Registration of Municipal Advisors

Federal RegisterJan 6, 2011

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-63576; File No. S7-45-10]

RIN 3235-AK86

Registration of Municipal Advisors

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed 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 (as amended, the “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 and form, Exchange Act rule 15Ba2-6T and Form MA-T, effective October 1, 2010. Rule 15Ba2-6T will expire on December 31, 2011.

The Commission is proposing new rules 15Ba1-1 through 15Ba1-7 and new Forms MA, MA-I, MA-W, and MA-NR under the Exchange Act. These proposed rules and forms are designed to give effect to provisions of Title IX of the Dodd-Frank Act that, among other things, would establish a permanent registration regime with the Commission for municipal advisors and would impose certain record-keeping requirements on such advisors.

DATES:

Comments should be received on or before February 22, 2011.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed

); or

• Send an e-mail to

rule-comments@sec.gov.

Please include File Number S7-45-10 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-45-10. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments will also be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Martha Haines, Assistant Director and Chief, Office of Municipal Securities, at (202) 551-5681; Dave Sanchez, Attorney Fellow, Office of Municipal Securities, at (202) 551-5540; Victoria Crane, Assistant Director, Office of Market Supervision, at (202) 551-5744; Ira Brandriss, Special Counsel, Office of Market Supervision, at (202) 551-5651; Jennifer Dodd, Special Counsel, Office of Market Supervision, at (202) 551-5653; Steve Kuan, Special Counsel, Office of Market Supervision, at (202) 551-5624; Daniel Gien, Attorney-Adviser, Office of Market Supervision, at (202) 551-5747; Yue Ding, Law Clerk, Office of Market Supervision, at (202) 551-5842; or any of the above at Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION:

The Commission is proposing rules 15Ba1-1 to 15Ba1-7 [17 CFR 240.15Ba1-1 to 240.15Ba1-7] under the Exchange Act, and Forms MA, MA-I, MA-W, and MA-NR [17 CFR 249.1300, 1310, 1320, and 1330].

Table of Contents

I. Introduction

A. Background

1. Overview of Municipal Securities Market

a. Municipal Advisors

b. Municipal Entities and Municipal Financial Products

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

b. Municipal Advisors

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

II. Discussion

A. Proposed Rules for the Permanent Registration of Municipal Advisors

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

a. Statutory Definition of “Municipal Advisor”

b. Interpretation of the Term “Municipal Advisor”; Definition of Related Terms

c. Exclusions From the Definition of “Municipal Advisor”

2. Proposed Rule 15Ba1-2

a. Application for Municipal Advisor Registration

b. Instructions and Glossary

c. Information Requested in Form MA

d. Information Requested in Form MA-I

3. Proposed Rule 15Ba1-3

a. Withdrawal From Municipal Advisor Registration

b. Form MA-W

4. Proposed Rule 15Ba1-4: Amendment to Application for Registration and Self-Certification

5. Proposed Rule 15Ba1-5: General Procedures for Serving Non-Residents and Form MA-NR

6. Proposed Rule 15Ba1-6: Registration of Successor to Municipal Advisor

B. Approval or Denial of Registration

C. Proposed Rule 15Ba1-7: Books and Records to be Made and Maintained by Municipal Advisors

III. General Request for Comment

IV. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total Initial and Annual Reporting and Record-Keeping Burdens

1. Form MA

2. Form MA-I

3. Amendments to Form MA and Form MA-I

4. Withdrawal From Municipal Advisor Registration

5. Non-Resident Municipal Advisors

6. Outside Counsel

7. Maintenance of Books and Records

8. Total Burden

E. Collections of Information Are Mandatory

F. Request for Comment

V. Economic Analysis

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

B. Registration System

1. Benefits

2. Costs

C. Non-Resident Municipal Advisors

1. Benefits

2. Costs

D. Record keeping

1. Benefits

2. Costs

E. Request for Comment on Economic Analysis

VI. Consideration of Impact on the Economy

VII. Initial Regulatory Flexibility Analysis

A. Reasons and Objectives for the Proposed Rules

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Record keeping, and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. General Request for Comment

VIII. Statutory Basis and Text of Proposed Amendments

I. Introduction

A. Background

On July 21, 2010, President Obama signed into law the Dodd-Frank Act.

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.

With Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section 15B of the Exchange Act

to, among other things, make it unlawful for municipal advisors

to provide certain advice to, or solicit, municipal entities

or certain other persons without registering with the Commission.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

See

Public Law 111-203 Preamble.

15 U.S.C. 78

-4. All references in this Release to the Exchange Act refer to the Exchange Act as amended by the Dodd-Frank Act.

See infra

Section II.A.1. (discussing the term “municipal advisor”).

See infra

note 82, and accompanying text (discussing the term “municipal entity”).

See

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

-4(a)(1)(B).

1. Overview of Municipal Securities Market

a. Municipal Advisors

Until the passage of the Dodd-Frank Act, the activities of municipal advisors were largely unregulated and municipal advisors were generally not required to register with the Commission or any other Federal, State or self-regulatory entity with respect to their municipal advisory activities. As discussed below in this section, some entities that are now subject to registration as municipal advisors pursuant to Section 15B of the Exchange Act, and rules or regulations promulgated thereunder, currently are subject to regulation by various Federal and State regulators in other capacities. These entities include brokers, dealers, municipal securities dealers, investment advisers, and banks. Such regulations, however, generally do not apply to their activities as municipal advisors.

Municipal advisors engage in municipal advisory activities in a variety of contexts. For example, municipal advisors participate in the majority of issuances of municipal securities.

According to the Municipal Securities Rulemaking Board (“MSRB” or “Board”), approximately $315 billion (70%)

of the municipal debt issued in 2008 was issued with the participation of municipal advisors commonly referred to as “financial advisors.”

Research also suggests that participation by municipal advisory firms in the issuance of municipal securities is rising, with the MSRB noting a 63% participation rate in 2006, a 66% participation rate in 2007, and a 70% participation rate in 2008.

A study that looked at historical involvement by “financial advisors” identified participation rates of approximately 50% in a nearly twenty-year period ending in 2002.

With respect to the issuance of municipal securities, municipal advisors (which may include entities registered as broker-dealers acting as municipal advisors) engage in such activities as assisting municipal entities in developing a financing plan, assisting in the selection of other parties to the financing such as bond counsel and underwriters, coordinating the rating process, ensuring adequate disclosure, and evaluating and negotiating the financing terms.

See

JayaramanVijayakumar 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

Municipal Securities Rulemaking Board, “Unregulated Municipal Market Participants: A Case for Reform” (Apr. 2009), available at

http://www.msrb.org/News-and-Events/Press-Releases/Press-Releases/~/media/Files/Special-Publications/MSRBReportonUnregulatedMarketParticipants_April09.ashx

(“MSRB Study”).

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.

Id.

See id.

See

Arthur Allen and Donna Dudney, May 2010,

Does the Quality of Financial Advice Affect Prices?

The Financial Review 45: 389 (“Allen and Dudney”) (analyzing data from 1984 to 2002).

Municipal advisors also engage in municipal advisory activities with respect to municipal financial products.

For example, as derivatives have developed in the municipal securities market, some municipal advisory firms developed expertise in that area. These municipal advisory firms are generally referred to as “swap advisors.”

Swap advisors may provide advice solely with respect to a municipal derivative transaction or may provide such advice in connection with other types of municipal advisory activities.

See infra

note 93 and accompanying text (discussing the term “municipal financial products”).

See

MSRB study,

supra note

In addition, municipal advisors may provide advice to municipal entities concerning investment strategies. These advisory firms assist in investing proceeds from bond offerings as well as manage other public monies. Such public monies include, for example, the general funds of states and local governments, public pension plans and funds dedicated to other public programs, such as public transportation, police and fire protection, public health, and public education. In addition, municipal advisors provide risk management, asset allocation, financial planning and cash management services and help State and local governments find and evaluate other advisors that manage public funds and provide other types of services.

As discussed in more detail below, unless excluded, these firms generally will have to register as municipal advisors under Section 15B of the Exchange Act.

Municipal advisors subject to registration may include Federal and State registered investment advisers, depending on the activities in which they are engaged.

See

Investment Advisers Act Release No. IA-2910 (August 3, 2009), 74 FR 39840, 39840-41 (August 7, 2009) (“Political Contributions Proposed Rule”).

See infra

Section II.A.1. (discussing the term “municipal advisor”).

See id.

Depending on their role with respect to investment strategies for municipal entities, commercial banks subject to regulation by various Federal and State regulators may also engage in activities that would subject them to registration as municipal advisors. Such commercial banks may act as trustees with respect to an issuance of municipal securities or otherwise provide advice with respect to municipal financial products. Other persons that are subject to registration as municipal advisors include those who solicit municipal entities on behalf of the types of municipal advisors discussed above, as well as on behalf of brokers, dealers, municipal securities dealers and other parties.

b. Municipal Entities and Municipal Financial Products

The municipal securities market consists of over 51,000 issuers,

a diverse group that includes states, their political subdivisions such as cities, towns and counties, and their instrumentalities such as school districts or port authorities. These public bodies are governed by State and local laws, including State constitutions, statutes, city charters, and municipal codes.

Such constitutions, statutes, charters, and codes impose on municipal issuers a vast and varied multiplicity of requirements relating to

governance, budgeting, accounting, and other financial matters.

The governing bodies of municipal issuers are as varied as the types of issuers, ranging from State governments, cities, towns, and counties with elected officials to commissions and other special purpose enterprises having appointed members.

Municipal securities are issued by government entities to pay for a variety of public projects, for cash flow and other governmental needs, and to fund non-governmental private projects by acting as a conduit on behalf of private organizations that wish to obtain tax-exempt interest rates.

As of March 31, 2010, municipal issuers had an outstanding principal amount of securities in excess of $2.8 trillion.

In 2009 alone, 15,055 new issuances of municipal securities took place, with a value of over $474.5 billion.

As of 2009, the average daily trading volume for the municipal bond market was $12.5 billion, as compared to $16.8 billion in the corporate bond market and $407.9 billion in the Treasury bond market.

See Report on Transactions in Municipal Securities,

Office of Economic Analysis and Office of Municipal Securities, the Division of Trading and Markets, U.S. Securities and Exchange Commission, (July 1, 2004).

See

American Bar Association, Disclosure Roles of Counsel in State and Local Government Securities Offerings 1 (Third Edition, 2009) (“Disclosure 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.

See

Federal Reserve Board,

Flow of Funds Accounts, Flows and Outstandings,

First Quarter 2010.

See The Bond Buyer Yearbook

14 (SourceMedia Inc.) (2010).

See

SIFMA,

Average Daily Trading Volume in the U.S. Bond Markets,

available at

http://www.google.com/url?q=http://www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/CM-US-Bond-Market-Trading-Volume-SIFMA.xls&sa=U&ei=5EHsTLvBFoT58AbPqdGjAQ&ved=0CBYQFjAA&usg=AFQjCNHv-FKIpdi_QB8m7jgvg2ssJJ1ikg

(last visited November 23, 2010).

Presently, there is no definitive public information regarding the size of the municipal securities derivative market. Estimates of the size of the market have been reported to range from $100 billion to $300 billion, annually, in notional principal amount.

Estimates of the number of municipal issuers that have engaged in derivative transactions also vary. Since interest rate swaps are bilateral contracts entered into privately, there is no comprehensive data on how many municipal issuers are active in the $450 trillion interest-rate swap market, although some anecdotal evidence suggests a relatively wide use. For instance, a review of Pennsylvania Department of Community and Economic Development records revealed that 185 school districts, towns and counties in Pennsylvania have engaged in derivative transactions since 2003, when the State's law was explicitly changed to allow for such transactions.

However, other estimates have pointed to a less widespread use of derivatives among municipal issuers.

Since 2008, the use of derivatives by municipal entities has declined and many municipal entities have terminated existing interest rate swaps.

See

MSRB Study,

supra

note 8.

See

Martin Z. Braun,

Deutsche Bank Swap Lures County as Budgets Crumble,

Bloomberg (November 26, 2008).

In a 2007 study, Standard & Poor's identified 750 municipal issuers that used swaps.

See

Joe Mysak,

California Declares War on State Bond Short-Sellers,

Bloomberg Businessweek (Apr. 27, 2010). In October 2009, Moody's undertook a review of the state and local governments that it rates with outstanding swaps and identified 500 of such entities.

See id.

Moody's also estimated that Pennsylvania issuers accounted for 22% of all municipal derivative transactions, suggesting that broad participation by municipal entities in Pennsylvania did not translate into broad participation by municipal entities nationwide.

See

Joe Mysak,

Swaps Nightmares Become Real for Amateur Financiers,

Bloomberg (Dec. 15, 2009).

See, e.g.,

Michael McDonald,

Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire,

Bloomberg (Nov. 10, 2010), available at

http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html.

According to recently available United States census data, as of 2008, there were approximately 2,550 state and local government employee retirement systems.

These “public pension plans” had over $2.2 trillion of assets and represented one-third of all U.S. pension assets.

Public pension plans might seek advice with respect to municipal financial products. In addition, third parties might solicit these public pension plans on behalf of firms seeking to provide services to these plans.

