA-W)
x $166 (combined hourly rate for a Compliance Manager and Compliance
Clerk) = $83. This estimate is lower than the estimate in the
Proposal due to a reduction in the combined hourly rate for a
Compliance Manager and Compliance Clerk from $170 to $166. See supra
note 1812 (calculating the combined hourly rate).
---------------------------------------------------------------------------
Non-resident municipal advisors will incur costs to complete Form
MA-NR and provide an opinion of counsel. In the Proposal, the
Commission estimated that the average cost per filer to complete Form
MA-NR would be approximately $255 \1979\ and that the average cost per
non-resident municipal advisory firm to obtain an opinion of counsel,
including the cost to hire outside counsel, would be approximately
$1,960.\1980\ The Commission now estimates the average PRA cost to
complete a single Form MA-NR will be approximately $249.\1981\ The
Commission also estimates that the average PRA cost per non-resident
municipal advisor to obtain an opinion of counsel, including the cost
to hire outside counsel, will be approximately $2,037.\1982\
---------------------------------------------------------------------------
\1979\ See Proposal, 76 FR 880 n. 431 and accompanying text.
\1980\ See id. at 880 n. 432 and accompanying text.
\1981\ 1.5 hours (average estimated time to complete Form MA-NR)
x $166 (combined hourly rate for a Compliance Manager and Compliance
Clerk) = $249. This estimate is lower than the estimate in the
Proposal due to a reduction in the combined hourly rate for a
Compliance Manager and Compliance Clerk from $170 to $166. See supra
note 1812 (calculating the combined hourly rate).
\1982\ 3.0 hours (average estimated time to obtain an opinion of
counsel) x $379 (hourly rate for an internal attorney) = $1,137. See
supra note 1779 (calculating the hourly rate for an in-house
attorney). $900 = average estimated cost to hire outside counsel to
provide opinion of counsel. $1,137 + $900 = $2,037. This estimate is
higher than the estimate in the Proposal due to an increase in the
hourly rate for an internal attorney from $354 to $379. See supra
note 1538 (explaining the outside counsel cost estimate).
---------------------------------------------------------------------------
The Commission also believes that some municipal advisory firms
will incur costs associated with hiring outside counsel to help them
comply with the requirements of the final rules and to complete Form
MA. In the Proposal, the Commission estimated that the average cost per
municipal advisory firm to hire outside counsel would be approximately
$400.\1983\ The Commission continues to estimate that the average cost
per municipal advisory firm to hire outside counsel will be
approximately $400.\1984\
---------------------------------------------------------------------------
\1983\ See Proposal, 76 FR 880 n. 433 and accompanying text.
\1984\ 1.0 hour (average estimated time spent by outside counsel
to help a municipal advisory firm comply with the rule) x $400
(hourly rate for an outside attorney) = $400. See supra note 1538
(explaining the outside counsel cost estimate).
---------------------------------------------------------------------------
[[Page 67630]]
Rule 15Ba1-8 will require all registered municipal advisors to
maintain true, accurate, and current books and records relating to
their municipal advisory activities. Generally, Rule 15Ba1-8 will
require such books and records to be maintained and preserved for a
period of not less than five years, the first two years in an easily
accessible place. In the Proposal, the Commission estimated that the
average cost per municipal advisory firm to comply with the proposed
recordkeeping requirement would be approximately $9,050.\1985\
---------------------------------------------------------------------------
\1985\ See Proposal, 76 FR 88 n. 434 and accompanying text.
---------------------------------------------------------------------------
The Commission estimates that, on average, the annual hourly burden
for each municipal advisory firm to comply with the recordkeeping
requirements will be 182 hours.\1986\ Thus, the Commission estimates
that the average PRA cost per municipal advisory firm to comply with
the recordkeeping requirements will be approximately $9,646 each
year.\1987\ In addition, the Commission continues to believe that it is
appropriate to assume that, for small firms, the per-hour costs
attributable to the recordkeeping requirements will be, at most,
equivalent to the hourly rate for a General Clerk.\1988\ Thus, the
Commission estimates that the average PRA cost per small entity
municipal advisory firm to comply with the recordkeeping requirements
will be approximately $9,646 each year.\1989\ The Commission believes
that for many small entity municipal advisory firms the actual cost
will likely be lower for a number of reasons, including differences in
the variety of services offered to municipal entities and the number of
municipal entity clients, but is using a conservative estimate of such
costs.
---------------------------------------------------------------------------
\1986\ See supra Section VII.D.8.
\1987\ 182 hours (estimated time spent by municipal advisors to
ensure annual compliance with the books and records requirement) x
$53 (hourly rate for a General Clerk) = $9,646. See supra note 1861
(calculating the hourly rate for a General Clerk). This estimate is
higher than in the Proposal because of an increase in the hourly
rate for a General Clerk from $50 per hour to $53 per hour.
\1988\ See supra note 1861 (calculating the hourly rate for a
General Clerk).
\1989\ See supra note 1987 and accompanying text.
---------------------------------------------------------------------------
As discussed above, one commenter asserted that the Commission used
an hourly rate for the books and records estimate that was too low for
small entity municipal advisors since they often do not employ General
Clerks.\1990\ While the Commission acknowledges that small municipal
advisors do not typically employ General Clerks and that, in many
cases, the municipal advisory professional himself may be responsible
for maintaining the books and records of the firm, the Commission does
not agree that it should use a higher hourly rate to estimate the
recordkeeping burden for small municipal advisors for several reasons.
The 182-hour estimate is an average annual hourly burden across all
firms regardless of their size, and is based on the Commission's
experience with other regulatory regimes. The Commission anticipates
that larger municipal advisory firms that offer a variety of services
to municipal entities and have significantly greater volumes of books
and records will incur an annual burden greater than 182 hours, while
smaller municipal advisory firms that have significantly lower volumes
of books and records will incur an annual burden lower than 182 hours.
Similarly, the $53 figure is an average hourly rate across all firms
regardless of their size and is inclusive of the variability of costs
across municipal advisors. The Commission does not have the information
necessary to provide reasonable estimates of the differences in hourly
burden among firms of various sizes, a separate average hourly burden
for small entity municipal advisors, or the differences in hourly rates
among firms of various sizes. The Commission is also unaware of any
such data being publicly available. The Commission staff also
understands that some small municipal advisors employ part-time staff
to perform certain business and clerical functions and that the costs
of such employees are less likely to reflect the costs for compliance
personnel at larger municipal advisory firms or the hourly rate
suggested by the commenter. The Commission assumes that municipal
advisors will use the most cost-effective approach available, depending
on their size and specific circumstances, to comply with the
recordkeeping requirement. Accordingly, the Commission does not believe
that it should use a higher hourly rate to estimate the recordkeeping
burden for small municipal advisors.
---------------------------------------------------------------------------
\1990\ See Joy Howard WM Financial Strategies Letter. See also
supra text accompanying note 1867.
---------------------------------------------------------------------------
Further, as stated above, the Commission believes that small
municipal advisory firms will likely incur lower annual costs for
maintaining books and records than larger firms. The Commission
recognizes that, although small municipal advisory firms and solo
practitioners may maintain their books and records without a general
clerk or additional staff assistance, such activity would not be
costless. The Commission believes that it is appropriate to assume
that, because small firms will utilize the most cost-effective approach
available, per-hour costs attributable to the books and records
requirements will be, at most, equivalent to the hourly rate for a
General Clerk. Therefore, the Commission uses the hourly rate for a
General Clerk to estimate the average cost across all municipal
advisory firms, regardless of size.
