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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.

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 MANR 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 §

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) 5515540; 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) 5515792; 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

EXECUTIVE SUMMARY

II.

INTRODUCTION

Background

III.

Overview of Municipal Securities Market

Municipal Advisors

Municipal Entities and Municipal Financial Products

Historical Regulation of Municipal Securities and Municipal Advisors

Municipal Securities Market

Municipal Advisors

Dodd-Frank Act and the Need for Oversight

Interim Final Temporary Rule 15Ba2-6T and Form MA-T

Proposal to Establish a Registration Regime for Municipal Advisors

DISCUSSION

Rules for the Registration of Municipal Advisors

Rule 15Ba1-1: Definition of “Municipal Advisor” and Related Terms

Statutory Definition of “Municipal Advisor”

Interpretation of the Term “Municipal Advisor”; Definition of

Related Terms

Advice Standard in General

ii.

Municipal Entity

iii.

Obligated Person

iv.

Municipal Financial Products

Municipal Derivatives

vi.

Guaranteed Investment Contracts

vii.

Issuance of Municipal Securities

viii.

Investment Strategies

ix.

Pooled Investment Vehicles

Solicitation of a Municipal Entity or Obligated Person

Exclusions and Exemptions from the Definition of “Municipal

Advisor”

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

Registered Investment Advisers

vi.

Registered Commodity Trading Advisors; Swap Dealers

vii.

Accountants, Attorneys, Engineers and Other

Professionals

viii.

Banks

Rule 15Ba1-2

Application for Municipal Advisor Registration

Information Requested in Form MA

Information Requested in Form MA-I

Rule 15Ba1-3: Exemption of Certain Natural Persons Associated with

Registered Municipal Advisors From Registration

Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; Form

MA-W

Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration

Form MA-W

Rule 15Ba1-5: Amendments to Form MA and Form MA-I

Rule 15Ba1-6: Consent to Service of Process to be Filed by NonResident Registered Municipal Advisors; Legal Opinion to be Provided

by Non-Resident Municipal Advisors; and Form MA-NR

Rule 15Ba1-6: Consent to Service of Process to be Filed by NonResident Registered Municipal Advisors; Legal Opinion to be

Provided by Non-Resident Municipal Advisors

Form MA-NR

Rule 15Ba1-7: Registration of Successor to Municipal Advisor

General Instructions and Glossary

Rule 15Bc4-1: Persons Associated with Municipal Advisors

Approval or Denial of Registration

Rule 15Ba1-8: Books and Records to be Made and Maintained by Municipal

Advisors

IV.

DESIGNATION OF FINRA TO EXAMINE FINRA MEMBER MUNICIPAL

ADVISORS

IMPLEMENTATION AND COMPLIANCE DATES

VI.

DELEGATION OF AUTHORITY

VII.

Delegation to the Director of the Office of Municipal Securities

Delegation to the Director of the Office of Compliance Inspections and

Examinations

PAPERWORK REDUCTION ACT

VIII. ECONOMIC ANALYSIS

IX.

FINAL REGULATORY FLEXIBILITY ANALYSIS

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 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.

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

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

See 15 U.S.C. 78o-4(a)(1)(B).

See, e.g., Municipal Securities Rulemaking Board, Unregulated Municipal Market

Participants – A Case for Reform, April 2009, http://www.msrb.org/News-andEvents/Press-Releases/Press-Releases/~/media/Files/SpecialPublications/MSRBReportonUnregulatedMarketParticipants_April09.ashx (“MSRB

Study”).

See S. Rep. No. 111-176, at 38 (2010).

See id.

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 brokerdealers. 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 recordkeeping 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.

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

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”).

See Section II.D. below and Securities Exchange Act Release No. 63576 (December 20,

2010), 76 FR 824 (January 6, 2011) (“Proposal”).

See Rule 15Ba2-6T and Securities Exchange Act Release No. 70468 (September 23, 2013)

(“Form MA-T Extension Release”).

See, e.g., MSRB Study, supra note 2.

engaging in transactions or investments with municipal advisors.