See

U.S. Census Bureau,

State & Local Government Employee Retirement Systems,

available at

http://www.census.gov/govs/retire.

See

Federal Reserve Board,

Flow of Funds Accounts, Flows and Outstanding,

First Quarter 2009 (at table L.119).

See

Investment Advisers Act Release No. IA-3043 (July 1, 2010), 75 FR 41018, 41019 (July 14, 2010) (“Political Contributions Final Rule”).

College savings plans (“529 Plans”) that comply with Section 529 of the Internal Revenue Code (“IRC”) provide tax advantages designed to encourage saving for future college costs.

529 Plans are sponsored by states, state agencies, or educational institutions. 529 plan assets have increased from $8.6 billion in 2000 to $104.9 billion in the fourth quarter of 2008, and the number of 529 plan participants has increased from 1.3 million in 2000 to 11.2 million in the fourth quarter of 2008.

Like public pension plans, 529 Plans might be solicited on behalf of third parties seeking to do business with such plans.

529 Plans might also seek advice with respect to municipal financial products and the issuance of municipal securities.

See

26 U.S.C. 529.

See

Investment Company Institute,

529 Plan Program Statistics, December 2008

(May 22, 2009), available at

http://www.ici.org/research/stats/529s/529s_12-08.

See

Political Contributions Final Rule,

supra

note 31, at 41019.

See

MSRB,

Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market,

Interpretative Notice of Rule D-12, dated January 18, 2001, available at

http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Definitional/Rule-D-12.aspx?tab=2

(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).

In addition to public pension plans and 529 Plans, state and local government agencies also maintain other pools of assets including their general funds and other special funds. Governmental entities generally invest such funds in a combination of individualized investments, investment agreements or local government investment pools (“LGIPs”).

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. States have several trillion dollars in state funds, including general funds, public pension plans, and 529 plans.

See e.g.,

The National Association of State Treasurers,

Reforming Corporate Governance,

State Government News (June/July 2003), available at

http://www.csg.org/knowledgecenter/docs/sgn0307ReformingCorporate.pdf

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

The Securities Act of 1933 (“Securities Act”)

and the Exchange Act

were both enacted with broad exemptions for municipal securities from all of their provisions except for the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act.

In the early 1970s, the municipal securities market was still relatively small.

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.

15 U.S.C. 77a

et seq.

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. 77

(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 bonds outstanding in 1975 after an issuance of $58 billion in that year.

See

The Bond Buyer's Municipal Finance Statistics, 1975 (June 1976).

See

Ann Judith Gellis,

Municipal Securities Market: Same Problems—No Solutions,

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

The regulation of the market for municipal securities at the Federal level essentially began in 1975. Congress, as part of the Securities Act Amendments of 1975 (“1975 Amendments”) created a limited regulatory scheme for the municipal securities market at the Federal level.

That scheme included mandatory registration with the Commission of brokers and dealers in municipal securities and gave the Commission broad rulemaking and enforcement authority over such brokers and dealers. At the same time, however, Congress prohibited the Commission from requiring issuers of municipal securities to file disclosures, such as a prospectus, with the Commission before selling municipal securities to investors. Thus, the Commission's oversight of the municipal securities market has been focused on the intermediaries between municipal entities and investors, rather than on municipal entities themselves. In addition, the 1975 Amendments authorized the creation of the MSRB and granted it authority to promulgate rules concerning broker and dealer transactions in municipal securities.

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. 78

(c)(1), 78

(c)(2), 78

-4(c)(1), 78

-4(c)(2), 78q(a), 78q(b), and 78u(a)(1)).

As noted above, pursuant to the 1975 Amendments, all brokers and dealers that underwrite or trade municipal securities are required to register with the Commission.

If a person engages in the activities of a broker or dealer in municipal securities and does not satisfy an exception from the registration provisions of the Exchange Act, such person must register with the Commission and may have to join a self-regulatory organization (“SRO”) such as the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Exchange Act defines a “municipal securities dealer” as any person (including a separately identifiable department or division of a bank) engaged in the business of buying and selling municipal securities for its own account other than in a fiduciary capacity, through a broker or otherwise

and requires such person to register with the Commission.

All brokers, dealers, and municipal securities dealers that engage in municipal securities transactions also must register with the MSRB and may not act in contravention of its rules.

See

15 U.S.C. 78

-4(a)-(b).

See

15 U.S.C. 78c(a)(30).

See

15 U.S.C. 78

-4(a)-(b).

See

MSRB rule A-12. These requirements for registration with the Commission and MSRB were in effect prior to passage of the Dodd-Frank Act and remain in effect.

Since 1975, the municipal securities market has grown and evolved significantly to encompass a wide variety of bond structures

and credit enhancement. Municipal bond insurance was first introduced in 1971 and letter of credit-supported municipal bonds became very popular after the introduction of variable rate municipal bonds in the early 1980s.

In 1988, auction rate securities were introduced into the municipal market.

In addition, the municipal securities market has experienced a proliferation of complex derivative products beginning generally with interest rate swap transactions in the mid 1980s.

The availability of such a variety of financing options has led to an increasing reliance on external advisors by municipal entities that issue municipal securities to assist them in deciding among the multiplying array of structural choices for their debt and to help them negotiate with the multiplying number of intermediaries.

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 18, at 54-55 (discussion of conduit bonds).

See

Gray and Cusatis,

supra

note 47, at 30-31. The Commission notes that although the use of letters of credit and bond insurance have declined since 2008, these forms of credit enhancement remain an option for municipal entities to consider when issuing municipal securities.

See id.

at 41.

See id.

at 49. Municipal market 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. Therefore, the most common use for derivatives in the municipal securities market is the execution of interest rate swaps to hedge issuers' interest rate exposure for new, anticipated, or outstanding debt.

See id.

See

Vijayakumar and Daniels,

supra

note 7, at 43-44.

b. Municipal Advisors

As discussed above, many market professionals are involved in issuing municipal securities and advising municipal entities with respect to municipal financial products. Historically, however, municipal advisors have been largely unregulated. For example, Commission staff has taken the position that financial advisors that limit their advisory activities to advising municipal issuers as to the structuring of their financings rather than providing advice for compensation regarding the investment of assets may not need to register as investment advisers.

Also, while dealers who act as municipal financial advisors are subject to regulation,

those regulations apply primarily to their business as dealers rather than their activities as municipal financial advisors.

Only in limited circumstances do those rules also apply to their municipal advisory activities.

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

(explaining the 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 supra

notes 43-46, and accompanying text.

See, e.g.,

17 CFR 240.15Ba2-2.

For example, MSRB rule G-37 currently prohibits a broker, dealer or municipal securities dealer from engaging in “municipal securities business with an issuer within two years after any contribution to an official of such issuer * * *” MSRB rule G-37. The rule further defines “municipal securities business” to include, among other things, underwriting and the provision of financial advisory services.

See id.

Additionally, approximately fifteen states, 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 only apply to specific situations.

Some state and local entities also require certain types of municipal advisors to disclose actual or apparent conflicts of interest.

See

MSRB study,

supra

note 8.

See id.

As discussed in more detail below, the Dodd-Frank Act amended the Exchange Act to require municipal advisors to register with the Commission.

In addition, the Exchange Act, as amended by the Dodd-Frank Act, grants the MSRB regulatory authority over municipal advisors,

and imposes a fiduciary duty on municipal advisors when advising municipal entities.

See

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

-4(a)(1)(B).

See

15 U.S.C. 78

-4(b).

See

15 U.S.C. 78

-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. 78

-4(c)(1).

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

The registration requirement for municipal advisors became effective on October 1, 2010.

Consequently, municipal advisors must now be registered in order to continue their municipal advisory activities. To enable municipal advisors to temporarily satisfy the registration requirement, and to make relevant information available to the public and municipal entities, the Commission adopted interim final temporary rule 15Ba2-6T

under the Exchange Act on September 1, 2010.

Pursuant to rule 15Ba2-6T, a municipal advisor must temporarily satisfy the statutory registration requirement by submitting certain information electronically through the Commission's public Web site on Form MA-T.

See

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

17 CFR 240.15Ba2-6T.

See

Securities Exchange Act Release No. 62824 (September 1, 2010), 75 FR 54465 (September 8, 2010) (“Temporary Registration Rule Release”).

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. Approximately 800 firms and individuals have registered on Form MA-T as municipal advisors.

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.

See

Temporary Registration Rule Release,

supra

note 63, for a full description of the requirements of Form MA-T.

The interim final temporary rule provides that, unless rescinded, a municipal advisor's temporary registration by means of Form MA-T 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 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.

The temporary registration procedure was developed as a transitional step toward the implementation of a permanent registration regime for municipal advisors. Accordingly, as discussed in more detail below, the Commission is proposing rules and forms that, if adopted, would establish a permanent registration regime for municipal advisors that would require registration by all persons meeting the definition of municipal advisor, including those persons currently registered on Form MA-T. In discussing the proposed permanent registration regime, the Commission addresses issues, concerns, and suggestions relevant to this proposal raised by commenters in response to the interim final temporary rule.

See

17 CFR 240.15Ba2-6T(e).

The Commission received seven comment letters in response to the interim final temporary rule. The comment letters are available on the Commission's Internet Web site at

http://www.sec.gov/comments/s7-19-10/s71910.shtml

. The Commission also received one comment letter in response to SEC regulatory initiatives under the Dodd-Frank Act that discussed municipal advisors in connection with pay-to-play rules and, therefore, is outside the scope of this release relating to the registration of municipal advisors. This comment letter is available on the Commission's Internet Web site at

http://www.sec.gov/comments/df-title-ix/municipal-securities-municipal-advisors/municipal-securities-municipal-advisors.shtml

II. Discussion

Section 15B(a)(1) of the Exchange Act, as amended by the Dodd-Frank Act, makes it unlawful for a municipal advisor

to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered with the Commission.

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.

See infra

Section II.A.1. (discussing the term “municipal advisor”).

See

15 U.S.C. 78

-4(a)(1)(B). For a discussion of the terms “municipal entity,” “obligated person,” “municipal financial product,” and “solicitation of a municipal entity or obligated person,”

see infra

Section II.A.1.b.

See

15 U.S.C. 78

-4(a)(2).

Consistent with the requirements of the Dodd-Frank Act, as discussed in detail below, the Commission is proposing new rules and forms that, if adopted, would establish a permanent Commission registration regime for municipal advisors. The Commission believes that the information disclosed pursuant to the proposed rules and forms would provide significant value to the Commission in its oversight of municipal advisors and their activities in the municipal securities markets. The information provided pursuant to these rules and forms would also aid municipal entities and obligated persons in choosing municipal advisors, engaging in transactions with municipal advisors, or participating in municipal securities transactions in which a municipal advisor is also engaged.

A. Proposed Rules for the Permanent Registration of Municipal Advisors

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

a. Statutory Definition of “Municipal Advisor”

Section 15B(e)(4)(A) of the Exchange Act,

as amended by the Dodd-Frank Act, defines the term “municipal advisor” to mean a person (who is not a municipal entity

or an employee of a municipal entity) (i) that provides advice to or on behalf of a municipal entity or obligated person

with respect to municipal financial products

or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or (ii) that undertakes a solicitation of a municipal entity.

15 U.S.C. 78

-4(e)(4)(A).

See infra

note 82, and accompanying text (discussing the term “municipal entity”).

See infra

note 86, and accompanying text (discussing the term “obligated person”).

See infra

note 93, and accompanying text (discussing the term “municipal financial products”).

See infra

note 103, and accompanying text (discussing the term “solicitation of a municipal entity or obligated person”).

The statutory definition of a “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” that engage in municipal advisory activities.

These persons are included if they 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 (including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues) or undertake a solicitation of a municipal entity or obligated person (

i.e.,

“municipal advisory activities”).

See

15 U.S.C. 78

-4(e)(4).

The proposed definition of “municipal advisory activities” has the same meaning as the definition of “municipal advisory services” in connection with rule 15Ba2-6T. Thus, in proposed rule 15Ba1-1 the Commission is proposing 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. 78

-4(e)(8)) or obligated person (as defined in Section 15B(e)(10) of the Securities Exchange Act of 1934 (15 U.S.C. 78

-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.” Proposed rule 15Ba1-1(e).

The definition of “municipal advisor” explicitly excludes “a broker, dealer, or municipal securities dealer serving as an underwriter,”

as well as attorneys offering legal advice or providing services that are of a traditional legal nature and engineers providing engineering advice.

Further, the definition of “municipal advisor” excludes “any investment adviser registered under the Investment Advisers Act of 1940, 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.”

See infra

note 105 (defining the term “underwriter”).

See

15 U.S.C. 78

-4(e)(4)(C).

See id.

Consequently, the statutory definition of “municipal advisor” includes distinct groups of professionals that offer different services and compete in distinct markets. The three principal types of municipal advisors are: (1) Financial advisors, including, but not limited to, broker-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; (2) investment advisers that advise municipal pension funds and other municipal entities on the investment of funds held by or on behalf of municipal entities (subject to certain exclusions from the definition of a “municipal advisor”); and (3) third-party marketers and solicitors.

b. Interpretation of the Term “Municipal Advisor”; Definition of Related Terms

As noted above, 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.

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.”