The Commission recognizes that such compliance burdens and expenses
may cause some smaller municipal advisory firms and sole proprietors to
exit the market or consolidate with other municipal advisory firms. The
Commission estimates that, at the upper range of annual costs, a small
entity municipal advisory firm will incur approximately $17,241 in PRA
costs during the first year \1991\ and $11,721 each subsequent year to
maintain its registration and books and records.\1992\ The Commission
estimates that sole proprietors will incur a lower PRA cost of
approximately $11,125 during the first year \1993\ and $10,119 each
subsequent year.\1994\
---------------------------------------------------------------------------
\1991\ $7,595 (estimated average initial registration burden for
a single municipal advisory firm) + $9,646 (estimated cost to
maintain books and records) = $17,241. See supra note 1813
(calculating the estimated average initial registration burden for a
single municipal advisory firm).
\1992\ $332 (estimated annual cost for one municipal advisor to
amend Form MA) + ((11,250 (estimated number of individuals for whom
municipal advisory firms will need to complete a Form MA-I) / 910
(estimated number of municipal advisors registered on Form MA)) x
$141 (estimated annual cost to complete updating amendments to Form
MA-I for each natural person municipal advisor)) + $9,646 (estimated
cost to maintain books and records) = $11,721.13.
\1993\ $581 (estimated initial cost for one municipal advisor to
complete a Form MA) + (1.0 (sole proprietor required to complete a
Form MA-I) x $498 (estimated initial cost to complete a Form MA-I))
+ $400 (estimated cost to hire outside counsel) + $9,646 (estimated
cost to maintain books and records) = $11,125.
\1994\ $332 (estimated annual cost for one municipal advisor to
amend Form MA) + (1.0 (sole proprietor required to complete a Form
MA-I) x $141 (estimated annual cost to complete updating amendments
to Form MA-I for each natural person municipal advisor)) + $9,646
(estimated cost to maintain books and records) = $10,119.
---------------------------------------------------------------------------
One sole proprietor has asserted that his annual revenue during the
past two years has not exceeded $350,000,\1995\ while another commenter
estimated that the median annual revenue for a four-person municipal
advisory firm was $800,000.\1996\ Such comments indicate that
registration costs could comprise approximately 2% of a sole
proprietor's \1997\ or a four-person
[[Page 67631]]
municipal advisory firm's \1998\ annual revenue. Nevertheless, the
Commission acknowledges that some small firms and sole proprietors will
not consider the annual cost to be trivial and may discontinue
providing municipal advisory services or consolidate with other
municipal advisory firms as a result. The requirements under the final
rules and forms were designed to impose only those burdens necessary to
accomplish the objectives of the Dodd-Frank Act.
---------------------------------------------------------------------------
\1995\ See supra note 1934 and accompanying text.
\1996\ See supra note 1932 and accompanying text.
\1997\ $6,877 (estimated registration cost for a sole proprietor
during the first year) / $350,000 (estimated annual revenue for a
sole proprietor) = 1.96%.
\1998\ $16,598 (estimated registration cost for a municipal
advisor registered with the Commission as an investment adviser and/
or broker-dealer during the first year) / $800,000 (estimated annual
revenue for a four-person municipal advisory firm) = 2.07%.
---------------------------------------------------------------------------
E. Agency Action to Minimize Effects on Small Entities
The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objective, while minimizing any
significant adverse impact on small advisors.\1999\ In considering
whether to adopt the final rules and forms, the Commission considered
the following alternatives: (i) The establishment of differing
compliance or reporting requirements or timetables that take into
account the resources available to small municipal advisors; (ii) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rules for such small advisors; (iii)
the use of performance rather than design standards; \2000\ and (iv) an
exemption from coverage of the rules, or any part thereof, for such
small advisors.
---------------------------------------------------------------------------
\1999\ See 5 U.S.C. 603(c).
\2000\ The Commission does not consider using performance rather
than design standards to be consistent with the Commission's
understanding of Congress's intent to have the Commission register
municipal advisors and oversee their activities or with other
registration regimes under Commission rules.
---------------------------------------------------------------------------
The Commission received several comments recommending that the
Commission create exemptions for small independent advisors.\2001\ Two
commenters suggested exempting from registration municipal advisors
involved in transactions below a debt financing limit.\2002\
---------------------------------------------------------------------------
\2001\ See, e.g., Bradley Payne Letter; Chancellor Financial
Associates Letter; Ranson Financial Associates Letter; Specialized
Public Finance Letter; Sullivan Letter; Tamalpais Advisors Letter.
\2002\ See Chancellor Financial Associates Letter (suggesting
``a limit predicated on the Internal Revenue Code's $10 million
limit (during a calendar year) in order for an issuer's bonds to be
bank-qualified''); Ranson Financial Associates Letter (suggesting
``that if a debt financing does not exceed a certain size or is of a
certain nature, that a firm would not have to register'').
---------------------------------------------------------------------------
The Commission does not believe differing compliance or reporting
requirements or an exemption from coverage of the final rules and
forms, or any part thereof, for small municipal advisors (i.e., the
first and fourth alternatives) would be appropriate or consistent with
investor protection or with the Commission's understanding of
Congress's intent to have the Commission register municipal advisors
and oversee their activities. Because the Commission believes the
protections of Section 15B of the Exchange Act, as amended by Section
975 of the Dodd-Frank Act, are intended to apply equally to clients of
both large and small municipal advisory firms, the Commission believes
it would be inconsistent with the purposes of the Exchange Act to
specify different requirements for small municipal advisors under the
final rules and forms. In addition, the requirements under the final
rules and forms are designed to impose only those burdens necessary to
accomplish the objectives of the Dodd-Frank Act.
As discussed above, the Commission believes that the requirement
that municipal advisors register with the Commission on Form MA and
update the information provided at least annually (or more often as
required by the rules) will provide a number of benefits.\2003\ For
example, the final rules and forms should allow municipal entities and
obligated persons to become better informed about municipal advisors at
a lower cost, which could increase the use of municipal advisors. In
addition, the permanent registration regime and recordkeeping
requirements should enhance the ability of Commission and other
securities regulators to oversee municipal advisors and monitor
compliance with the requirements of the Exchange Act and MSRB rules.
The Commission believes that requiring less information about small
municipal advisors would be insufficient for these purposes.
---------------------------------------------------------------------------
\2003\ See supra Section VIII.D.3.b.
---------------------------------------------------------------------------
Regarding the second alternative, the Commission does not believe
it is necessary to clarify, consolidate, or simplify the registration
or recordkeeping requirements for small municipal advisors. In
developing the rules and forms, the Commission considered requiring
additional information from municipal advisors and using different
submission mechanisms. The Commission decided that the information in
the forms and the submission requirements are simple and
straightforward, and that they take into account the resources
available to all municipal advisors, including small municipal
advisors. The Commission believes that small advisors will incur less
cost to complete Form MA than larger municipal advisory firms with more
complex businesses because certain disclosures, for example disclosures
related to Item 6 and the number of DRPs required, will be less
complicated and require less time to complete.
One commenter suggested the Commission allow small municipal
advisors to convert their temporary registration to permanent status by
agreeing to observe a fiduciary duty to clients and filing Form ADV
(Part 1) with FINRA.\2004\ The Commission acknowledges that this
approach would expedite the registration process for those municipal
advisors that currently file Form ADV, but also notes that this
approach would result in a registration process with multiple formats
that may become difficult to track over time. In addition, the
information required to be disclosed on Form ADV would not provide
comparable information about municipal advisory activities. The
Commission continues to believe that the collection of information in a
uniform, standardized format from all municipal advisors will
facilitate consistent public disclosure of municipal advisor
registration information to municipal advisors, municipal entities,
obligated persons, the Commission, and other interested persons.