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

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

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

See 15 U.S.C. 78o-4(e)(4)(A).

See 15 U.S.C. 78o-4(e)(4)(B).

See 15 U.S.C. 78o-4(e)(4)(C).

See 15 U.S.C. 78o-4(e)(5).

not municipal derivatives, guaranteed investment contracts, and the recommendation of and

brokerage of municipal escrow investments. 13

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) 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

See 15 U.S.C. 78o-4(e)(3).

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

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 activitybased 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

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).

See 15 U.S.C. 78o-4(e)(4)(A).

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.

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.

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”

See infra Section III.A.1.c.i.

See 15 U.S.C. 78o-4(e)(3).

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).

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

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

See infra Section III.A.1.b.viii.

See infra note 876 and accompanying text (discussing comments regarding an exemption for

banks from the municipal advisor registration rules).

See infra Section III.A.1.c.viii.

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 or similar capacity (e.g., a bond indenture trustee, paying agent, or municipal

escrow agent).

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

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

Exemption When There is an Independent Registered Municipal Advisor

Several commenters suggested that a person providing advice with respect to municipal

See infra Section III.A.1.b.i.

See Dodd-Frank Act sections 731 et seq., 764 et seq.

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, securitybased 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.

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

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

See infra Section III.A.1.c.iii.

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

1. Overview of Municipal Securities Market

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

their municipal advisory activities. As discussed below in this section and in the Proposal, 32 some

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1376 (2010).

See Pub. L. No. 111-203 Preamble.

15 U.S.C. 78o-4.

See infra Section III.A.1. (discussing the term “municipal advisor”).

See infra Section III.A.1.b.ii. (discussing the term “municipal entity”).

See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 78o-4(a)(1)(B).

See Proposal, 76 FR at 825.

See id.

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.

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

See infra note 36 (referring to municipal advisors as “financial advisors”).

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.

See MSRB Study, supra note 2, at 1.

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.

See id., at 2.

looked at historical involvement by “financial advisors” identified participation rates of

approximately 50% in the period from 1984 to 2002. 38

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.

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

Other persons that may be required to register as municipal advisors include those who

See Arthur Allen and Donna Dudney, May 2010, Does the Quality of Financial Advice

Affect Prices? The Financial Review 45: 389 (“Allen and Dudney”).

See Proposal, 76 FR at 825.

See infra Section III.A.1.b.iv. (discussing the term “municipal financial products”).

See MSRB Study, supra note 35.

See infra Sections III.A.1.b.vi. and III.A.1.b.viii. (discussing the terms “guaranteed

investment contracts” and “investment strategies,” respectively).

See Investment Advisers Act Release No. 3043 (July 1, 2010), 75 FR 41018, 41019 (July

14, 2010) (“Political Contributions Final Rule”).

solicit municipal entities on behalf of brokers, dealers, municipal securities dealers, municipal

advisors, and investment advisers. Such solicitation activities are discussed herein. 44

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

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

See infra Section III.A.1.b.x.

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”).

See American Bar Association, Disclosure Roles of Counsel in State and Local Government

Securities Offerings 1 (Third Edition, 2009) (“Disclosure Roles of Bond Counsel”).

See id., at 2.

See id., at 78.

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.

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

Interests offered by college savings plans (“529 Savings Plans”) that comply with Section

529 of the Internal Revenue Code 53 are another type of 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

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

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.

See id., at 6.

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.

See 26 U.S.C. 529.

See 2012 Report on the Municipal Securities Market, supra note 45, at 8.

See College Savings Plans Network 529 Report (March 2013), available at

http://www.collegesavings.org/includes/pdfs/March%202013%20529%20Report%20Final.p

df and Investment Company Institute, 529 Plan Program Statistics, Fourth Quarter 2012,

available at http://www.ici.org/research/stats/529s/529s_12_q4.

See, e.g., MSRB Notice 2002-19 (May 14, 2002) (Application of Fair Practice and

Advertising Rules to Municipal Fund Securities).