See

15 U.S.C. 78

-4(e)(4).

The registration requirement for municipal advisors under Section 15B of the Exchange Act applies to every person, including every natural person, who provides the types of advice described in the definition of “municipal advisor”—whether that person is an organized entity, sole proprietor, employee of a municipal advisory firm, or otherwise. For clarity, the Commission refers to each organized entity that is a municipal advisor, including sole proprietors, as a “municipal advisory firm,” and each municipal advisor that is a natural person, including sole proprietors, as a “natural person municipal advisor.”

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.”

To provide additional clarification with respect to clause (B) of the definition of “municipal entity,” the Commission notes that the definition includes, but is not limited to, public pension funds, local government investment pools 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.

15 U.S.C. 78

-4(e)(8).

One commenter asked whether “small issuers such as individual charter schools (that are deemed public schools by the state with individual charters)” would be included in the definition of “municipal entity.”

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

letter from Brad R. Jacobsen, dated September 7, 2010 (“Jacobsen Letter”).

See, e.g.,

US Charter Schools,

Answers to Frequently Asked Questions,

available at

http://www.uscharterschools.org/pub/uscs_docs/o/faq.html

(last visited November 2, 2010).

15 U.S.C. 78

-4(e)(8). 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 or other reasons.

See, e.g.,

US Charter Schools,

Charter School Facilities: A Resource Guide on Development and Financing,

available at

http://www.uscharterschools.org/gb/dev_fin/financing.htm

(last visited November 23, 2010). 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.

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.”

One commenter stated that this definition in Exchange Act Section 15B(e)(10) is “potentially very broad” and asked for clarification regarding the definition.

In particular, the commenter encouraged the Commission to interpret the definition of “obligated person” for purposes of the definition of “municipal advisor” consistently with the definition of “obligated person” for purposes of rule 15c2-12.

15 U.S.C. 78

-4(e)(10). Obligated persons can include entities acting as conduit borrowers such as private universities, non-profit hospitals, and private corporations.

See

letter from John J. Wagner, Kutak Rock LLP, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, dated September 28, 2010 (“Kutak Rock Letter”).

See id.

Rule 15c2-12 relates to municipal securities disclosures.

See

17 CFR 240.15c2-12.

The Commission believes 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. 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).”

Thus, pursuant to the exemptive authority granted in Section 15B(a)(4) of the Exchange Act, the Commission proposes to exempt from the definition of “obligated person” providers of municipal bond insurance, letters of credit, or other liquidity facilities. Specifically, proposed rule 15Ba1-1(i) provides that the term “obligated person” shall not include providers of municipal bond insurance, letters of credit, or other liquidity facilities.

The Commission believes that this interpretation does not conflict with the goals of the Dodd-Frank Act to provide further protections for certain entities that participate in borrowings in the municipal securities market and would help ensure uniformity among rules relating to such market. Providers of municipal bond insurance, letters of credit, or other liquidity facilities are generally non-governmental providers of credit enhancements.

As providers of credit enhancement, these entities are not borrowing funds through a municipal entity and, therefore, the Commission believes they do not require the type of protection that should be applicable with respect to those who borrow funds through municipal entities in municipal securities transactions. In addition, the Commission notes that this interpretation would further uniformity among rules relating to the definition of obligated persons in the municipal securities market.

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

proposed rule 15Ba1-1(i).

See also

Securities Exchange Act Release No. 34961 (November 10, 1994), 59 FR 59590 (November 17, 1994).

The Commission notes that a municipal entity that provides credit enhancement could be an obligated person for purposes of the proposed rule.

See

Kutak Rock Letter.

Municipal Financial Products; Investment Strategies

Section 15B(e)(5) provides that the term “municipal financial product” means “municipal derivatives, guaranteed investment contracts, and investment strategies.”

Exchange Act Section 15B(e)(3) provides that “the term `investment strategies' includes plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments.”

One commenter requested that the Commission clarify the term “investment strategies” for purposes of the definition of “municipal financial products.”

The Commission notes that the definition of “investment strategies” provides that it “includes” plans or programs for the investment of the proceeds of municipal securities and, therefore, the Commission interprets the definition to mean that it includes, without limitation, the investment of the proceeds of municipal securities. Further, the Commission interprets this definition to include plans, programs, or pools of assets that invest funds held by or on behalf of a municipal entity, and, therefore, any person that provides advice with respect to such funds must register as a municipal advisor unless it is covered by one of the exclusions discussed below. Consistent with this interpretation, proposed rule 15Ba1-1(b) provides that the term “investment strategies” includes “plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity.”

In proposing this interpretation of the term “investment strategies,” the Commission considered the statutory definitions of “municipal advisor” and “municipal entity.” Specifically, the Commission noted that the definition of a “municipal entity” includes “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.”

Based on these definitions, the Commission believes it was Congress's intent to include in the definition of “municipal advisor” persons that provide advice with respect to plans, programs or pools of assets that invest funds held by, or on behalf of, a municipal entity, such as a 529 college savings plan, LGIP or public pension plan. Such plans, programs, and pools of assets are generally funded from sources other than proceeds of municipal securities, such as families who wish to save for a child's college expenses, general monies of state and local governments being temporarily invested prior to their budgeted expenditure, and pension contributions from employees and state and local government employers. As a result, the Commission does not believe that it was Congress's intent to limit the requirement to register as a municipal advisor only to those persons that provide advice with respect to plans or programs for the investment of proceeds from municipal securities. Also, because every bank account of a municipal entity is comprised of funds “held by or on behalf of a municipal entity,” money managers providing advice to municipal entities with respect to their bank accounts could be municipal advisors. The Commission notes, however, that to the extent a person is providing advice to a pooled investment vehicle in which a municipal entity has invested funds along with other investors that are not municipal entities, the pooled investment vehicle would not be considered funds “held by or on behalf of a municipal entity” and, therefore, the person providing advice to the pooled investment vehicle would not have to register as a municipal advisor.

15 U.S.C. 78

-4(e)(5).

15 U.S.C. 78

-4(e)(3).

See

letter from Carolyn Walsh, Vice President and Senior Counsel, Center for Securities, Trust and Investments, American Bankers Association (“ABA”), and Deputy General Counsel, ABA Securities Association, to Elizabeth M. Murphy, Secretary, Commission, dated October 13, 2010 (“ABA Letter”).

See also

letter from Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (“SIFMA”), to Martha Haines, Assistant Director and Chief, Office of Municipal Securities, Commission, dated November 15, 2010 (“SIFMA Letter”) (suggesting interpretations of the term “investment strategies”).

Proposed rule 15Ba1-1(b).

15 U.S.C. 78

-4(e)(8)(B).

To the extent that the pooled investment vehicle is a LGIP, the pooled investment vehicle would be considered to be funds “held by or on behalf of” a municipal entity and, therefore, a person providing advice with respect to a LGIP would have to register as a municipal advisor.

See also

SIFMA Letter (suggesting that moneys in a commingled account would not be considered proceeds unless the municipal entity specifically communicates that such investment is being made with proceeds of an issue of municipal securities).

100

See

ABA Letter.

As noted above, the Commission is proposing to interpret the term “investment strategies” to include plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity, as well as plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives or guaranteed investment contracts, or the recommendation of or brokerage of municipal escrow investments. Municipal entities utilizing the services of advisors with respect to plans, programs or pools of assets that invest funds are subject to the same risks regardless of whether those funds are the proceeds of municipal securities. The Commission does not have any evidence that the competency of the advisors or quality of advice needed by municipal entities with respect to the proceeds of municipal securities and municipal escrow investments is any different than with respect to the investment of other public funds—which may exceed the amount of proceeds of municipal securities or municipal escrow investments. Furthermore, this approach avoids any need to trace the investment of proceeds of municipal securities commingled with other public funds and eliminates the potential for abuse from the artificial commingling of the proceeds of municipal securities with other public funds solely to avoid registration as a municipal advisor and compliance with any rules or regulations relating to such advisors.

Municipal Derivatives

The term “municipal derivatives” is not defined in Section 15B of the Exchange Act. Accordingly, the Commission is proposing, in rule 15Ba1-1(f), that the term “municipal derivatives” means “any swap (as defined in Section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)) and Section 3(a)(69) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(69)), including any rules and regulations thereunder) or security-based swap (as defined in Section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)), including any rules and regulations thereunder) 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.”

101

Thus, the Commission is including in the definition of “municipal derivatives” the definitions of “swap” and “security-based swap,” as those terms are defined by statute (and any rules or regulations thereunder). The Commission believes it is appropriate to use such definitions for purposes of defining the term “municipal derivatives” where the counterparty is a municipal entity or obligated person.

101

See

proposed rule 15Ba1-1(f).

Solicitation of a Municipal Entity or Obligated Person

The definition of “municipal advisor” in Exchange Act Section 15B(e)(4) includes a person that undertakes a solicitation of a municipal entity or obligated person.

102

Exchange Act Section 15B(e)(9) provides that the term “solicitation of a municipal entity or obligated person” means “a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-2]) that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.”

103

As a result of this definition, the Commission notes that, unless an exclusion applies, any third-party solicitor that seeks business on behalf of a broker, dealer, municipal securities dealer, municipal advisor or investment adviser from a municipal entity must register as a “municipal advisor.” For example, a third-party solicitor that seeks business on behalf of an investment adviser from a municipal pension fund or a local government investment pool must register as a “municipal advisor.” In addition, the determination regarding whether a solicitation of a municipal entity requires a person to register as a municipal advisor is not based on the number, or size, of investments that are solicited. Thus, the Commission would consider a solicitation of a single investment of any amount in a municipal entity to require the person soliciting the municipal entity to register as a municipal advisor.

102

See

15 U.S.C. 78

-4(e)(4)(A)(ii). The Commission notes that the definition of “municipal advisor” under Section 15B(e)(4)(A) means, in part, a person that “undertakes a solicitation of a municipal entity.”

Id.

In defining the phrase “solicitation of a municipal entity,” Section 15B includes within that phrase, the words “or obligated person.”

See

15 U.S.C. 78

-4(e)(9). Section 15B(a)(1)(B) also includes solicitations of obligated persons. Thus, the Commission interprets the definition of “municipal advisor” to include the solicitation of a municipal entity or obligated person.

103

15 U.S.C. 78

-4(e)(9).

As noted above, the definition of “solicitation of municipal entity or obligated person” applies to solicitations on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation. Accordingly, persons soliciting on behalf of affiliated entities would not fall within the definition of municipal advisor and would not be required to register pursuant to Section 15B of the Exchange Act. The statute would not, however, preclude such persons from registering as municipal advisors and being subject to the rules and regulations applicable to registered municipal advisors. For example, a person that makes a direct or indirect communication with a municipal entity or obligated person on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser that controls, is controlled by, or is under common control with the person undertaking such communication, where the communication is for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity, may voluntarily file Form MA or MA-I, as applicable, and apply to register as a municipal advisor. By registering as a municipal advisor, such person must comply with all Federal securities laws and rules or regulations promulgated thereunder relating to registered municipal advisors, including the

obligation to comply with MSRB rules that apply to municipal advisors.

104

Recently proposed amendments to the Investment Advisers Act seek to permit investment advisers to pay any “regulated municipal advisor” to solicit government entities on its behalf.

See

Investment Advisers Act Release No. IA-3110 at 69 (November 19, 2010). Such solicitors may include affiliated entities of the investment adviser. As part of its deliberations with respect to the Dodd-Frank Act, Congress expressed its intent that municipal advisors be permitted to solicit government clients and be subject to regulation as municipal advisors.

See id.

at n. 217. Allowing entities to register as municipal advisors and subject themselves to the regulatory regime for municipal advisors as a condition to being paid as solicitors on behalf of affiliated investment advisers does not contravene this Congressional intent.

c. Exclusions From the Definition of “Municipal Advisor”

Broker, Dealer, or Municipal Securities Dealer Serving as an Underwriter

The definition of “municipal advisor” in proposed rule 15Ba1-1(d) would clarify that the exclusion from the definition for a broker, dealer, or municipal securities dealer serving as an underwriter

105

does not apply when such persons are acting in a capacity other than as an underwriter on behalf of a municipal entity or obligated person.

106

The Commission interprets the exclusion to apply solely to a broker, dealer, or municipal securities dealer serving as an underwriter on behalf of a municipal entity or obligated person in connection with the issuance of municipal securities.

107

Thus, a broker, dealer or municipal securities dealer would not be excluded from the definition of a “municipal advisor” if the broker, dealer or municipal securities dealer engages in municipal advisory activities when acting in a capacity other than as an underwriter on behalf of a municipal entity or obligated person. For example, a broker-dealer advising a municipal entity with respect to the investment of bond proceeds or the advisability of a municipal derivative, would be a municipal advisor with respect to those activities. In addition, a broker-dealer acting as a placement agent for a private equity fund that solicits a municipal entity or obligated person to invest in the private equity fund would be a municipal advisor with respect to that activity. The Commission notes that including such activities within the scope of municipal advisory activities is consistent with the Exchange Act.

108

105

The term “underwriter” is defined in Section 2(a)(11) of the Securities Act of 1933.