---------------------------------------------------------------------------
\2004\ See Specialized Public Finance Letter.
---------------------------------------------------------------------------
Another commenter recommended small firms be allowed to pay lower
registration fees to the MSRB.\2005\ As discussed above,\2006\ the
Commission does not charge municipal advisors a fee to register with
the Commission. Although the Dodd-Frank Act permits the MSRB to require
municipal advisors to pay such reasonable fees and charges as may be
necessary or appropriate to defray the costs and expenses of operating
and administering the MSRB,\2007\ the Commission does not set or
approve fees charged by the MSRB. Instead, the Exchange Act provides
that certain designated SRO rules, including fees charged by the MSRB,
take effect upon filing with the Commission \2008\ and may thereafter
be enforced by the SRO to the extent not inconsistent with the Exchange
Act, the rules and regulations thereunder, and applicable
[[Page 67632]]
Federal and State law.\2009\ The Commission notes, however, that the
MSRB is required to consider the effects of its rules on small
municipal advisors.\2010\
---------------------------------------------------------------------------
\2005\ See Sullivan Letter.
\2006\ See supra note 1808.
\2007\ See 15 U.S.C. 78o-4(b)(2)(J).
\2008\ See 15 U.S.C. 78s(b)(3)(A).
\2009\ See 15 U.S.C. 78s(b)(3)(C). The Commission has sixty days
from the date of filing, however, during which it ``summarily may
temporarily suspend'' the fees ``if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of'' the Exchange Act. See id. If the Commission takes such
action, the Commission shall institute proceedings to determine
whether the proposed rule should be approved or disapproved. See id.
In addition, Section 19(c) of the Exchange Act authorizes the
Commission, by rule, to abrogate, add to, and delete from the rules
of an SRO (other than a registered clearing agency) as the
Commission deems necessary or appropriate to insure the fair
administration of the SRO, to conform its rules to requirements of
the Exchange Act and the rules and regulations thereunder applicable
to such organization, or otherwise in furtherance of the purposes of
the Exchange Act. See 15 U.S.C. 78s(c).
\2010\ See 15 U.S.C. 78o-4(b)(2)(L)(iv) (providing that an MSRB
rule may ``not impose a regulatory burden on small municipal
advisors that is not necessary or appropriate in the public interest
and for the protection of investors, municipal entities, and
obligated persons, provided that there is robust protection of
investors against fraud'').
---------------------------------------------------------------------------
One commenter suggested that the Commission could provide
meaningful relief by waiving small firms from the requirement to
provide audited financial reports.\2011\ The Commission notes that the
final rules and forms do not require audited or other financial reports
as part of the recordkeeping requirement. The preparation of audited
financial reports is at the discretion of the municipal advisor, and
the Commission expects that municipal advisors will generally utilize
the most cost-effective solution to comply with the requirements of the
permanent registration regime.
---------------------------------------------------------------------------
\2011\ See Tamalpais Advisors Letter.
---------------------------------------------------------------------------
X. Statutory Basis and Text of Amendments
Pursuant to the Exchange Act, and particularly Sections 15B, 17,
and 36 (15 U.S.C. 78o-4, 78q, and 78mm, respectively), the Commission
is adopting Sec. 200.19d, Sec. 200.30-3a, Sec. Sec. 240.15Ba1-1
through 240.15Ba1-8, Sec. 240.15Bc4-1, and Sec. Sec. 249.1300 through
249.1330 (Form MA, Form MA-I, Form MA-W, and Form MA-NR), and the
Commission is amending Sec. Sec. 200.19c and 200.30-18.
List of Subjects
17 CFR Part 200
Administrative practice and procedure, Authority delegations
(Government agencies), Organization and functions (Government
agencies).
17 CFR Parts 240 and 249
Reporting and recordkeeping requirements, Municipal advisors,
Registration requirements.
Text of Rules and Forms
For the reasons set out above, Title 17, Chapter II of the Code of
Federal Regulations is amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
Subpart A--Organization and Program Management
0
1. The general authority citation for part 200, subpart A, is revised
to read as follows:
Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, 78d-1, 78d-2, 78o-4,
78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et seq., unless
otherwise noted.
* * * * *
0
2. Section 200.19c is revised to read as follows:
Sec. 200.19c Director of the Office of Compliance Inspections and
Examinations.
The Director of the Office of Compliance Inspections and
Examinations (``OCIE'') is responsible for the compliance inspections
and examinations relating to the regulation of exchanges, national
securities associations, clearing agencies, securities information
processors, the Municipal Securities Rulemaking Board, brokers and
dealers, municipal securities dealers, municipal advisors, transfer
agents, investment companies, and investment advisers, under Sections
15B, 15C(d)(1) and 17(b) of the Securities Exchange Act of 1934 (15
U.S.C. 78o-4, 78o-5(d)(1) and 78q(b)), Section 31(b) of the Investment
Company Act of 1940 (15 U.S.C. 80a-30(b)), and Section 204 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-4).
0
3. Section 200.19d is added to read as follows:
Sec. 200.19d Director of the Office of Municipal Securities.
The Director of the Office of Municipal Securities is responsible
to the Commission for the administration and execution of the
Commission's programs under the Securities Exchange Act of 1934
relating to the registration and regulation of municipal advisors. The
functions involved in the regulation of such entities include
recommending the adoption and amendment of Commission rules, and
responding to interpretive and no-action requests.
0
4. Section 200.30-3a is added to read as follows:
Sec. 200.30-3a Delegation of authority to Director of the Office of
Municipal Securities.
Pursuant to the provisions of Pub. L. 100-181, 101 Stat. 1254, 1255
(15 U.S.C. 78d-1, 78d-2), the Securities and Exchange Commission hereby
delegates, until the Commission orders otherwise, the following
functions to the Director of the Office of Municipal Securities to be
performed by him or under his direction by such person or persons as
may be designated from time to time by the Chairman of the Commission:
(a) With respect to the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.):
(1) Pursuant to section 15B of the Act (15 U.S.C. 78o-4):
(i) To authorize the issuance of orders granting registration of
municipal advisors within 45 days of the filing of an application for
registration as a municipal advisor (or within such longer period as to
which the applicant consents); and
(ii) To authorize the issuance of orders canceling the registration
of a municipal advisor, if such municipal advisor is no longer in
existence or has ceased to do business as a municipal advisor.
(b) Notwithstanding anything in the foregoing, in any case in which
the Director of the Office of Municipal Securities believes it
appropriate, he may submit the matter to the Commission.
0
5. Section 200.30-18 is amended by adding paragraphs (j)(7) and (j)(8)
to read as follows:
Sec. 200.30-18 Delegation of authority to Director of the Office of
Compliance Inspections and Examinations.
* * * * *
(j) * * *
(j) * * *
(7) Under section 15B(a) of the Act (15 U.S.C. 78o-4(a)):
(i) To authorize the issuance of orders granting registration of
municipal advisors within 45 days of the filing of an application for
registration as a municipal advisor (or within such longer period as to
which the applicant consents); and
(ii) To grant registration of municipal advisors sooner than 45
days after the filing of an application for registration.