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

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

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,

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/MSRBRules/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).

See Political Contributions Final Rule, supra note 43, at 41044-46.

See id., at 41019.

See id.

See U.S. Census Bureau, Annual Survey of Public Pensions: State- and LocallyAdministered Defined Benefit Data Summary Report: 2011 (August 2013), available at

http://www2.census.gov/govs/retire/2011summaryreport.pdf.

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.

investment agreements, and local government investment pools (“LGIPs”). 63

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

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.

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).

See 2012 Report on the Municipal Securities Market, supra note 45, at 91.

See MSRB Study, supra note 35, at 10.

See Martin Z. Braun, Deutsche Bank Swap Lures County as Budgets Crumble, Bloomberg

(Nov. 26, 2008), available at

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

2. Historical Regulation of Municipal Securities and Municipal Advisors

Municipal Securities Market

As discussed in the Proposal, 72 the Securities Act of 1933 (“Securities Act”) 73 and the

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUYLG7W1nGpM.

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-waron-short-sellers-of-bonds-commentary-by-joe-mysak.html.

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.

See id.

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-doddfrank-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-taxpayersas-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.

See Proposal, 76 FR at 826.

15 U.S.C. 77a et seq.

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

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

15 U.S.C. 78a et seq.

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)).

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.

See Ann Judith Gellis, Municipal Securities Market: Same Problems – No Solutions, 21 Del.

J. Corp. L. 427, 428 (1996).

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)).

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,

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

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

through a broker or otherwise. See 15 U.S.C. 78c(a)(30).

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)).

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).

See 15 U.S.C. 78o-4(a)-(b). See also Proposal, 76 FR at 827.

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/UserManuals/GuidelinesforRegistration.ashx.

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

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 creditsupported 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

See 15 U.S.C. 78o(b)(8) and 78o-4(a).

See 15 U.S.C. 78o-4(c)(7).

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).

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).

See Vijayakumar and Daniels, supra note 34, at 43-44.

See Gray and Cusatis, supra note 87, at 30-31.

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 at 827, note

48. See also 2012 Report on the Municipal Securities Market, supra note 45, at 10-11.

See Gray and Cusatis, supra note 87, at 41.

beginning generally with interest rate swap transactions in the mid-1980s. The derivatives utilized

since then have become more complex. 92

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 financings

may not need to register as investment advisers. 94

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

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.

See Proposal, 76 FR at 827.

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).

See MSRB Study, supra note 35, at 4.

municipal advisors to disclose actual or apparent conflicts of interest. 96

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

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]

See id., at 6.

See, generally, Proposal, 76 FR 824.

See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 78o-4(a)(1)(B).

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”).

101

See supra notes 3-4 and accompanying text.

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

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

102

See S. Rep. No. 111-176, at 38 (2010).

103

See id.

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).

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.

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

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-cv07465-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-cv00755-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).

107

See Section 975(i) of the Dodd-Frank Act.

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 through the Commission’s

public website on Form MA-T. 110

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

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

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.

111

See Temporary Registration Rule Release, supra note 5, for a full description of the

requirements of Form MA-T.

112

See Temporary Registration Rule Release, 75 FR at 54471.

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.

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

In response to the Proposal, the Commission received over 1,000 unique comment letters

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.

116

See Proposal, 76 FR at 824.

117

See id.

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.

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

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).

119

See infra Section III.A.1. (discussing the term “municipal advisor”).

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

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.

Rules for the Registration of Municipal Advisors

1. Rule 15Ba1-1: Definition of “Municipal Advisor” and Related Terms

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 entity123 or an employee of a

municipal entity124) 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

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).

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”).

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

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.

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 at 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”).

132

See Proposal, 76 FR at 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”).

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 15Ba11(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.

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

134

See 15 U.S.C. 78o-4(e)(4)(C).

135

See 15 U.S.C. 78o-4(e)(4)(C).

136

See Proposal, 76 FR at 832, note 113 and accompanying text.

such person receives compensation (direct or indirect). 137

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)

137

See infra note 409 and accompanying text.