See

15 U.S.C. 77b(a)(11).

106

See

15 U.S.C. 78

-4(e)(4)(C) (providing that the definition of “municipal advisor” does not include a broker, dealer, or municipal securities dealer serving as an underwriter (as defined in section 2(a)(11) of the Securities Act of 1933)).

107

See

Temporary Registration Rule Release, supra note 63, at 54467, n.19.

See also

S. Rep. No. 176, 111th Cong., 2d. Sess. 148 (2010) (“Senate Report”) (noting the need to subject activities such as solicitation of a municipal entity to engage an investment adviser to MSRB regulation). The Commission believes that Congress excluded a broker, dealer or municipal securities dealer acting as an underwriter on behalf of a municipal entity or obligated person in connection with the issuance of municipal securities because such activity is already subject to MSRB rules.

108

See

Exchange Act Section 15B(e)(4)(A) and (B) (including placement agents and solicitors that undertake a solicitation of a municipal entity in the definition of municipal advisor); Senate Report; Letter from Senator Christopher J. Dodd, U.S. Senate Committee on Banking, Housing and Urban Affairs, to Elizabeth M. Murphy, Secretary, Commission, dated February 2, 2010.

One commenter asked for clarification regarding whether a broker-dealer or another entity that provides advice or assistance to a municipal entity on an informal non-contractual (and non-compensated) basis would have to register as a municipal advisor.

109

This commenter believes that such persons should not have to register as municipal advisors.

110

Another commenter, however, stated that “[a]ny advisor who provides `free' service will be compensated at some point for this service. The services being rendered are the trigger for registration and the corresponding fiduciary duty, not the title of the relationship, the terms of the contract, or the compensation received. Such advisor should not be permitted to avoid registration and fiduciary responsibilities.”

111

Similarly, another commenter stated that individuals that offer “`free' or `voluntary' Municipal Securities Advisory Services should not be exempt from registration.”

112

109

See

Kutak Rock Letter.

See also

letter from Amy Natterson Kroll and W. Hardy Callcott, Bingham McCutchen LLP, to Elizabeth M. Murphy, Secretary, Commission, dated October 13, 2010 (“Bingham Letter”) (stating that it urges “the Commission to clarify that providing uncompensated introductions to potential underwriters or other potential financing participants does not constitute a `solicitation' that would trigger registration as a municipal advisor”).

110

See

Kutak Rock Letter.

111

See

letter from Steve Apfelbacher, President, National Association of Independent Public Finance Advisors, to Commission, dated October 8, 2010 (“NAIPFA Letter”).

See also

Bingham Letter (acknowledging that “clean energy services companies ultimately do receive compensation for their projects—but they do not get paid separately (either by municipal entities, or by the firms providing financing) for making introductions”).

112

See

letter from Joy A. Howard, Principal, WM Financial Strategies, to Commission, dated October 5, 2010 (“Howard Letter”).

In defining the term “municipal advisor” in Exchange Act Section 15B(e)(4), Congress did not distinguish between those municipal advisors who are compensated for providing advice and those who are not compensated for providing advice. Thus, consistent with Congress's definition of the term “municipal advisor,” the Commission does not believe the issue of whether a municipal advisor is compensated for providing municipal advice should factor into the determination of whether the municipal advisor must register with the Commission.

113

The Commission notes that in defining the term “solicitation of a municipal entity or obligated person” Congress included language that such solicitation means, in part, “a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation.” “Indirect compensation” has been interpreted by other regulatory agencies to include non-monetary compensation. For example, the Commodity Futures Trading Commission (“CFTC”) has interpreted the term “indirect compensation,” in the context of the registration requirements and procedures for introducing brokers, to include, among other things, soft compensation such as research.

See

CFTC Release on Introducing Brokers and Associated Persons of Introducing Brokers, Commodity Trading Advisors and Commodity Pool Operators; Registration and Other Regulatory Requirements, 48 FR 35248, 35251 (August 3, 1983) (the CFTC's definition of “introducing broker” excludes those persons who are not compensated, directly or indirectly, for their activities as introducing brokers).

Registered Investment Advisers

Proposed rule 15Ba1-1(d)(2)(ii) would clarify the exclusion from the definition of “municipal advisor” in Exchange Act Section 15B(e)(4)(C) for Commission-registered investment advisers.

114

Specifically, consistent with the Commission's interpretation in connection with rule 15Ba2-6T, proposed rule 15Ba1-1(d)(2)(ii) would provide that the term “municipal advisor” shall not include: “An investment adviser registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1

et seq.

) or a person associated with such registered investment adviser, unless the registered investment adviser or person associated with the investment adviser engages in municipal advisory activities other than providing investment advice that would subject such adviser or person associated with such adviser to the Investment Advisers Act of 1940.”

115

114

See

proposed rule 15Ba1-1(d)(2)(ii).

115

See id.

See also

Temporary Registration Rule Release,

supra

note 63, at 54467.

Thus, the Commission interprets the exclusion from the definition of “municipal advisor” in Exchange Act Section 15B(4)(C) for registered investment advisers and their associated persons who are providing investment advice, to mean that a registered investment adviser or an associated person of a registered investment adviser would not have to register as a “municipal advisor” with respect to the provision of any investment advice subject to the Investment Advisers

Act.

116

A registered investment adviser or an associated person of a registered investment adviser must register with the Commission as a municipal advisor if the adviser or associated person engages in any municipal advisory activities that would not be investment advice subject to the Investment Advisers Act.

117

For example, a Commission-registered investment adviser that provides advice with respect to how a municipal entity should structure or issue municipal securities would be required to register as a municipal advisor.

118

A Commission-registered investment adviser that solicits a municipal entity on behalf of a municipal advisor would also be required to register as a municipal advisor. The Commission believes that this interpretation is in furtherance of the goals of the Dodd-Frank Act to regulate persons that engage in municipal advisory activities.

116

See id.

The staff interprets broadly the term “advice” with respect to the Investment Advisers Act.

See supra

note 52 (noting the Division of Investment Management: Staff Legal Bulletin No. 11). For purposes of the Commission's interpretation under proposed rule 15Ba1-1(d)(2)(ii), the Commission interprets “advice” to include any activity that constitutes “advice” subject to the Investment Advisers Act.

117

Similarly, a municipal advisor registered under Section 15B of the Exchange Act may be required to register as an investment adviser if its business includes providing investment advice that is subject to the Investment Advisers Act. Commission staff has provided guidance with respect to circumstances under which a municipal advisor may be required to register as an investment adviser.

See

Staff Legal Bulletin No. 11,

supra

note 52.

118

The Commission notes that a person that provides advice as to whether and how a municipal entity should issue municipal securities would not have to register with the Commission as an investment adviser.

See id.

(stating “[w]e would not consider a financial advisor to be an investment adviser if it limits its activities to providing advice as to whether and how a municipality should issue debt securities”).

Commodity Trading Advisors

Consistent with the Commission's interpretation in connection with rule 15Ba2-6T, the Commission interprets the exclusion in the Dodd-Frank Act for registered commodity trading advisors and their related persons providing advice related to swaps to apply only to such persons when they are providing advice related to swaps, as that term is defined in Section 1a(47) of the Commodity Exchange Act and Section 3(a)(69) of the Exchange Act,

119

and any rules or regulations promulgated thereunder.

120

Accordingly, proposed rule 15Ba1-1(d)(2)(iii) would provide that the exclusion from the definition of “municipal advisor” in Exchange Act Section 15B(e)(4)(C) for registered commodity trading advisors, or any person associated with a registered commodity trading advisor, is only available to a commodity trading advisor or person associated with a commodity trading advisor, to the extent such commodity trading advisor or associated person of the commodity trading advisor is providing advice related to swaps. The exclusion would not apply to the commodity trading advisor or associated person of the commodity trading advisor to the extent he or she engages in municipal advisory activities other than the provision of advice related to swaps.

121

A commodity trading advisor, or an associated person of a commodity trading advisor, must register with the Commission as a municipal advisor if the commodity trading advisor, or an associated person of a commodity trading advisor, engages in any municipal advisory activities that do not include advice related to swaps.

122

For example, if an advisor is providing advice to a municipal entity with respect to engaging in a swap transaction and provides advice to the municipal entity with respect to the structure of a municipal securities offering, the advisor would have to register with the Commission as a municipal advisor and would be subject to regulation by the MSRB as a municipal advisor. In addition, a commodity trading advisor must register with the Commission if the advisor provides advice with respect to swaps on behalf of a municipal entity or obligated person, but is not registered as a commodity trading advisor.

119

7 U.S.C. 1a(47) and 15 U.S.C. 78c(a)(69). The exclusion would not apply when such persons are providing advice with respect to security-based swaps.

120

See

Temporary Registration Rule Release,

supra

note 63, at 54467.

121

See

proposed rule 15a1-1(d)(2)(iii).

122

See id.

Attorneys, Engineers and Other Professionals

The definition of municipal advisor in Exchange Act Section 15B(e)(4) excludes professionals such as attorneys offering legal advice and engineers providing engineering advice.

123

One commenter noted that the definition of “municipal advisor” does not contemplate a specific exclusion for accountants offering “traditional accounting advice.”

124

In discussing what is “traditional accounting advice,” the commenter noted the engagement of accountants by municipal entities in connection with the issuance of municipal securities for the purpose of consenting to the use of accountant prepared or audited financial statements and/or providing bring down or comfort letters

125

relating to such financial statements.

126

123

See

15 U.S.C. 78

-4(e)(4)(C).

124

See

Kutak Rock Letter.

125

In auditing literature, bring down and comfort letters are referred to as “letters for underwriters.”

See

AU Sec. 634, Letters for Underwriters. Thus, the Commission is proposing to use the term “letters for underwriters” for this purpose.

126

See

Kutak Rock Letter.

Because accountants may provide advice to municipal entities that includes advice about the structure, timing, terms, and other similar matters concerning the issuance of municipal securities, the Commission does not believe it is appropriate to exclude these professionals from the definition of municipal advisor entirely. Accountants may also be engaged by municipal entities to provide other services, such as conducting feasibility studies or preparing financial projections.

127

In addition, as noted by this commenter, in defining “municipal advisor” in Exchange Act Section 15B(e)(4), Congress only excluded attorneys offering legal advice or services of a traditional legal nature, or engineers providing engineering advice.

128

At this time, the Commission believes that it is not necessary or appropriate to exclude all accountants from the definition of “municipal advisor.”

127

See id.

See also

Howard Letter (stating that certified public accountants that provide advice on bond issues “clearly meet the definition of `Municipal Advisor' under the Act and should be subject to registration”).

128

See

Kutak Rock Letter.

See also

15 U.S.C. 78

-4(e)(4)(C).

The Commission believes, however, that the preparation or audit of financial statements, or the issuance of letters for underwriters

129

by accountants would not constitute the provision of advice within the meaning of Exchange Act Section 15B(e)(4)(A)(i).

130

Accordingly, in proposed rule 15Ba1-1(d)(2)(vi), the Commission proposes to exclude from the definition of a “municipal advisor” accountants preparing financial statements, auditing financial statements, or issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person.

131

129

See supra

note 125.

130

See

15 U.S.C. 78

-4(e)(4)(A)(i).

131

See

proposed rule 15Ba1-1(d)(2)(vi).

In addition, with respect to the exclusion from the definition of “municipal advisor” for attorneys offering legal advice or services of a traditional legal nature, the Commission interprets this exclusion to apply only when the legal services are to a client of the attorney that is a municipal entity or obligated person. Accordingly, proposed rule 15Ba1-1(d)(2)(iv) provides that the

term “municipal advisor” shall not include any attorney unless the attorney engages in municipal advisory activities other than offering legal advice or providing services that are of a traditional legal nature to a client of the attorney that is a municipal entity or obligated person.

132

Generally, the Commission interprets advice provided by a lawyer to its client with respect to the structure, timing, terms and other similar matters concerning municipal financial products or the issuance of municipal securities to be services of a traditional legal nature if such advice is provided within a lawyer-client relationship specifically related to such products in conjunction with related legal advice. Thus, for example, advice comparing the structures, terms, or associated costs of issuance of different types of securities or financial instruments (such as fixed rate bonds or variable rate demand obligations) given by an attorney hired to advise a municipal entity client embarking on a bond offering, would be considered to be services of a traditional legal nature, as would advice concerning the tax consequences of alternative financing structures or advice recommending a particular financing structure due to legal considerations such as the limitations included in existing contracts and indentures to which the issuer is a party. However, advice which is primarily financial in nature, such as advice concerning the financial feasibility of a project or financing, advice estimating or comparing the relative cost to maturity of an issuance depending on various interest rate assumptions or advice recommending a particular structure as being financially advantageous under prevailing market conditions, would be primarily financial advice and not services of a traditional legal nature.

132

See

proposed rule 15Ba1-1(d)(2)(iv).

With respect to the exclusion from the definition of “municipal advisor” for engineers providing engineering advice, one commenter requested that the Commission include in this exclusion “activity which is incidental to engineering services.”

133

In addition, this commenter urged the Commission to “distinguish purely informational and educational activities which do not rise to the level of advice from individualized advice about the appropriate investment for a particular state or local government entity.”