(8) Under section 15B(c) of the Act (15 U.S.C. 78o-4(c)):
(i) To authorize the issuance of orders canceling the registration
of a municipal advisor, if such municipal advisor is no longer in
existence or has ceased to do business as a municipal advisor; and
[[Page 67633]]
(ii) To determine whether notices of withdrawal from registration
on Form MA-W shall become effective sooner than the 60-day waiting
period.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
6. The general authority citation for part 240 is revised, and
sectional authorities for Sec. Sec. 240.15Ba1-1 through 240.15Ba1-8
and Sec. 240.15Bc4-1 are added, to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29,
80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; and
12 U.S.C. 5221(e)(3) unless otherwise noted.
* * * * *
Sections 240.15Ba1-1 through 240.15Ba1-8 are also issued under
sec. 975, Public Law 111-203, 124 Stat. 1376 (2010).
Section 240.15Bc4-1 is also issued under sec. 975, Public Law
111-203, 124 Stat. 1376 (2010).
* * * * *
0
7. Sections 240.15Ba1-1 through 240.15Ba1-8 are added to read as
follows:
SEC.
* * * * *
Sec. 240.15Ba1-1 Definitions.
Sec. 240.15Ba1-2 Registration of municipal advisors and information
regarding certain natural persons.
Sec. 240.15Ba1-3 Exemption of certain natural persons from
registration under section 15B(a)(1)(B) of the Act.
Sec. 240.15Ba1-4 Withdrawal from municipal advisor registration.
Sec. 240.15Ba1-5 Amendments to Form MA and Form MA-I.
Sec. 240.15Ba1-6 Consent to service of process to be filed by non-
resident municipal advisors; legal opinion to be provided by non-
resident municipal advisors.
Sec. 240.15Ba1-7 Registration of successor to municipal advisor.
Sec. 240.15Ba1-8 Books and records to be made and maintained by
municipal advisors.
Sec. 240.15Ba1-1 Definitions.
As used in the rules and regulations prescribed by the Commission
pursuant to section 15B of the Act (15 U.S.C. 78o-4) in Sec. Sec.
240.15Ba1-1 through 240.15Ba1-8 and 240.15Bc4-1:
(a) Guaranteed investment contract 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.
(b) 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.
(c) Managing agent means any person, including a trustee, who
directs or manages, or who participates in directing or managing, the
affairs of any unincorporated organization or association other than a
partnership.
(d)(1) Municipal advisor.
(i) In general. Except as otherwise provided in paragraphs (d)(2)
and (d)(3) of this section, the term municipal advisor has the same
meaning as in section 15B(e)(4) of the Act (15 U.S.C. 78o-4(e)(4)).
Under section 15B(e)(4)(A) of the Act (15 U.S.C. 78o-4(e)(4)(A)), the
term municipal advisor means 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 or an obligated person. Under
section 15B(e)(4)(C) of the Act (15 U.S.C. 78o-4(e)(4)(C)) and
paragraph (d)(2) of this section, a municipal advisor does not include
a person that engages in specified excluded activities.
(ii) Advice standard. For purposes of the municipal advisor
definition under paragraph (d)(1)(i) of this section, advice excludes,
among other things, the provision of general information that does not
involve a recommendation regarding municipal financial products or the
issuance of municipal securities (including with respect to the
structure, timing, terms and other similar matters concerning such
financial products or issues).
(iii) Certain types of municipal advisors. Under section
15B(e)(4)(B) of the Act (15 U.S.C. 78o-4(e)(4)(B)), municipal advisors
include, without limitation, financial advisors, guaranteed investment
contract brokers, third-party marketers, placement agents, solicitors,
finders, and swap advisors, to the extent that such persons otherwise
meet the requirements of the municipal advisor definition in this
paragraph (d)(1).
(2) Exclusions from municipal advisor definition. Pursuant to
section 15B(e)(4)(C) of the Act (15 U.S.C. 78o-4(e)(4)(C)), the term
municipal advisor excludes the following persons with respect to the
specified excluded activities:
(i) Serving as an underwriter. A broker, dealer, or municipal
securities dealer serving as an underwriter of a particular issuance of
municipal securities 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.
(ii) Registered investment advisers--In general. Any investment
adviser registered under the Investment Advisers Act of 1940 (15 U.S.C.
80b-1 et seq.) 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. Solely for
purposes of this paragraph (d)(2)(ii), 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.
(iii) Registered commodity trading advisors. Any commodity trading
advisor registered under the Commodity Exchange Act (7 U.S.C. 1 et
seq.), or person associated with a registered commodity trading
advisor, to the extent that such registered commodity trading advisor
or such person is providing advice that is related to swaps (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)), and any rules and
regulations thereunder).
(iv) Attorneys. Any attorney to the extent that the attorney is
offering legal advice or providing services that are of a traditional
legal nature with respect to the issuance of municipal securities or
municipal financial products to a client of such attorney that is a
municipal entity, obligated person, or other participant in the
transaction. To the extent an attorney represents himself or herself as
a financial advisor or financial expert regarding the issuance of
municipal securities or municipal financial products, however, the
attorney is not excluded with respect to such financial activities
under this paragraph (d)(2)(iv).
(v) Engineers. Any engineer to the extent that the engineer is
providing engineering advice.
(3) Exemptions from municipal advisor definition. The Commission
exempts the following persons from the definition of municipal advisor
to the
[[Page 67634]]
extent they are engaging in the specified activities:
(i) Accountants. Any accountant 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.
(ii) Public officials and employees. (A) Any 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 person is acting within the scope of such person's official
capacity.
(B) 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.
(iii) Banks. Any bank, 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) Any investments that are held in a deposit account, savings
account, certificate of deposit, or other deposit instrument issued by
a bank;
(B) Any 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) Any 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) Any investment made by a bank acting in the capacity of an
indenture trustee or similar capacity.
(iv) Responses to requests for proposals or qualifications. Any
person providing a response in writing or orally to a request for
proposals or qualifications from a municipal entity or obligated person
for services in connection with a municipal financial product or the
issuance of municipal securities; provided, however, that such person
does not receive separate direct or indirect compensation for advice
provided as part of such response.
(v) Swap dealers.
(A) A swap dealer (as defined in Section 1a(49) of the Commodity
Exchange Act (7 U.S.C. 1a(49)) and the rules and regulations
thereunder) registered under the Commodity Exchange Act or associated
person of the swap dealer recommending a municipal derivative or a
trading strategy that involves a municipal derivative, so long as the
registered swap dealer or associated person is not acting as an advisor
to the municipal entity or obligated person with respect to the
municipal derivative or trading strategy pursuant to Section 4s(h)(4)
of the Commodity Exchange Act and the rules and regulations thereunder.
(B) For purposes of determining whether a swap dealer is acting as
an advisor in this paragraph (d)(3)(v), the municipal entity or
obligated person involved in the transaction will be treated as a
special entity under Section 4s(h)(2) of the Commodity Exchange Act and
the rules and regulations thereunder (even if such municipal entity or
obligated person does not satisfy the definition of special entity
under those provisions).
(vi) Participation by an independent registered municipal advisor.
Any person engaging in municipal advisory activities in a circumstance
in which a municipal entity or obligated person is otherwise
represented by an independent registered municipal advisor with respect
to the same aspects of a municipal financial product or an issuance of
municipal securities, provided that the following requirements are met:
(A) Independent registered municipal advisor. An independent
registered municipal advisor is providing advice with respect to the
same aspects of the municipal financial product or issuance of
municipal securities. For purposes of this paragraph (d)(3)(vi), the
term independent registered municipal advisor means a municipal advisor
registered pursuant to section 15B of the Act (15 U.S.C. 78o-4) and the
rules and regulations thereunder and that is not, and within at least
the past two years was not, associated (as defined in section 15B(e)(7)
(15 U.S.C. 78o-4(e)(7)) of the Act) with the person seeking to rely on
this paragraph (d)(3)(vi).