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 at 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).

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

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 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

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.

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 at

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

Commission notes, for example, that advice to a municipal entity about whether to issue municipal

securities would be “municipal advisor activity.”

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

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).

144

See Proposal, 76 FR at 829, note 77. See also supra note 143 and accompanying text

(discussing the term “municipal advisory activities”).

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

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

145

See, e.g., Proposal 76 FR at 832, text accompanying note 113 (discussing whether

compensation for providing advice factors into the determination of whether a person must

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”).

146

See Proposal, 76 FR at 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).

specific circumstances or investment objectives. 148

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 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

148

See Proposal, 76 FR at 838.

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.

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

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

152

NABL Letter (emphasis in original).

153

Letter from John J. Wagner, Kutak Rock, dated February 21, 2011 (“Kutak Rock Letter”).

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”).

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

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

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

158

See BNY Letter.

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.

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

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 15Ba11(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

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, 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

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

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.

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).

165

Whether a “recommendation” has taken place is not susceptible to a bright line definition,

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

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 at 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.p

df.

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-G19.aspx?tab=2.

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

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.

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.

168

See supra notes 162 and 165.

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

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.

Several commenters suggested that the definition of “municipal entity” should be limited to

issuers of municipal securities 172 because the phrase “any other issuer of municipal securities” in

169

15 U.S.C. 78o-4(e)(8).

170

See infra note 191 (defining 403(b) and 457 plans).

171

See Proposal, 76 FR at 835.

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

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, taxsheltered 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

(“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.

of municipal securities pursuant to other provisions of the federal securities laws. 178

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

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)).

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.

Another commenter questioned whether a public retirement system would be a municipal entity, a

municipal financial product, or both. 180

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

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

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.

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.

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

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

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.

188

See supra notes 173-176 and accompanying text.

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

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

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 DoddFrank 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.

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).

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

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

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/IRC403(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”).

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

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.

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 controlled by, the municipal entity that

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.

195

See supra note 187 and accompanying text.

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).

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.

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.”

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

197

NABL Letter.

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,

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

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.”

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 at 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).

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.

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

204

See Proposal, 76 FR at 830.

205

See id.

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.

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.”

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 such a payment obligation, who is not otherwise excluded

from the definition of obligated person. 209 One commenter specifically stated that guaranty

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”).

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

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

210

See National Council of Higher Education Loan Programs Letter.

211

See Kutak Rock Letter.

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).

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.

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

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.

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

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.

Another commenter stated that buyers of municipal securities rely on the letter of credit and

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.

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).

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, 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.

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

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.”

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).

obtained such credit enhancements, and would therefore have to register as a municipal advisor. 223

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

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.

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.

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

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

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

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.

228

See infra Section III.A.1.b.viii.

229

See infra note 236 and accompanying text.

230

See letter from Jonathan Roberts, Principal, Roberts Consulting, LLC, dated February 18,

2011 (“Roberts Consulting Letter”).

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

financing. 233

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 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.

One commenter argued that a person that is an obligated person does not remain an

231

See id.

232

See id.

233

See id.

234

Conversely, providing advice to a client who is a municipal entity regarding debt financing

alternatives would constitute a municipal advisory activity.

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

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

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).

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.

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

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

238

See 15 U.S.C. 78o-4(e)(4).

239

See 15 U.S.C. 78o-4(e)(10).

240

15 U.S.C. 78o-4(e)(8). See also infra note 241.

241

See Proposal, 76 FR at 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.

obligated persons. 242

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

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

242

See id., at 835.

243

See Kutak Rock Letter.

244

See id.

245

See id.

246

See NABL Letter.

247

See id.

248

See also supra note 241 and accompanying text (recognizing that a charter school may be an

obligated person).

is still a municipal entity for purposes of this rule, and advisors to such municipal entities are

subject to a statutory fiduciary duty. 249

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

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

249

See 15 U.S.C. 78o-4(c).

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).

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).

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

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

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

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 rela

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