134

Moreover, this commenter stated that “a clean energy services company should not also be required to register as a municipal advisor simply because it provides cash-flow modeling and other similar information that is inextricably linked to the engineering analysis, even if that modeling is individualized to the municipal entity.”

135

In addition, the commenter urged the Commission to define “advice” to “exclude feasibility studies that are a necessary part of any engineering projects, including clean energy services projects.”

136

133

See

Bingham Letter.

134

Id.

135

Id.

136

Id.

As discussed above and below, the exclusions from the definition of “municipal advisor” included by Congress in Section 15B(e)(4) of the Exchange Act were limited.

137

With respect to engineers, the exclusion applies to engineers providing “engineering advice.” For example, costing out engineering alternatives would not subject an engineer to registration as a municipal advisor because such activity would be considered engineering advice. The exclusion does not include circumstances in which the engineer is engaging in municipal advisory activities, including cash-flow modeling or the provision of information and education relating to municipal financial products or the issuance of municipal securities, even if those activities are incidental to the provision of engineering advice. In addition, the exclusion does not include circumstances in which the engineer is preparing feasibility studies concerning municipal financial products or the issuance of municipal securities that include analysis beyond the engineering aspects of the project and, therefore, an engineer preparing such studies would be subject to registration as a municipal advisor.

138

137

See

15 U.S.C. 78

-4(e)(4)(C).

138

A “feasibility study” is a report detailing the economic practicality of and the need for a proposed capital program. It frequently analyzes demand for the product or service being sold and forecasts financial statements or other operating statistics. The feasibility study may include a user or other rate analysis to provide an estimate of revenues that will be generated for the purpose of substantiating that debt service can be met from pledged revenues. In addition, the feasibility study may provide details of the physical, operating, economic or engineering aspects of the proposed project, including estimates of construction costs, completion dates and drawdown schedules.

See

MSRB Glossary of Municipal Securities Terms, available at

http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=f.

Employees of a Municipal Entity

Exchange Act Section 15B(e)(4)(A) provides that the term “municipal advisor” excludes employees of a municipal entity.

139

One commenter suggested that the Commission clarify that this exclusion from the definition of “municipal advisor” would include any person serving as an appointed or elected member of the governing body of a municipal entity, such as a board member, county commissioner or city councilman.

140

This commenter stated that because these persons are not technically “employees” of the municipal entity (but rather are “unpaid volunteers”), these persons would not fall within the exclusion from the definition of “municipal advisor” for “employees of a municipal entity” and, therefore, may have to register as municipal advisors.

141

139

15 U.S.C. 78

-4(e)(4)(A).

140

See

Kutak Rock Letter.

141

See id.

See also

15 U.S.C. 78

-4(e)(4)(A).

The Commission believes that the exclusion from the definition of a “municipal advisor” for “employees of a municipal entity” should include any person serving as an elected member of the governing body of the municipal entity to the extent that person is acting within the scope of his or her role as an elected member of the governing body of the municipal entity. “Employees of a municipal entity” should also include appointed members of a governing body to the extent such appointed members are

ex officio

members of the governing body by virtue of holding an elective office.

142

The Commission does not believe that appointed members of a governing body of a municipal entity that are not elected

ex officio

members should be excluded from the definition of a “municipal advisor.” The Commission believes that this interpretation is appropriate because employees and elected members are accountable to the municipal entity for their actions. In addition, the Commission is concerned that appointed members, unlike elected officials and elected

ex officio

members, are not directly accountable for their performance to the citizens of the municipal entity.

142

This would include persons appointed to fill the remainder of the term for an elective office.

Banks

Another commenter stated that the Commission should exempt from the definition of a “municipal advisor” banks providing “traditional banking services” and banks and trust companies that provide “investment advisory services.”

143

As support, this

commenter stated that banks are currently well-regulated and banks that offer trustee services are subject to rigorous and frequent examination, as well as extensive regulation by the various Federal or State banking regulators.

144

The Commission notes that Congress included in the statutory definition of “municipal advisor” a limited number of exclusions from the definition, and such exclusions did not include banks in any capacity. As discussed below, under “Request for Comment,” among other things, the Commission is seeking comment on whether the definition of a “municipal advisor” should exclude banks providing advice to a municipal entity or obligated person concerning transactions that involve a “deposit,” as defined in Section 3(

) of the Federal Deposit Insurance Act,

145

at an “insured depository institution,” as defined in Section 3(c)(2) of the Federal Deposit Insurance Act.

146

Such an exclusion, if adopted, would result in excluding banks from the definition of a “municipal advisor” to the extent that the bank is providing advice to a municipal entity or obligated person with respect to such traditional banking products as insured checking and savings accounts and certificates of deposit, while not excluding from the definition of a “municipal advisor” a bank that is providing advice to a municipal entity or obligated person concerning other municipal advisory activities. The Commission notes that, similarly, banks are not excluded from the requirement to register as municipal securities dealers.

143

See

ABA Letter. In providing examples of the types of activities in which banks and trust companies engage, this commenter stated that: “[o]n the commercial side of the bank, these services and products include direct loans, checking accounts, and CDs. Banks of all sizes also frequently are asked to respond to RFP requests from municipal entities regarding investment products offered by the banking entity, such as interest-bearing bank

deposits, money market mutual funds, or other exempt securities. Banks also are significant investors in the securities issued by municipalities and provide credit or, through their affiliates, underwriting services to municipalities when the city or township wants to buy a fire truck or build a new school or other similar facility. Furthermore, for over one hundred and fifty years, banks and trust companies have provided fiduciary services to municipal entities in the United States. In this capacity banks often manage investment accounts for local towns and act as trustees with respect to bond proceeds, escrow accounts, governmental pension plans and other similar capacities.”

Id.

144

See id.

145

12 U.S.C. 1813(

146

12 U.S.C. 1813(c)(2).

Request for Comment

The Commission requests comments generally on its proposals discussed above and also requests comment on the following specific issues:

• In light of our understanding of Congressional objectives and intent, are the Commission's interpretations under the definition of “municipal advisor” and related terms, and the exclusions from the definition of “municipal advisor” appropriate? Should any of these interpretations be modified or clarified in any way?

• The Commission notes that the definition of “municipal entity” includes, but is not limited to, public pension funds, local government investment pools 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. Is the Commission's interpretation of “municipal entity” for purposes of the proposed definition of “municipal advisor” appropriate? Is additional clarification necessary? If so, how should the Commission further clarify this interpretation?

• In what circumstances with respect to municipal financial products or the issuance of municipal securities should charter schools be considered municipal entities? In what circumstances with respect to municipal financial products or the issuance of municipal securities should charter schools be considered obligated persons? To what extent do state laws vary in their treatment of charter schools in ways that would affect their classification as municipal entities or obligated persons?

• The Commission proposes to exempt from the definition of “obligated person” providers of municipal bond insurance, letters of credit, or other liquidity facilities so that the definition of “obligated person” for purposes of the proposed rules is consistent with the definition of “obligated person” in rule 15c2-12 under the Exchange Act. Should the proposed definition be modified or clarified in any way? Should the term “obligated person” for purposes of municipal advisor registration be consistent with the definition of “obligated person” for purposes of rule 15c2-12? If so, why? If not, why not? Should the Commission include additional exemptions from the definition of “obligated person”? If so, please explain and provide specific examples.

• The Commission proposes to interpret the term “investment strategies” to include plans or programs for the investment of the proceeds of municipal securities (other than municipal derivatives and guaranteed investment contracts), plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity, or the recommendation of or brokerage of municipal escrow investments. Should the Commission modify or clarify this interpretation in any way? If so, why? If not, why not? Please provide any suggested alternative language. Should the Commission exclude plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity that are not proceeds of the issuance of municipal securities from the definition of investment strategies? If so, why? If not, why not? If the Commission were to limit investment strategies to “plans or programs for the investment of the proceeds of municipal securities (other than municipal derivatives and guaranteed investment contracts) or the recommendation of or brokerage of municipal escrow investments,” how should the Commission determine when funds should no longer be considered “proceeds of municipal securities?” What obligations should parties other than the municipal entity have in determining whether funds held by or on behalf of a municipal entity are proceeds of municipal securities?

• As noted above, to the extent a person is providing advice to a pooled investment vehicle in which one or more municipal entities are investors along with other investors that are not municipal entities, the pooled investment vehicle would not be considered funds “held by or on behalf of a municipal entity” and, therefore, a person providing advice to the pooled investment vehicle would not be required to register as a municipal advisor. Should the Commission modify or clarify this interpretation in any way? If so, why? If not, why not? Please provide any suggested alternative language. Should the Commission provide that such interpretation should apply only if the investors that are not municipal entities are the primary investors in the pooled investment vehicle? If so, how, and above what level, should the Commission determine that investors that are not municipal entities are the primary investors in the pooled investment vehicle? Should such a determination be based on a dollar amount or a percentage of the pooled investment vehicle's assets? Should the Commission provide that this pooled investment vehicle interpretation would no longer apply if the municipal entity (or municipal entities) investing in the pooled investment vehicle becomes the primary investor in the pooled investment vehicle subsequent to the initial investment? If so, above what level of investment should a municipal entity (or municipal entities) be considered to be the primary investor in the pooled investment vehicle? Should such a determination be based on a dollar amount or a percentage of the pooled investment vehicle's assets?

• As discussed above, the Commission is proposing to interpret the term “investment strategies” to include plans, programs or pools of

assets that invest funds held by or on behalf of a municipal entity. Thus, commingled proceeds, regardless of when they lose their characteristic as proceeds, would still constitute “funds held by or on behalf of a municipal entity” and, therefore, any advice with respect to such funds would be municipal advice, unless subject to an exclusion. Is this interpretation too broad? Please explain and include a discussion of concerns, if any, such an interpretation could raise.

• In interpreting the term “solicitation of a municipal entity or obligated person,” the Commission notes that, unless an exclusion applies, any third-party solicitor that seeks business on behalf of an investment adviser from a municipal entity or obligated person, such as a municipal pension fund or a local government investment pool, must register as a municipal advisor. In addition, the Commission notes that the determination regarding whether a solicitation of a municipal entity or obligated person requires a person to register as a municipal advisor is not based on the number, or the size, of investments that are solicited. Thus, the Commission would consider a solicitation of a single investment by a municipal entity or obligated person in any amount to require the person soliciting the municipal entity or obligated person to register as a municipal advisor. Do these interpretations require further clarification? If so, how? Should these interpretations be modified in any way? Please explain and provide suggested alternative language, as appropriate. Is there a

de minimis

number or size of investments that should be allowed to be solicited before a person is required to register as a municipal advisor? If so, what should this

de minimis

amount be? Please explain the rationale for providing for a

de minimis

exception.

• Should the Commission, as proposed, permit the voluntary registration by persons that solicit a municipal entity or obligated person on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser that controls, is controlled by, or is under common control with the person undertaking such solicitation? If not, why not? Should the Commission permit voluntary registration by any other group of persons? If so, which persons and why?

• In interpreting the term “solicitation of a municipal entity or obligated person,” the Commission also notes that such solicitation must be “for the purpose of obtaining or retaining an engagement * * * in connection with municipal financial products [or] the issuance of municipal securities.” Are there types of obligated persons to which this definition should not apply in connection with the issuance of municipal securities? If so, please identify the types of obligated persons to which the definition should not apply and explain why. Are there types of municipal financial products (such as municipal derivatives which include swaps or security-based swaps where an obligated person is the counterparty) to which this definition should not apply? If so, please identify the types of municipal financial products to which the definition should not apply and explain why.

• Proposed rule 15Ba1-1(f) would define the term “municipal derivatives” to mean “any swap (as defined in Section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)) and Section 3(a)(69) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(69)), including any rules and regulations thereunder) or security-based swap (as defined in Section 3a(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)), including any rules and regulations thereunder) 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.” Should this definition be clarified or modified in any way? If so, how? Should the definition of municipal derivatives specifically include other financial products? For example, should the definition specifically include options, forwards or futures? If so, which products and why? Should this definition include a financial product that is composed of multiple components where one or more of such components is derivative in nature, such as a structured note or convertible bond?

147

Should this definition include financial products, in addition to swaps and security-based swaps, that are based on municipal securities that are exempted securities under the Exchange Act or are exempt from registration under the Securities Act? Should it include an over-the-counter option contract with a municipal entity? If so, which additional financial products should be included in the definition and why?

147

See

SIFMA Letter.

• Is our interpretation of the exclusion from the definition of a “municipal advisor” for a broker, dealer, or municipal securities dealer serving as an underwriter appropriate? Specifically, the Commission interprets this exclusion to mean that a broker-dealer acting as an underwriter or placement agent that solicits a municipal entity to invest in a security, or a broker-dealer acting as an underwriter that also advises a municipal entity with respect to the investment of proceeds of municipal securities or the advisability of a municipal derivative would be a municipal advisor. Should these interpretations be modified in any way, or further clarified? If so, how?

• Consistent with Congress's definition of the term “municipal advisor,” the Commission does not believe that whether a municipal advisor is compensated for providing municipal advice should factor into the determination regarding whether the municipal advisor must register with the Commission. Are there any persons who engage in uncompensated municipal advisory activities, or municipal advisory activities for indirect compensation, that the Commission should exclude from the definition of “municipal advisor”? Please explain.