(B) Required representation. A person seeking to rely on this
paragraph (d)(3)(vi) receives from the municipal entity or obligated
person a representation in writing that it is represented by, and will
rely on the advice of, an independent registered municipal advisor,
provided that the person receiving such representation has a reasonable
basis for relying on the representation.
(C) Required disclosures.
(1) With respect to a municipal entity, such person discloses in
writing to the municipal entity that, by obtaining such representation
from the municipal entity, such person is not a municipal advisor and
is not subject to the fiduciary duty set forth in section 15B(c)(1) of
the Act (15 U.S.C. 78o-4(c)(1)) with respect to the municipal financial
product or issuance of municipal securities, and provides a copy of
such disclosure to the independent registered municipal advisor.
(2) With respect to an obligated person, such person discloses in
writing to the obligated person that, by obtaining such representation
from the obligated person, such person is not a municipal advisor with
respect to the municipal financial product or issuance of municipal
securities, and provides a copy of such disclosure to the independent
registered municipal advisor.
(3) Each such disclosure must be made at a time and in a manner
reasonably designed to allow the municipal entity or obligated person
to assess the material incentives and conflicts of interest that such
person may have in connection with the municipal advisory activities.
(vii) Persons that provide advice on certain investment strategies.
A person that provides advice with respect to investment strategies
that are not plans or programs for the investment of the proceeds of
municipal securities or the recommendation of and brokerage of
municipal escrow investments.
(viii) Certain solicitations. A person that undertakes a
solicitation of a municipal entity or obligated person for the purpose
of obtaining or retaining an engagement by a municipal entity or by an
obligated person of a broker, dealer, municipal securities dealer, or
municipal advisor for or in connection with municipal financial
products that are investment strategies to the extent that those
investment strategies are not plans or programs for the investment of
the proceeds of municipal securities or the recommendation of and
brokerage of municipal escrow investments.
(4) Special rule for separately identifiable departments or
divisions of banks for municipal advisory purposes. If a bank engages
in municipal advisory activities through a separately identifiable
department or division that meets the requirements of this paragraph
(d)(4), the determination of whether those municipal advisory
activities cause any person to be a municipal advisor may be made
separately for such department or division. In such event, that
department or division, rather than the bank itself, shall be deemed to
be the municipal advisor.
(i) Separately identifiable department or division. For purposes of
this paragraph (d)(4), a separately identifiable department or division
of a bank is that unit of the bank which conducts all of the municipal
advisory activities of the bank, provided that the following
requirements are met:
[[Page 67635]]
(A) Supervision. Such unit is under the direct supervision of an
officer or officers designated by the board of directors of the bank as
responsible for the day-to-day conduct of the bank's municipal advisory
activities, including the supervision of all bank employees engaged in
the performance of such activities.
(B) Separate records. All of the records relating to the bank's
municipal advisory activities are separately maintained in, or
extractable from, such unit's own facilities or the facilities of the
bank, and such records are so maintained or otherwise accessible as to
permit independent examination thereof and enforcement of applicable
provisions of the Act, the rules and regulations thereunder, and the
rules of the Municipal Securities Rulemaking Board relating to
municipal advisors.
(ii) [Reserved]
(e) Municipal advisory activities means the following activities
specified in section 15B(e)(4)(A) of the Act (15 U.S.C. 78o-4(e)(4)(A))
and paragraph (d)(1) of this section that, absent the availability of
an exclusion under paragraph (d)(2) of this section or an exemption
under paragraph (d)(3) of this section, would cause a person to be a
municipal advisor:
(1) Providing 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) Solicitation of a municipal entity or an obligated person.
(f) Municipal derivatives means 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) An obligated person, acting in such capacity, is a
counterparty.
(g) Municipal entity means any State, political subdivision of a
State, or municipal corporate instrumentality of a State or of a
political subdivision of a State, including:
(1) Any agency, authority, or instrumentality of the State,
political subdivision, or municipal corporate instrumentality;
(2) 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
(3) Any other issuer of municipal securities.
(h) Municipal escrow investments.
(1) In general. Except as otherwise provided in paragraph (h)(2) of
this section, municipal escrow investments means proceeds of municipal
securities and any other funds of a municipal entity that are deposited
in an escrow account to pay the principal of, premium, if any, and
interest on one or more issues of municipal securities.
(2) Reasonable reliance on representations. In determining whether
or not funds to be invested or reinvested constitute municipal escrow
investments for purposes of this section, a person may rely on
representations in writing made by a knowledgeable official of the
municipal entity or obligated person whose funds are to be invested or
reinvested regarding the nature of such investments, provided that the
person seeking to rely on such representations has a reasonable basis
for such reliance.
(i) Municipal financial product has the same meaning as in section
15B(e)(5) of the Act (15 U.S.C. 78o-4(e)(5)).
(j) Non-resident means:
(1) In the case of an individual, one who resides in or has his
principal office and place of business in any place not subject to the
jurisdiction of the United States;
(2) In the case of a corporation, one incorporated in or having its
principal office and place of business in any place not subject to the
jurisdiction of the United States; or
(3) In the case of a partnership or other unincorporated
organization or association, one having its principal office and place
of business in any place not subject to the jurisdiction of the United
States.
(k) Obligated person has the same meaning as in section 15B(e)(10)
of the Act (15 U.S.C. 78o-4(e)(10)); provided, however, that 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 financial information or operating data is not
material to a municipal securities offering, without reference to any
municipal bond insurance, letter of credit, liquidity facility, or
other credit enhancement; or
(3) The federal government.
(l) Principal office and place of business means the executive
office of the municipal advisor from which the officers, partners, or
managers of the municipal advisor direct, control, and coordinate the
activities of the municipal advisor.
(m)(1) Proceeds of municipal securities--In general. Except as
otherwise provided in paragraphs (m)(2) and (m)(3) of this section,
proceeds of municipal securities means monies derived by a municipal
entity from the sale of municipal securities, investment income derived
from the investment or reinvestment of such monies, and any monies of a
municipal entity or obligated person held in funds under legal
documents for the municipal securities that are reasonably expected to
be used as security or a source of payment for the payment of the debt
service on the municipal securities, including reserves, sinking funds,
and pledged funds created for such purpose, and the investment income
derived from the investment or reinvestment of monies in such funds.
When such monies are spent to carry out the authorized purposes of
municipal securities, they cease to be proceeds of municipal
securities.
(2) Exception for Section 529 college savings plans. Solely for
purposes of this paragraph (m), monies derived from a municipal
security issued by an education trust established by a State under
Section 529(b) of the Internal Revenue Code (26 U.S.C. 529(b)) are not
proceeds of municipal securities.
(3) Reasonable reliance on representations. In determining whether
or not funds to be invested constitute proceeds of municipal securities
for purposes of this section, a person may rely on representations in
writing made by a knowledgeable official of the municipal entity or
obligated person whose funds are to be invested regarding the nature of
such funds, provided that the person seeking to rely on such
representations has a reasonable basis for such reliance.
(n) Solicitation 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.
[[Page 67636]]
Sec. 240.15Ba1-2 Registration of municipal advisors and information
regarding certain natural persons.
(a) Form MA. A person applying for registration with the Commission
as a municipal advisor pursuant to section 15B of the Act (15 U.S.C.
78o-4) must complete Form MA (17 CFR 249.1300) in accordance with the
instructions in the Form and file the Form electronically with the
Commission.
(b) Form MA-I. (1) A person applying for registration or registered
with the Commission as a municipal advisor pursuant to section 15B of
the Act (15 U.S.C. 78o-4) must complete Form MA-I (17 CFR 249.1310)
with respect to each natural person who is a person associated with the
municipal advisor (as defined in section 15B(e)(7) of the Act (15
U.S.C. 78o-4(e)(7))) and engaged in municipal advisory activities on
its behalf in accordance with the instructions in the Form and file the
Form electronically with the Commission.
(2) A natural person applying for registration with the Commission
as a municipal advisor pursuant to section 15B of the Act (15 U.S.C.
78o-4), in addition to completing and filing Form MA pursuant to
paragraph (a) of this section, must complete Form MA-I (17 CFR
249.1310) in accordance with the instructions in the Form and file the
Form electronically with the Commission.
(c) When filed. Each Form MA (17 CFR 249.1300) shall be considered
filed with the Commission upon submission of a completed Form MA,
together with all additional required documents, including all required
filings of Form MA-I (17 CFR 249.1310), to the Commission's Electronic
Data Gathering, Analysis, and Retrieval system.
(d) Form MA and Form MA-I are reports. Each Form MA (17 CFR
249.1300) and Form MA-I (17 CFR 249.1310) required to be filed under
this section shall constitute a report within the meaning of sections
15B(c), 17(a), 18(a), 32(a) of the Act (15 U.S.C. 78o-4(c), 78q(a),
78r(a), 78ff(a)) and other applicable provisions of the Act.
Sec. 240.15Ba1-3 Exemption of certain natural persons from
registration under section 15B(a)(1)(B) of the Act.
A natural person municipal advisor shall be exempt from section
15B(a)(1)(B) of the Act (15 U.S.C. 78o-4(a)(1)(B)) if he or she:
(a) Is an associated person of an advisor that is registered with
the Commission pursuant to section 15B(a)(2) of the Act (15 U.S.C. 78o-
4(a)(2)) and the rules and regulations thereunder; and
(b) Engages in municipal advisory activities solely on behalf of a
registered municipal advisor.
Sec. 240.15Ba1-4 Withdrawal from municipal advisor registration.
(a) Form MA-W. Notice of withdrawal from registration as a
municipal advisor shall be filed on Form MA-W (17 CFR 249.1320) in
accordance with the instructions to the Form.
(b) Electronic filing. Any notice of withdrawal on Form MA-W (17
CFR 249.1320) must be filed electronically.
(c) Effective date. A notice of withdrawal from registration shall
become effective for all matters on the 60th day after the filing
thereof, within such longer period of time as to which the municipal
advisor consents or which the Commission by order may determine as
necessary or appropriate in the public interest or for the protection
of investors, or within such shorter period of time as the Commission
may determine. If a notice of withdrawal from registration is filed at
any time subsequent to the date of the issuance of a Commission order
instituting proceedings pursuant to section 15B(c) of the Act (15
U.S.C. 78o-4(c)) to censure, place limitations on the activities,
functions or operations of, or suspend or revoke the registration of,
the municipal advisor, or if prior to the effective date of the notice
of withdrawal pursuant to this paragraph (c), the Commission institutes
such a proceeding or a proceeding to impose terms or conditions upon
such withdrawal, the notice of withdrawal shall not become effective
pursuant to this paragraph (c) except at such time and upon such terms
and conditions as the Commission deems necessary or appropriate in the
public interest or for the protection of investors.
(d) Form MA-W is a report. Each Form MA-W (17 CFR 249.1320)
required to be filed under this section shall constitute a report
within the meaning of sections 15B(c), 17(a), 18(a), 32(a) of the Act
(15 U.S.C. 78o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable
provisions of the Act.
Sec. 240.15Ba1-5 Amendments to Form MA and Form MA-I.
(a) When amendment is required--Form MA. A registered municipal
advisor shall promptly amend the information contained in its Form MA
(17 CFR 249.1300):
(1) At least annually, within 90 days of the end of a municipal
advisor's fiscal year, or of the end of the calendar year for a sole
proprietor; and
(2) More frequently, if required by the General Instructions (17
CFR 249.1300), as applicable.
(b) When amendment is required--Form MA-I. A registered municipal
advisor shall promptly amend the information contained in Form MA-I (17
CFR 249.1310) by filing an amended Form MA-I whenever the information
contained in the Form MA-I becomes inaccurate for any reason.
(c) Electronic filing of amendments. A registered municipal advisor
shall file all amendments to Form MA (17 CFR 249.1300) and Form MA-I
(17 CFR 249.1310) electronically.
(d) Amendments to Form MA and Form MA-I are reports. Each amendment
required to be filed under this section shall constitute a report
within the meaning of sections 15B(c), 17(a), 18(a), 32(a) of the Act
(15 U.S.C. 78o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable
provisions of the Act.
Sec. 240.15Ba1-6 Consent to service of process to be filed by non-
resident municipal advisors; legal opinion to be provided by non-
resident municipal advisors.
(a)(1) Each non-resident municipal advisor applying for
registration pursuant to section 15B(a) of the Act (15 U.S.C. 78o-4(a))
shall, at the time of filing of the municipal advisor's application on
Form MA (17 CFR 249.1300), file with the Commission a written
irrevocable consent and power of attorney on Form MA-NR (17 CFR
249.1330) to appoint an agent in the United States, other than a
Commission member, official, or employee, upon whom may be served any
process, pleadings, or other papers in any action brought against the
non-resident municipal advisor to enforce this chapter.
(2) Each municipal advisor applying for registration pursuant to or
registered under section 15B of the Act (15 U.S.C. 78o-4) shall, at the
time of filing the relevant Form MA (17 CFR 249.1300) or Form MA-I (17
CFR 249.1310), file with the Commission a written irrevocable consent
and power of attorney on Form MA-NR (17 CFR 249.1330) to appoint an
agent in the United States, other than a Commission member, official,
or employee, upon whom may be served any process, pleadings, or other
papers in any action brought against the municipal advisor's non-
resident general partner or non-resident managing agent, or non-
resident natural persons who are persons associated with the municipal
advisor (as defined in section 15B(e)(7) of the Act (15 U.S.C. 78o-
4(e)(7))) and engaged in municipal
[[Page 67637]]
advisory activities on its behalf, to enforce this chapter.
(b) The registered municipal advisor shall communicate promptly to
the Commission by filing a new Form MA-NR (17 CFR 249.1330) any change
to the name or address of the agent for service of process of each such
non-resident municipal advisor, general partner, managing agent, or
natural persons who are persons associated with the municipal advisor
(as defined in section 15B(e)(7) of the Act (15 U.S.C. 78o-4(e)(7)))
and engaged in municipal advisory activities on its behalf.
(c)(1) Each registered non-resident municipal advisor must promptly
appoint a successor agent for service of process and file a new Form
MA-NR (17 CFR 249.1330) if the non-resident municipal advisor
discharges its identified agent for service of process or if its agent
for service of process is unwilling or unable to accept service on
behalf of the non-resident municipal advisor.
(2) Each registered municipal advisor must require each of its non-
resident general partners or non-resident managing agents, or non-
resident natural persons who are persons associated with the municipal
advisor (as defined in section 15B(e)(7) of the Act (15 U.S.C. 78o-
4(e)(7))) and engaged in municipal advisory activities on its behalf,
to promptly appoint a successor agent for service of process and the
registered municipal advisor must file a new Form MA-NR (17 CFR
249.1330) if such non-resident general partner, managing agent, or
associated person discharges the identified agent for service of
process or if the agent for service of process is unwilling or unable
to accept service on behalf such person.