• The Commission would interpret the exclusion from the definition of “municipal advisor” in Exchange Act Section 15B(4)(C) for Commission-registered investment advisers and their associated persons who are providing investment advice, to mean that a Commission-registered investment adviser or an associated person of a Commission-registered investment adviser would not have to register as a “municipal advisor” with respect to the provision of any advice that would subject the adviser (or associated person) to the Investment Advisers Act. Should this interpretation be modified or clarified in any way? If so, how?

• As a result of the changes in the threshold for registration as an investment adviser,

148

fewer entities will be required to register as investment advisers under the Federal securities laws and will instead be subject to state registration requirements. Investment advisers that are not registered with the Commission would not be exempt from registration as municipal advisors to the extent that they are engaging in municipal advisory activities. Should state-registered investment advisers be exempt from the definition of “municipal advisor” to the extent they are providing advice that otherwise would be subject to the Investment Advisers Act, but for the operation of a prohibition to, or exemption from, Commission registration?

148

See

15 U.S.C. 80b-3a(a).

• Should the Commission's interpretation of the exclusion from the definition of a “municipal advisor” for registered commodity trading advisors and their associated persons providing advice related to swaps be modified in any way, or further clarified? If so, how?

• The Commission proposes to exclude from the definition of a “municipal advisor” persons preparing financial statements, auditing financial statements, or issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person. Should persons providing these accounting services be excluded from the definition of “municipal advisor”? Are there additional types of services that an accountant provides that should not require the registration of an accountant as a municipal advisor? If so, what additional types of accounting services should qualify an accountant for an exclusion from the definition of “municipal advisor”? Are there activities that are incidental to the provision of accounting services or inextricably linked to accounting services that can only reasonably be performed by an accountant that might otherwise constitute advice with respect to the issuance of municipal securities or municipal financial products?

• Should the Commission expand the exclusion from the definition of “municipal advisor” beyond engineers providing engineering advice? If so, why and how should such exclusion be expanded? If not, why not? How should the Commission interpret the term “engineering advice”? Are there activities that are “incidental to the provision of engineering advice” or “inextricably linked to engineering advice” that can only reasonably be performed by an engineer that might otherwise constitute advice with respect to the issuance of municipal securities or municipal financial products? As discussed above, the Commission does not interpret the exclusion of engineers providing engineering advice to include circumstances in which the engineer is preparing feasibility studies concerning municipal financial products or the issuance of municipal securities that include analysis beyond the engineering aspects of the project and, therefore, an engineer preparing such studies would be subject to registration as a municipal advisor. Is this an appropriate interpretation? Please explain.

• The Commission proposes to exclude from the definition of municipal advisor attorneys offering legal advice or services of a traditional legal nature. As discussed above, the Commission interprets this exclusion to apply only when the legal services are to a client of the attorney that is a municipal entity or obligated person. Is this an appropriate interpretation? Please explain. Should the Commission provide an exclusion for all activities of an attorney as long as that attorney has an attorney-client relationship with the municipal entity or obligated person? Why or why not? Should the scope of the exclusion for attorneys be different for attorneys for obligated persons? Why or why not? Neither the Dodd-Frank Act nor the proposed rule defines the term “services of a traditional legal nature.” Is the meaning of the term sufficiently clear? If not, should the Commission provide additional interpretive guidance? How should the Commission interpret the term?

• Are there other types of professional activities that should be excluded from the definition of a “municipal advisor”? Please explain.

• The Commission is proposing to exclude from the definition of “municipal entity” elected members of a governing body of a municipal entity, but to include appointed members of a municipal entity's governing body unless such appointed members are

ex officio

members of the governing body by virtue of holding an elective office. Are these distinctions appropriate? Please explain. Are there other persons associated with a municipal entity who might not be “employees” of a municipal entity that the Commission should exclude from the definition of a “municipal advisor”?

• Should employees of obligated persons be excluded from the definition of “municipal advisor” to the extent they are providing advice to the obligated person, acting in its capacity as an obligated person, in connection with municipal financial products or the issuance of municipal securities? One commenter

149

expressed concern that volunteers at entities such as charter schools could be required to register as municipal advisors. Are there types of persons other than employees of obligated persons that should be excluded from the definition of “municipal advisor?” If yes, please provide examples of the specific types of persons and the specific circumstances under which they should be excluded.

149

See

Jacobsen Letter.

• Should the Commission exclude from the definition of a “municipal advisor” banks providing advice to a municipal entity or obligated person concerning transactions that involve a “deposit,” as defined in Section 3(l) of the Federal Deposit Insurance Act

150

at an “insured depository institution,” as defined in Section 3(c)(2) of the Federal Deposit Insurance Act,

151

such as insured checking and savings accounts and certificates of deposit? Should the Commission exclude from the definition of a “municipal advisor” banks that respond to requests for proposals (“RFPs”) from municipal entities regarding other investment products offered by the banking entity, such as money market mutual funds or other exempt securities? Should the Commission exclude from the definition of “municipal advisor” a bank that provides to a municipal entity a listing of the options available from the bank for the short-term investment of excess cash (for example, interest-bearing bank accounts and overnight or other periodic investment sweeps) and negotiates the terms of an investment with the municipal entity?

152

Should the Commission exclude from the definition of “municipal advisor” a bank that provides to a municipal entity the terms upon which the bank would purchase for the bank's own account (to be held to maturity) securities issued by the municipal entity, such as bond anticipation notes, tax anticipation notes, or revenue anticipation notes?

153

Should the Commission exclude from the definition of “municipal advisor” a bank that directs or executes purchases and sales of securities or other instruments with respect to funds in a trust account or other fiduciary account in accordance with predetermined investment criteria or guidelines, including on a discretionary basis?

154

Should the Commission exclude from the definition of a “municipal advisor” banks and trust companies that provide other fiduciary services to municipal entities, such as acting as trustees with respect to governmental pension plans and other similar capacities? Should banks and trust companies be exempt from the definition of “municipal advisor” to the extent they are providing advice that otherwise would subject them to registration under the Investment Advisers Act, but for the operation of a prohibition to or exemption from registration? Please explain any response to these questions and to the extent that an exemption is recommended, please provide suggested exemptive language.

150

See supra

note 145.

151

See supra

note 146.

152

See

SIFMA Letter.

153

See id.

154

See id.

• Should the Commission exclude from the definition of “municipal advisor” a broker-dealer that provides a municipal entity with price quotations

with respect to particular securities (or securities having particular characteristics) which the broker-dealer would be prepared to sell as principal or acquire for the municipal entity?

155

Should the Commission exclude from the definition of “municipal advisor” a broker-dealer that provides to a municipal entity a list of securities meeting specified criteria that are readily available in the marketplace, but without making a recommendation as to the merits of any investment particularized to the municipal entity's specific circumstances or investment objectives?

156

155

See id.

156

See id.

• Should the Commission exclude from the definition of “municipal advisor” 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?

157

See id.

• Should the Commission permit registration of only separately identifiable departments or divisions of a bank (“SIDs”)? Please explain. Would the following suggested rule text, based on MSRB rule G-1 relating to SIDs engaged in municipal securities dealer activitites, provide appropriate conditions for determining whether and when a SID engaged in municipal advisory activities may register as a municipal advisor: “(a) A separately identifiable department or division of a bank, as such term is used in Section 3(a)(30) of the Securities Exchange Act of 1934, is that unit of the bank which conducts all of the municipal advisory activities of the bank,

provided that:

(1) Such unit is under the direct supervision of an officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal advisory activities, including the supervision of all bank employees engaged in the performance of such activities; and (2) There are separately maintained in or separately extractable from such unit's own facilities or the facilities of the bank, all of the records relating to the bank's municipal advisory activities, and

further provided that

such records are so maintained or otherwise accessible as to permit independent examination thereof and enforcement of applicable provisions of the Exchange Act, the rules and regulations thereunder and the rules of the MSRB relating to municipal advisors; (b) The fact that directors and senior officers of the bank may from time to time set broad policy guidelines affecting the bank as a whole and which are not directly related to the day-to-day conduct of the bank's municipal advisory activities, shall not disqualify the unit hereinbefore described as a separately identifiable department or division of the bank or require that such directors or officers be considered as part of such unit; and (c) The fact that the bank's municipal advisory activities are conducted in more than one geographic organizational or operational unit of the bank shall not preclude a finding that the bank has a separately identifiable department or division for purposes of this rule,

provided, however,

that all such units are identifiable and that the requirements of paragraphs (1) and (2) of section (a) of this rule are met with respect to each such unit. All such geographic, organizational or operational units of the bank shall be considered in the aggregate as the separately identifiable department or division of the bank for purposes of this rule.”? Should this language be clarified or modified in any way? Please provide suggested alternative language, as appropriate. Are there reasons that the language of MSRB rule G-1, as modified, should not be used for SIDs engaging in municipal advisory activities? Please explain.

• Are there other exclusions from the definition of “municipal advisor” that the Commission should consider? Please explain.

2. Proposed Rule 15Ba1-2

a. Application for Municipal Advisor Registration

As discussed above, the registration requirement for municipal advisors under Section 15B of the Exchange Act applies to every person, including every natural person, who provides the types of advice described in the definition of a “municipal advisor”—whether that person is an organized entity, sole proprietor, employee of a municipal advisory firm, or otherwise.

158

The information that is appropriate to seek from a firm before it can be allowed to register may be different from the information that is appropriate to seek from an individual. Thus, as described in detail below, the Commission is proposing the submission of Form MA by municipal advisory firms and the submission of Form MA-I by natural person municipal advisors. A sole proprietor is included in the definition of “municipal advisory firm” and “natural person municipal advisor.” As a result, a sole proprietor would have to complete both Form MA and Form MA-I.

158

See supra

Section II.A.1. (discussing the definition of the term “municipal advisor”).

The Commission is proposing rule 15Ba1-2, which would establish the procedures by which a municipal advisor may apply to the Commission for registration. The proposed rule provides that an application for the registration of a municipal advisor must be filed electronically with the Commission on proposed new Form MA or Form MA-I, in accordance with the instructions to Forms MA or MA-I, as applicable.

159

If the Commission adopts the registration rule as proposed, municipal advisors may be required to file the forms required by the proposed rule in paper until such time as an electronic filing system is operational and capable of receiving the forms. Municipal advisors would be notified as soon as the electronic system can accept filing of the forms. At such time, the Commission may require each municipal advisor to promptly re-file electronically the applicable forms.

Proposed rule 15Ba1-2(a) would require a municipal advisory firm, including those currently registered on Form MA-T, to apply for registration with the Commission as a municipal advisor by completing Form MA in accordance with the instructions to the form, and filing Form MA electronically with the Commission. Proposed rule 15Ba1-2(b) would require a natural person municipal advisor, which would include an individual employee of a firm who meets the definition of municipal advisor, to apply for registration with the Commission as a municipal advisor by completing Form MA-I in accordance with the instructions to the form and electronically filing the form with the Commission.

160

See infra

note 233.

Each Form MA and MA-I would be considered filed upon acceptance by the Commission. As noted above, proposed rule 15Ba1-2 would require Forms MA and MA-I to be filed electronically with the Commission.

161

Similarly, the Commission's registration forms for broker-dealers and investment advisers—Forms BD and ADV—are currently filed electronically through

the Central Registration Depositary (“CRD”) system operated by FINRA and the Investment Adviser Registration Depository (“IARD”) system operated by FINRA, respectively. The Commission is considering whether forms for the permanent registration as a municipal advisor should be submitted through the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”), or otherwise.

162

Filings required to be made on a day that the Commission's electronic filing system is closed would be considered timely filed, if filed electronically no later than the following business day.

163

Information required by the forms would be made publicly available unless otherwise noted below. In addition, Forms MA and MA-I would constitute “reports” for purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78

-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Exchange Act.

164

As a consequence, it would be unlawful for a municipal advisor to willfully make or cause to be made, a false or misleading statement of a material fact or omit to state a material fact in Form MA or Form MA-I.

161

The Commission is also proposing that Forms MA-W (relating to withdrawals from registration) and MA-NR (relating to appointments of agent for service of process by non-resident municipal advisors and non-resident general partners and managing agents of municipal advisors) be filed electronically. Form MA-W would also constitute a “report” for purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78

-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Exchange Act.

See

proposed rule 15Ba1-3(d). As a consequence, it would also be unlawful for a municipal advisor to willfully make or cause to be made, a false or misleading statement of a material fact or omit to state a material fact in Form MA-W.

162

If the registration forms are required to be submitted through EDGAR, the electronic filing requirements of Regulation S-T would apply.

See generally

17 CFR 232 (governing the electronic submission of documents filed with the Commission). In addition, the Commission is considering whether a fee would be charged for filing Forms MA, MA-I, MA-NR or MA-W. For example, the MSRB, in conjunction with or on behalf of the Commission, has the authority to charge reasonable fees for the submission of information to information systems developed for the purpose of serving as a repository of information from municipal market participants.

See

Section 15B(b)(3) of the Exchange Act (15 U.S.C. 78

-4(b)(3)).

163

See

proposed rule 15Ba1-2(c).

164

See

proposed rule 15Ba1-2(d).