(d) Each non-resident municipal advisor applying for registration
pursuant to section 15B(a) of the Act (15 U.S.C. 78o-4(a)) shall
provide an opinion of counsel on Form MA (17 CFR 249.1300) that the
municipal advisor can, as a matter of law, provide the Commission with
access to the books and records of the municipal advisor as required by
law and that the municipal advisor can, as a matter of law, submit to
inspection and examination by the Commission.
(e) Form MA-NR (17 CFR 249.1330) must be filed electronically.
Sec. 240.15Ba1-7 Registration of successor to municipal advisor.
(a) In the event that a municipal advisor succeeds to and continues
the business of a municipal advisor registered pursuant to section
15B(a) of the Act (15 U.S.C. 78o-4(a)), the registration of the
predecessor shall be deemed to remain effective as the registration of
the successor if the successor, within 30 days after the succession,
files an application for registration on Form MA (17 CFR 249.1300), and
the predecessor files a notice of withdrawal from registration on Form
MA-W (17 CFR 249.1320); provided, however, that the registration of the
predecessor municipal advisor will cease to be effective as the
registration of the successor municipal advisor 45 days after the
application for registration on Form MA is filed by the successor.
(b) Notwithstanding paragraph (a) of this section, if a municipal
advisor succeeds to and continues the business of a registered
predecessor municipal advisor, and the succession is based solely on a
change in the predecessor's date or state of incorporation, form of
organization, or composition of a partnership, the successor may,
within 30 days after the succession, amend the registration of the
predecessor municipal advisor on Form MA (17 CFR 249.1300) to reflect
these changes. This amendment shall be deemed an application for
registration filed by the predecessor and adopted by the successor.
Sec. 240.15Ba1-8 Books and records to be made and maintained by
municipal advisors.
(a) Every person registered or required to be registered under
section 15B of the Act (15 U.S.C. 78o-4) and the rules and regulations
thereunder shall make and keep true, accurate, and current the
following books and records relating to its municipal advisory
activities:
(1) Originals or copies of all written communications received, and
originals or copies of all written communications sent, by such
municipal advisor (including inter-office memoranda and communications)
relating to municipal advisory activities, regardless of the format of
such communications;
(2) All check books, bank statements, general ledgers, cancelled
checks and cash reconciliations of the municipal advisor;
(3) A copy of each version of the municipal advisor's policies and
procedures, if any, that:
(i) Are in effect; or
(ii) At any time within the last five years were in effect, not
including those in effect prior to January 13, 2014;
(4) A copy of any document created by the municipal advisor that
was material to making a recommendation to a municipal entity or
obligated person or that memorializes the basis for that
recommendation;
(5) All written agreements (or copies thereof) entered into by the
municipal advisor with any municipal entity, employee of a municipal
entity, or an obligated person or otherwise relating to the business of
such municipal advisor as such;
(6) A record of the names of persons who are currently, or within
the past five years were, associated with the municipal advisor, not
including persons associated with the municipal advisor prior to
January 13, 2014;
(7) Books and records containing a list or other record of:
(i) The names, titles, and business and residence addresses of all
persons associated with the municipal advisor;
(ii) All municipal entities or obligated persons with which the
municipal advisor is engaging or has engaged in municipal advisory
activities in the past five years, not including those prior to January
13, 2014;
(iii) The name and business address of each person to whom the
municipal advisor provides or agrees to provide, directly or
indirectly, payment to solicit a municipal entity, an employee of a
municipal entity, or an obligated person on its behalf; and
(iv) The name and business address of each person that provides or
agrees to provide, directly or indirectly, payment to the municipal
advisor to solicit a municipal entity, an employee of a municipal
entity, or an obligated person on its behalf; and
(8) Written consents to service of process from each natural person
who is a person associated with the municipal advisor and engages in
municipal advisory activities solely on behalf of such municipal
advisor.
(b)(1) All books and records required to be made under this section
shall be maintained and preserved for a period of not less than five
years, the first two years in an easily accessible place.
(2) Partnership articles and any amendments thereto, articles of
incorporation, charters, minute books, and stock certificate books of
the municipal advisor and of any predecessor, excluding those that were
only in effect prior to January 13, 2014, shall be maintained in the
principal office of the municipal advisor and preserved until at least
three years after termination of the business or withdrawal from
registration as a municipal advisor.
(c) A municipal advisor subject to paragraph (a) of this section,
before ceasing to conduct or discontinuing business as a municipal
advisor, shall arrange for and be responsible for the preservation of
the books and records required to be maintained and preserved
[[Page 67638]]
under this section for the remainder of the period specified in this
section, and shall notify the Commission in writing, at its principal
office in Washington, DC, of the exact address where such books and
records will be maintained during such period.
(d) Electronic storage permitted.
(1) General. The records required to be maintained and preserved
pursuant to this part may be maintained and preserved for the required
time on:
(i) Electronic storage media, including any digital storage medium
or system that meets the terms of this section; or
(ii) Paper documents.
(2) General requirements. The municipal advisor must:
(i) Arrange and index the records in a way that permits easy
location, access, and retrieval of any particular record;
(ii) Provide promptly any of the following that the Commission (by
its staff or other representatives) may request:
(A) A legible, true, and complete copy of the record in the medium
and format in which it is stored;
(B) A legible, true, and complete printout of the record; and
(C) Means to access, view, and print the records; and
(iii) Separately store, for the time required for preservation of
the record, a duplicate copy of the record on any medium allowed by
this section.
(3) Special requirements for electronic storage media. In the case
of records on electronic storage media, the municipal advisor must
establish and maintain procedures:
(i) To maintain and preserve the records, so as to reasonably
safeguard them from loss, alteration, or destruction;
(ii) To limit access to the records to properly authorized
personnel and the Commission (including its staff and other
representatives); and
(iii) To reasonably ensure that any reproduction of a non-
electronic record on electronic storage media is complete, true, and
legible when retrieved.
(e)(1) Any book or other record made, kept, maintained, and
preserved in compliance with Sec. Sec. 240.17a-3 and 240.17a-4, rules
of the Municipal Securities Rulemaking Board, or Sec. 275.204-2 under
the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.), which is
substantially the same as a book or other record required to be made,
kept, maintained, and preserved under this section, shall satisfy the
requirements of this section.
(2) A record made and kept pursuant to any provision of paragraph
(a) of this section that contains all the information required under
any other provision of paragraph (a) of this section, need not be
maintained in duplicate in order to meet the requirements of the other
provisions of paragraph (a) of this section.
(f)(1) Except as provided in paragraph (f)(3) of this section, each
non-resident municipal advisor registered or applying for registration
pursuant to section 15B of the Act (15 U.S.C. 78o-4) and the rules and
regulations thereunder shall keep, maintain, and preserve, at a place
within the United States designated in a notice from such municipal
advisor as provided in paragraph (f)(2) of this section, true, correct,
complete, and current copies of books and records that such municipal
advisor is required to make, keep current, maintain or preserve
pursuant to any provisions of any rule or regulation of the Commission
adopted under the Act.
(2) Except as provided in paragraph (f)(3) of this section, each
non-resident municipal advisor subject to paragraph (f)(1) of this
section shall furnish to the Commission a written notice specifying the
address of the place within the United States where the copies of the
books and records required to be kept, maintained, and preserved by
such municipal advisor pursuant to paragraph (f)(1) of this section are
located. Each non-resident municipal advisor registered or applying for
registration when this paragraph becomes effective shall file such
notice within 30 calendar days after this paragraph becomes effective.
Each non-resident municipal advisor that files an application for
registration after this paragraph becomes effective shall file such
notice with such application for registration.
(3) Notwithstanding the provisions of paragraphs (f)(1) and (2) of
this section, a non-resident municipal advisor need not keep, maintain,
or preserve within the United States copies of the books and records
referred to in paragraphs (f)(1) and (2) of this section, if:
(i) Such non-resident municipal advisor files with the Commission,
at the time or within the period provided by paragraph (f)(2) of this
section, a written undertaking, in a form acceptable to the Commission
and signed by a duly authorized person, to furnish to the Commission,
upon demand, at the Commission's principal office in Washington, DC, or
at any Regional Office of the Commission designated in such demand,
true, correct, complete, and current copies of any or all of the books
and records which such municipal advisor is required to make, keep
current, maintain, or preserve pursuant to any provision of any rule or
regulation of the Commission adopted under the Act, or any part of such
books and records that may be specified in such demand. Such
undertaking shall be in substantially the following form:
The undersigned hereby undertakes to furnish at its own expense
to the Securities and Exchange Commission at the Commission's
principal office in Washington, DC or at any Regional Office of the
Commission specified in a demand for copies of books and records
made by or on behalf of the Commission, true, correct, complete, and
current copies of any or all, or any part, of the books and records
that the undersigned is required to make, keep current, maintain, or
preserve pursuant to any provision of any rule or regulation of the
Securities and Exchange Commission under the Securities Exchange Act
of 1934. This undertaking shall be suspended during any period when
the undersigned is making, keeping current, maintaining, and
preserving copies of all of said books and records at a place within
the United States in compliance with 17 CFR 240.15Ba1-7(f)(1) and
(2). This undertaking shall be binding upon the undersigned and the
heirs, successors and assigns of the undersigned, and the written
irrevocable consents and powers of attorney of the undersigned, its
general partners, and managing agents filed with the Securities and
Exchange Commission shall extend to and cover any action to enforce
the same.
and
(ii) Such non-resident municipal advisor furnishes to the
Commission, at such municipal advisor's own expense 14 calendar days
after written demand therefor forwarded to such municipal advisor by
registered mail at such municipal advisor's last address of record
filed with the Commission and signed by the Secretary of the Commission
or such person as the Commission may authorize to act in its behalf,
true, correct, complete, and current copies of any or all books and
records which such municipal advisor is required to make, keep current,
maintain, or preserve pursuant to any provision of any rule or
regulation of the Commission adopted under the Act, or any part of such
books and records that may be specified in said written demand. Such
copies shall be furnished to the Commission at the Commission's
principal office in Washington, DC, or at any Regional Office of the
Commission which may be specified in said written demand.
0
8. Section 240.15Bc4-1 is added to read as follows:
Sec. 240.15Bc4-1 Persons associated with municipal advisors.
A person associated, seeking to become associated, or, at the time
of the alleged misconduct, associated or seeking to become associated
with a municipal advisor, shall be subject to a
[[Page 67639]]
Commission order that censures or places limitations on the activities
or functions of such person, or suspends for a period not exceeding
twelve months or bars such person from being associated with a broker,
dealer, investment adviser, municipal securities dealer, municipal
advisor, transfer agent, or nationally recognized statistical rating
organization, if the Commission finds, on the record after notice and
opportunity for hearing, that such censure, placing of limitations,
suspension, or bar is in the public interest and that such person has
committed any act, or is subject to an order or finding, enumerated in
subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of section
15(b) of the Act (15 U.S.C. 78o(b)(4)(A), 78o(b)(4)(D), 78o(b)(4)(E),
78o(b)(4)(H), 78o(b)(4)(G)), has been convicted of any offense
specified in subparagraph (B) of such paragraph (4) (15 U.S.C.
78o(b)(4)(B)) within 10 years of the commencement of the proceedings
under section 15B(c)(4) (15 U.S.C. 78o-4(c)(4)), or is enjoined from
any action, conduct, or practice specified in subparagraph (C) of such
paragraph (4) (15 U.S.C. 78o(b)(4)(C)). It shall be unlawful for any
person as to whom an order entered pursuant to section 15B(c)(4) of the
Act (15 U.S.C. 78o-4(c)(4)) or section 15B(c)(5) of the Act (15 U.S.C.
78o-4(c)(5)) suspending or barring him from being associated with a
municipal advisor is in effect willfully to become, or to be,
associated with a municipal advisor without the consent of the
Commission, and it shall be unlawful for any municipal advisor to
permit such a person to become, or remain, a person associated with it
without the consent of the Commission, if such municipal advisor knew,
or, in the exercise of reasonable care should have known, of such
order.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
9. The general authority citation for part 249 continues to read as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
10. Subpart N is revised to read as follows:
Subpart N--Forms for Registration of Municipal Advisors and for
Providing Information Regarding Certain Natural Persons
Sec.
249.1300 Form MA, for registration as a municipal advisor, and for
amendments to registration.
249.1300T Form MA-T, for temporary registration as a municipal
advisor, and for amendments to, and withdrawals from, temporary
registration.
249.1310 Form MA-I, for providing information regarding natural
person municipal advisors, and for amendments to such information.
249.1320 Form MA-W, for withdrawal from registration as a municipal
advisor.
249.1330 Form MA-NR, for appointment of agent for service of process
by non-resident municipal advisor, non-resident general partner or
managing agent of a municipal advisor, and non-resident natural
person associated with a municipal advisor.
Subpart N--Forms for Registration of Municipal Advisors and for
Providing Information Regarding Certain Natural Persons
Sec. 249.1300 Form MA, for registration as a municipal advisor, and
for amendments to registration.
The form shall be used for registration as a municipal advisor
pursuant to section 15B of the Securities Exchange Act of 1934 (15
U.S.C. 78o-4) and for amendments to registrations.
Sec. 249.1300T Form MA-T, for temporary registration as a municipal
advisor, and for amendments to, and withdrawals from, temporary
registration.
The form shall be used for temporary registration as a municipal
advisor, and for amendments to, and withdrawals from, temporary
registration pursuant to Section 15B of the Exchange Act, (15 U.S.C.
78o-4).
Sec. 249.1310 Form MA-I, for providing information regarding natural
person municipal advisors, and for amendments to such information.
The form shall be used for providing information regarding natural
person municipal advisors, and for amendments to such information.
Sec. 249.1320 Form MA-W, for withdrawal from registration as a
municipal advisor.
The form shall be used for filing a notice of withdrawal from
registration as a municipal advisor pursuant to section 15B of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-4).
Sec. 249.1330 Form MA-NR, for appointment of agent for service of
process by non-resident municipal advisor, non-resident general partner
or managing agent of a municipal advisor, and non-resident natural
person associated with a municipal advisor.
The form shall be used to furnish information pertaining to the
appointment of agent for service of process by a non-resident municipal
advisor and by registered municipal advisors to furnish the same for
each of its non-resident general partner or managing agent, or non-
resident natural person associated with a municipal advisor pursuant to
section 15B of the Securities Exchange Act of 1934 (15 U.S.C. 78o-4).
Sec. 249.1300T [Removed]
0
11. Effective January 1, 2015, Sec. 249.1300T is removed.
[Note: The following Forms will not appear in the Code of Federal
Regulations.]
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By the Commission.
Date: September 20, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-23524 Filed 11-8-13; 8:45 am]
BILLING CODE 8011-01-C