Request for Comment

The Commission requests comments generally on the proposed registration procedures and also requests comment on the following specific issues:

• Forms MA and MA-I would have to be filed electronically for purposes of registering with the Commission. Should the proposed rule include an option for the forms to be filed in paper rather than electronically? If so, please explain under what circumstances it would be appropriate for allowing paper filings of the forms.

• Are there any other issues concerning the filing of forms electronically about which the Commission should be made aware? If so, what are they?

• Are there specific capabilities that the Commission should consider in developing an electronic registration system? For example, should the system have the capability to cross-check other electronic registration systems, such as IARD and CRD? If so, which systems and why?

• Is EDGAR the best vehicle for filing of the required forms with the Commission? If not, what vehicle would be superior and why? Should the Commission allow the filing of documents in electronic media other than EDGAR? If so, please make specific recommendations.

• Would requiring the filing of the forms on EDGAR be an appropriate way to make the requested information publicly available? Should the Commission require Web site posting of the information instead or in addition? What advantages, if any, would Web site posting have over requiring that the information be filed, and made publicly available, on EDGAR?

• Does the method for submitting documents in electronic format as opposed to paper format create any issues or hardships for any group of potentially affected firms?

b. Instructions and Glossary

The Commission is proposing a set of instructions (“Instructions”), which include general instructions for proper completion and submission of each of the proposed Forms MA, MA-I, MA-W and MA-NR (“General Instructions”), specific instructions for the completion of Form MA and Form MA-I (“Instructions to Form MA” and “Instructions to Form MA-I”, respectively), and a glossary of terms (“Glossary”) intended to help municipal advisors complete the forms for registration. These Instructions and Glossary are attached to this release, together with proposed Forms MA, MA-I, MA-W and MA-NR.

165

The instructions are intended to answer basic questions concerning completion of the forms. Generally, the definitions in the Glossary are derived from Form ADV,

166

the terms in Exchange Act Section 15B(e),

167

and the definitions in proposed rule 15Ba1-1.

168

For ease of reference, we are proposing one Glossary that would apply to all of the proposed forms. All terms in the forms that appear in italics are defined or described in the Glossary.

169

165

Proposed Form MA-W would be used for withdrawal from registration as a municipal advisor, and proposed Form MA-NR would be used for the appointment of an agent for service of process by a non-resident municipal advisor or a non-resident general partner or managing agent of a municipal advisor.

See infra

Sections II.A.3.b. and II.A.5. (discussing Forms MA-W and MA-NR, respectively).

166

See

17 CFR 279.1.

167

See

15 U.S.C. 78

-4(e).

168

See

proposed rule 15Ba1-1.

169

There are a number of terms in the Glossary. In addition to those described elsewhere in this release, the Glossary also includes definitions or descriptions of the following terms: charged, Chief Compliance Officer, contingent fees, discretionary authority, enjoined, Federal banking agency, felony, foreign financial regulatory authority, found, investigation, investment-related, involved, minor rule violation, misdemeanor, order, person, proceeding, resign, and supervised person.

General Instruction 1 would direct an applicant looking for more information about the Commission's rules with respect to municipal advisors and the Exchange Act to the Commission's Web site. General Instruction 2 explains who should file Forms MA, MA-I, MA-NR and MA-W, including who may voluntarily register as a municipal advisor. General Instruction 3 would instruct an applicant with respect to the organization of Form MA (for example, that Form MA also includes Schedules A, B, C, and D, as well as Criminal Action, Regulatory Action, and Civil Judicial Action Disclosure Pages, as described further below), and would require that an applicant complete all items in Form MA. General Instruction 4 would provide comparable instructions as to the organization and completion of Form MA-I and the schedules and disclosure pages required by that form. General Instruction 5 would instruct that domestic municipal advisors would be required to execute the Domestic Execution Page to Form MA, while non-resident municipal advisors would be required to execute the Non-Resident Municipal Advisor Execution Page. General Instruction 6 would provide that with respect to Form MA-I, a municipal advisor would sign Item 7 of that form. General Instruction 7 would set forth the applicable person to sign Form MA or MA-I on behalf of the applicant, and that such person would be the sole proprietor (in the case of a sole proprietorship), a general partner (in the case of a partnership), an authorized principal (in the case of a corporation), and for all others, an authorized individual who participates in managing or directing the municipal advisor's affairs, or in the case of a natural person, the natural person filing the form on its own behalf, and that in all cases the signature should be a typed name. General Instructions 8 and 9 discuss when to update Forms MA and MA-I respectively, as discussed further herein.

170

General Instruction 10 would provide that an applicant would complete and file all of the forms electronically, and would provide the Web site for the electronic filing system once the appropriate web address has

been confirmed. General Instruction 11 would provide the instructions for electronic filing with the Commission. General Instructions 12 and 13 would provide instructions for how and when an applicant would complete a self-certification as to its qualifications as a municipal advisor and ability to comply with Federal securities laws. General Instruction 14 would discuss the requirement for a non-resident municipal advisor to attach a legal opinion to its Non-Resident Municipal Advisor Execution Page to Form MA.

170

See infra

Section II.A.4.

The General Instructions would also inform an applicant that the Commission collects information for regulatory purposes, that filing the Form MA or MA-I is mandatory for municipal advisors that are required to register with the Commission, that the Commission will not accept forms that do not include the required information, and that the Commission will maintain and make publicly available the information submitted on the forms.

The Instructions also would provide some instructions specific to each of Form MA and Form MA-I. Instruction 1 to Form MA would explain that a municipal advisor that has taken over the business of another municipal advisor or has changed its structure or legal status would be a new organization with registration obligations under the Exchange Act. A municipal advisor that is acquiring or assuming substantially all of the assets and liabilities of the advisory business of a registered municipal advisor would file a new application for registration on Form MA within 30 calendar days of the succession, and once the new registration is effective, Form MA-W (as described below) must be filed to withdraw the registration of the acquired municipal advisor. If a new municipal advisor is formed solely as a result of a change in form of organization, a reorganization, or a change in the composition of a partnership, and there has been no practical change in control or management, the applicant may amend the existing registration to reflect the changes by filing an amendment within 30 calendar days after the change or reorganization. Instruction 2 to Form MA would explain that the response to Item 4 of Form MA (described below) should reflect the applicant's current municipal advisory activities, except with respect to its responses regarding the types of compensation the applicant expects to accept, or the types of municipal advisory activities in which the applicant expects to engage, during the next year. Instruction 3 to Form MA would explain that Schedule D is to be completed if any response to Form MA requires further explanation, or if the applicant wishes to provide additional information.

Instruction 1 to Form MA-I would explain that the applicant must enter its CRD number (if assigned), his or her social security number,

171

and the addresses of all offices at which he or she will be physically located or supervised, in Item 1 of the form. Instruction 2 to Form MA-I would clarify that for purposes of completing Item 2 to Form MA-I, the applicant must enter all the other names that the applicant is using, has used, is known, or has been known, other than the applicant's legal name, since the age of 18, which would include nicknames, aliases, and names used before and after marriage. Instruction 3 to Form MA-I would make clear that for purposes of Item 3, with respect to the applicant's residential history for the past 5 years, post office boxes may not be used to complete the response and the applicant may not leave any gaps in residential history greater than 3 months. Instruction 4 to Form MA-I would provide that with respect to Item 4 of Form MA-I, the applicant's employment history for the past 10 years must be provided with no gaps greater than 3 months, and that the history should account for full-time and part-time employment, self-employment, military service and homemaking, and that unemployment, full-time education, extended travel, and other similar statuses should be included. Instruction 5 to Form MA-I for Item 5 of the form would explain that with respect to other businesses in which the applicant is engaged, the following information would be required: the name and address of the other business; nature of the business; position, title, or relationship with the other business, including duties; start date of the relationship with the other business; and the approximate number of hours per month devoted to the other business. Instruction 6 to Form MA-I for Item 6 would also make clear that responses to certain disclosure questions (discussed further below) could make the individual applicant subject to a statutory disqualification. As with Form MA, Instruction 7 to Form MA-I would indicate that the form would be signed (in Item 7 of Form MA-I) by typing a signature in the designated field, and would make clear that by typing a name, the signatory acknowledges and represents that the entry constitutes in every way, use, or aspect, his or her legally binding signature.

171

An applicant's social security number would not be made publicly available. This information is necessary in connection with the Commission's enforcement and examination functions pursuant to Section 15B(c) of the Exchange Act (15 U.S.C. 78

-4(c)).

Request for Comment

The Commission requests comment generally on the proposed Instructions and Glossary and also requests comment on the following specific issues:

• Are the proposed General Instructions to Forms MA, MA-I, MA-W and MA-NR, and the specific Instructions to Forms MA and MA-I, sufficiently clear? If not, identify any instructions that should be clarified and, if possible, offer alternatives.

• Are the proposed definitions in the Glossary appropriate and sufficiently clear? If not, why not and how should they be modified or clarified? Please suggest alternate language, as applicable.

• Would it be useful if the Commission were to provide any additional instructions or define any additional terms in the Glossary? If so, what are they?

• Are there alternatives to requiring applicants to provide their social security number that the Commission should consider? If so, what are they?

c. Information Requested in Form MA

Proposed Form MA, which would be the form submitted by municipal advisors that are municipal advisory firms, is modeled primarily on Form ADV (Part 1)

172

used for the registration of investment advisers with the Commission, with appropriate changes made to reflect the differences in the activities of municipal advisors and the markets that they serve. More specifically, applicants would be required to provide the information described below. The items are drafted broadly to apply to the different types of municipal advisors that may register with the Commission. If adopted, the contents of the proposed form (unless otherwise specified) would be publicly available.

172

See

17 CFR 279.1.

Form MA would ask for information about the municipal advisor and persons associated with the advisor. The Commission believes it is necessary to obtain the requested information to decide whether to grant or deny an application for registration, to manage the Commission's regulatory and examination programs, and to make such information available to the MSRB to better inform its regulation of municipal advisors. Specifically, the information would assist the

Commission in identifying municipal advisors, their owners, and their business models, and in determining whether a municipal advisor might present sufficient concerns as to warrant the Commission's further attention in order to protect their clients. In addition, the information would assist the Commission in understanding the kinds of activities in which the applicant participates that form the basis for registration. The information would also be useful to the Commission in tailoring any requests for additional information that the Commission may send to a municipal advisor. Furthermore, the required information would assist the Commission in the preparation of the Commission's inspection and examination of municipal advisors and the MSRB in determining what regulations for municipal advisors may be necessary or appropriate and how such regulations might be best accomplished. In determining what information to propose to be disclosed, the Commission has also considered the broader public interest in the availability of information about municipal advisors to the public (including clients and prospective clients).

Form MA would require the applicant to provide information describing itself and its business through a series of fill-in-the-blank, multiple choice, and check-the-box questions. Form MA would first require a municipal advisor to indicate whether it is submitting the form for initial registration as a municipal advisor, submitting an annual update to a registration as a municipal advisor, or submitting an amendment (other than an annual update) to a registration as a municipal advisor.

173

Amendments to Form MA are discussed further below.

See infra

Section II.A.4.

Request for Comment

The Commission requests comment generally on proposed Form MA and also requests comment on the following specific issues:

• The Commission requests comment generally on the organization of the form and the clarity of the language it has used.

• Is the use of Form MA for purposes of registration, submitting an annual update, and submitting an amendment (other than an annual update) appropriate? Would the use of the same form for multiple purposes be confusing for applicants? Would it be preferable to have a separate form for each of these purposes? Would these requirements be confusing or otherwise difficult for a municipal advisor to comply with?

• Are there any issues concerning the public availability of information provided on Forms MA and MA-I about which the Commission should be made aware? If so, what are they and how might they be addressed?

Item 1: Identifying Information

Proposed Form MA would require a municipal advisor to indicate the full legal name of the municipal advisor and, if different, the name under which it primarily conducts its municipal advisor-related business; the address of its principal office and place of business;

174

the telephone and fax numbers at that location; and any Web site addresses.

175

In addition, the municipal advisor would be required to supply the name of its Chief Compliance Officer, if any, and title of any other person whom the municipal advisor has authorized to receive information and respond to questions about the registration (the “contact person”), as well as the address, telephone number and fax number, if any, and e-mail address, if any, of the Chief Compliance Officer and any other contact person. Further, Item 1 of Form MA would require an applicant to list on Schedule D any additional names under which it conducts municipal advisor-related business and the offices at which such business is conducted. The Commission is requesting this identifying and contact information to assist the Commission and the staff in evaluating applications for registration and overseeing registered municipal advisors.

174

Proposed rule 15Ba1-1(j) would define principal office and place of business to mean: “the executive office of the municipal advisor from which the officers, partners, or managers of the municipal advisor direct, control, and coordinate the activities of the municipal advisor.”

See also

Glossary.

In addition, the municipal advisor must supply its mailing address, if it is different from its principal office and place of business.

175

If the applicant has more than one Web site, it would be required to list all its Web site addresses on Schedule D.

Form MA would also require a municipal advisor to provide its Employer Identification Number (used with respect to Internal Revenue Service matters), or, if a sole proprietor, a social security number.

176

If the municipal advisor is also registered with the Commission as an investment adviser, broker, dealer, or municipal securities dealer, or if it has previously registered with the Commission as a municipal advisor on Form MA-T, it would be required to provide its related SEC file number or numbers. In addition, if the municipal advisor has a number (a “CRD Number”) assigned to it either under the CRD system or the IARD system, it would be required to provide its CRD Number. If it is otherwise registered with the Commission, it would also be required to disclose its other SEC file numbers.

177

176

We are proposing to ask for the social security number of sole proprietors to permit the electronic filing system to distinguish between persons who share the same name. This information is necessary in connection with the Commission's enforcement and examinations functions pursuant to Section 15B(c) of the Exchange Act (15 U.S.C. 78

-4(c)). To protect the privacy of these persons, the social security numbers would not be available on the public disclosure system. Similarly, the public disclosure system would not report the home address of a sole proprietor who reports its home address as its principal office and place of business.

177

The Commission is also proposing that applicants would be required to disclose any state registration numbers.

This information would allow the Commission to more effectively cross-reference those entities applying for registration as municipal advisors to those who are registered as brokers, dealers, municipal securities dealers, investment advisers, or otherwise registered

178

with the Commission. The ability to cross-reference would allow the Commission to assemble more complete information concerning a municipal advisor who is also registered as a broker, dealer, municipal securities dealer, investment adviser, or otherwise registered with the Commission to inform the Commission's decision as to whether to approve an application for registration as a municipal advisor. The ability to cross-reference would also permit the Commission to plan for and carry out efficient and effective examinations of registered municipal advisors that are also otherwise registered.

179

In addition, by obtaining all of an applicant's regulatory file numbers, the Commission would be able to cross-reference disciplinary information that is submitted to the CRD or IARD systems with that submitted on Form MA, and would be able to gain a more complete understanding of a municipal advisor's structure and business.

178

For example, the Commission notes that pursuant to Section 764 of the Dodd-Frank Act, security-based swap dealers will be required to register with the Commission.

See

Section 764(a) of the Dodd-Frank Act; 15 U.S.C. 78

F(a).

179

See

15 U.S.C. 78

-4(c)(7) (providing that examinations shall be conducted by the Commission).

Item 1 of Form MA would also require the applicant to state whether it maintains, or intends to maintain some or all of its books and records required to be kept under MSRB or Commission rules somewhere other than at its principal office and place of business,

and if so to provide (on Schedule D) information about the other location. Form MA would also require an applicant to disclose on Schedule D all of the entities with which it is affiliated, and whether it is affiliated with a business that is registered with a foreign financial regulatory authority, and if so to provide (on Schedule D) the name, in English, of each foreign financial regulatory authority and country with which the affiliated person is registered. This information would help inform the Commission as to the structure of the municipal advisor's business, which would help staff prepare for examinations of the municipal advisor.

Request for Comment

The Commission requests comment generally on Item 1 of proposed Form MA and also requests comment on the following specific issues:

• Is the identifying and contact information requested under Item 1 of Form MA appropriate? Should the Commission request disclosure of additional or different information?

• Would any of the information required to be disclosed under Item 1 be difficult for a municipal advisor to provide?

• Would the use of other identifying numbers be more useful or appropriate? Please explain.

• Is there information requested under Item 1 that should not be publicly disclosed? Please explain.

• Would information as to an applicant's affiliated entities be useful for gaining an understanding of a municipal advisor's relationship with other entities? Would it be useful to prospective municipal advisory clients? Is there different information that would provide a better understanding of a municipal advisor's relationship with other entities? If so, what information? Is providing the information requested overly burdensome? If so, why? Should the disclosure required by Item 1-K be limited to affiliates that engage in financial activities?

Item 2: Form of Organization

Item 2 of proposed Form MA would require a municipal advisor to specify whether it is organized as a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, limited partnership, or other; the month of its annual fiscal year end; the date on which it was organized; and state where it was organized (either the U.S. state or the country outside the U.S.). This information would assist the Commission in evaluating the applications for registration and overseeing registered municipal advisors.

Item 2 would also require an applicant to specify whether it is a public reporting company under Section 12 or 15(d) of the Exchange Act, and if so, provide its Commission assigned Central Index Key (“CIK”) number. This information would provide a signal that additional public information is available about the municipal advisor and/or its control persons.

Request for Comment

The Commission requests comment generally on Item 2 of proposed Form MA and also requests comment on the following specific issues:

• Would the information requested to be disclosed in Item 2 be useful in evaluating a municipal advisor? Is there additional information under Item 2 that should be disclosed? Please explain.

• Are the forms of organization listed under Item 2-A appropriate? Are there additional forms of organization that should be listed?

• To what extent would it be beneficial to require disclosure of whether a municipal advisor is a public reporting company? If a municipal advisor is a public reporting company, is there additional information on Form MA that should be disclosed about the advisor?

• In addition to providing a current CIK number, should municipal advisors be required to disclose all previously issued CIK numbers for that municipal advisor? Would such historical CIK numbers be helpful in accessing the information filed with regulators relating to a municipal advisor? Would SEC and CRD numbers be sufficient for tracking all regulatory filings by a municipal advisor? Please explain.

Item 3: Successions

Item 3 of Form MA would require applicants to disclose whether they are succeeding to the business of a registered municipal advisor, the date of succession, and disclose on Schedule D the name of, and registration information for, the firm they are succeeding. As discussed below, depending on whether the succession is a result of a merger or acquisition, or a reorganization, the succeeding firm would be able to register by either submitting a new Form MA or amending the Form MA of its predecessor.

180

This information would assist the Commission, among other things, in overseeing registered municipal advisors and in determining whether there has been a change in control of a municipal advisor.

181

180

See infra

Section II.A.6. (discussing proposed rule 15Ba1-6 regarding registration of a successor to a municipal advisor).

181

See id.

Request for Comment

The Commission requests comment generally on Item 3 of proposed Form MA and also requests comment on the following specific issues:

• Would the information requested to be disclosed in Item 3 provide information that would help inform an understanding of the relationship between a municipal advisor and its successor, and whether the succession involves a change of control or a change of corporate form? Is there additional information under Item 3 that should be disclosed? Please explain.

• Is there additional information about a succession that would be useful to have disclosed on the Form MA? For example, should the applicant disclose the reason for the succession?

Item 4: Information About Applicant's Business

Item 4 would require an applicant to provide information regarding the approximate number of employees it has, approximately how many of those employees engage in municipal advisory activities, approximately how many of those employees are registered representatives of a broker-dealer or an investment adviser, approximately how many firms or other persons that are not employees or associated persons of the applicant solicit municipal advisory clients on the applicant's behalf (if the number entered includes firms, the names of such firms would be required to be disclosed on Schedule D), and approximately how many employees also do business independently on the applicant's behalf as affiliates of the applicant (the names of these employees would be required to be disclosed on Schedule D).

182

Instruction 2 to Form MA would provide guidance to newly-formed municipal advisors for completing Item 4.

Item 4 would also require the applicant to approximate the number of clients with whom it engaged in municipal advisory activities in the past fiscal year, and to specify by checking the appropriate box(es) whether its clients include: Municipal entities, non-profit organizations (

e.g.,

501(c)(3) organizations) who are obligated persons, corporations or other businesses not listed who are obligated persons, other types of entities, or whether the applicant only engages in solicitation and does not serve clients in the context of its municipal advisory

activities. Applicants would also have to specify approximately the number of municipal entities or obligated persons that were solicited by the applicant on behalf of a third-party during its most recently completed fiscal year, including any clients that it both solicits and with which it engages in other municipal advisory activities; and whether it solicits public pension funds, 529 plans, local or state government investment pools, hospitals, colleges, or other types of municipal entities or obligated persons (and which other types of municipal entities or obligated persons), as well as whether the applicant only serves clients and does not engage in solicitation at all in the context of its municipal advisory activities.

Applicants would also be required to disclose whether they are compensated by hourly charges, fixed fees (not contingent on the issuance of municipal securities), contingent fees, subscription fees (for a newsletter or other publications), or otherwise. If the applicant receives compensation from anyone other than clients, the applicant would be required to provide an explanation of such arrangement.

Disclosure of information relating to the number of a municipal advisor's employees and compensation arrangements would provide the Commission with a clearer understanding of the business structure of registered municipal advisors, including the size of the advisors, the number of its employees that engage in municipal advisory activities, and in what capacity these employees engage in such activities. Information about compensation arrangements also would identify possible conflicts of interest that the municipal advisor may have with its clients.

Item 4 would also require the municipal advisor to indicate the general types of municipal advisory activities in which it engages. The following eleven activities are listed: (1) Advice concerning the issuance of municipal securities (including, without limitation, advice concerning the structure, timing, terms and other similar matters, such as the preparation of feasibility studies, tax rate studies, appraisals and similar documents, related to an offering of municipal securities), (2) advice concerning the investment of the proceeds of municipal securities (including, without limitation, advice concerning the structure, timing, terms and other similar matters concerning such investments), (3) advice concerning municipal escrow investments (including, without limitation, advice concerning their structure, timing, terms and other similar matters), (4) advice concerning the investment of other funds of a municipal entity or obligated person (including, without limitation, advice concerning the structure, timing, terms and other similar matters concerning such investments), (5) advice concerning guaranteed investment contracts (including, without limitation, advice concerning their structure, timing, terms and other similar matters), (6) advice concerning the use of municipal derivatives (including, without limitation, advice concerning their structure, timing, terms and other similar matters), (7) solicitation of investment advisory business from a municipal entity or obligated person (including, without limitation, municipal pension plans) on behalf of an unaffiliated person or firm (

e.g.,

third party marketers, placement agents, solicitors and finders), (8) solicitation of business other than investment advisory business from a municipal entity or obligated person on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor or investment adviser (

e.g.,

third party marketers, placement agents, solicitors and finders), (9) advice or recommendations concerning the selection of other municipal advisors or underwriters with respect to municipal financial products or the issuance of municipal securities, (10) brokerage of municipal escrow investments, or (11) other (specify). Applicants who check “other” activities would be required to provide a narrative description of such activities. The listed activities are those in which the Commission understands that municipal advisors engage, and are derived from the definition of municipal advisor in Exchange Act Section 15B(e)(4).

183

This information would assist the Commission in understanding the scope of activities in which a municipal advisor engages, in identifying possible conflicts of interest, in preparing for on-site inspections and examinations, and would provide the Commission with data useful to making regulatory policy.

183

See

15 U.S.C. 78

-4(e)(4).

Request for Comment

The Commission requests comment generally on Item 4 of proposed Form MA and also requests comment on the following specific issues:

• Is the information requested to be disclosed in Item 4 information that would best help inform an understanding of the scope of a municipal advisor's business? Is there additional information under Item 4 that should be disclosed? Please explain. Is any of the requested information unnecessary or not useful? Please explain.

• Is there other information that would be helpful to request regarding the structure of a municipal advisor, in addition to the number of employees, to help provide a clear understanding of the municipal advisor's business structure?

• Are there other types of compensation arrangements for municipal advisors that should be listed under Item 4?

• Are there additional types of municipal advisory activities that should be included in the list of activities provided to municipal entities and obligated persons under Item 4? Please explain, and provide suggested language, as appropriate.

Item 5: Other Business Activities

Item 5 would require applicants to provide information about their other business activities. Specifically, an applicant would be asked whether it is actively engaged in business as a (1) broker-dealer, municipal securities dealer or government securities broker or dealer, (2) registered representative of a broker-dealer, (3) commodity pool operator (whether registered or exempt from registration), (4) commodity trading advisor (whether registered or exempt from registration), (5) futures commission merchant, (6) major swap participant,

184

(7) major security-based swap participant,

185

(8) swap dealer

186

or security-based swap dealer,

187

(9) trust company, (10) real estate broker, dealer, or agent, (11) insurance company, broker, or agent, (12) banking or thrift institution (including a separately identifiable department or division of a bank), (13) investment adviser (including financial planners), (14) lawyer or law firm,

188

(15)

accountant or accounting firm,

189

(16) engineering firm,

190

or (17) other financial product advisor and if so, to specify. An applicant would also be asked to state whether it is actively engaged in any other business, and if such other business is its primary business. If an applicant's primary business is not one of those enumerated above, it would be required to describe the other business on proposed Schedule D to Form MA. This information would assist the Commission, among other things, in identifying conflicts of interests for municipal advisors, preparing for inspections and examinations of municipal advisors, and would assist the Commission and the MSRB in understanding municipal advisors in the context of their activities for regulatory purposes.

184

See

Exchange Act Rule 3(a)(66) (15 U.S.C. 78c(a)(66)), as amended by Section 761(a) of the Dodd-Frank Act, and the rules and regulations thereunder.

185

See

Exchange Act Rule 3(a)(67) (15 U.S.C. 78c(a)(67)), as amended by Section 761(a) of the Dodd-Frank Act, and the rules and regulations thereunder.

186

See

Exchange Act Rule 3(a)(76) (15 U.S.C. 78c(a)(76)), as amended by Section 761(a) of the Dodd-Frank Act, and the rules and regulations thereunder.

187

See

Exchange Act Rule 3(a)(71) (15 U.S.C. 78c(a)(71)), as amended by Section 761(a) of the Dodd-Frank Act, and the rules and regulations thereunder.

188

See supra

section II.A.1

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.