Registration of Municipal Advisors

Federal RegisterNov 12, 2013

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240 and 249

[Release No. 34-70462; File No. S7-45-10]

RIN 3235-AK86

Registration of Municipal Advisors

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

Section 975 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) amended Section 15B of the Securities Exchange Act of 1934 (“Exchange Act”) to require municipal advisors, as defined below, to register with the Securities and Exchange Commission (“Commission” or “SEC”), effective October 1, 2010. To enable municipal advisors to temporarily satisfy this requirement, the Commission adopted an interim final temporary rule, Exchange Act Rule 15Ba2-6T, and form, Form MA-T, effective October 1, 2010. To enable municipal advisors to continue to register under the temporary registration regime until the applicable compliance date for permanent registration, the Commission is extending Rule 15Ba2-6T, in a separate release, to December 31, 2014. The Commission is today adopting new Rules 15Ba1-1 through 15Ba1-8, new Rule 15Bc4-1, and new Forms MA, MA-I, MA-W, and MA-NR under the Exchange Act. These rules and forms are designed to give effect to provisions of Title IX of the Dodd-Frank Act that, among other things, require the Commission to establish a registration regime for municipal advisors and impose certain record-keeping requirements on such advisors.

DATES:

Effective Date:

January 13, 2014, except that amendatory instruction 11 removing § 249.1300T is effective January 1, 2015.

Compliance Date:

The applicable compliance dates are discussed in the section of the release titled “V. Implementation and Compliance Dates”.

FOR FURTHER INFORMATION CONTACT:

Office of Municipal Securities:

John Cross, Director, at (202) 551-5839; Jessica Kane, Senior Special Counsel to the Director, at (202) 551-3235; Rebecca Olsen, Attorney Fellow, at (202) 551-5540; or Mary Simpkins, Senior Special Counsel, at (202) 551-5683; at Office of Municipal Securities, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

Office of Market Supervision:

Molly Kim, Senior Special Counsel, at (202) 551-5644; Ira Brandriss, Special Counsel, at (202) 551-5651; Brian Baltz, Special Counsel, at (202) 551-5762; Jennifer Dodd, Special Counsel, at (202) 551-5653; Derek James, Special Counsel, at (202) 551-5792; Yue Ding, Attorney-Adviser, at (202) 551-5842; or Eugene Hsia, Attorney-Adviser, at (202) 551-5709; at Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

The Commission is adopting Rules 15Ba1-1 to 15Ba1-8 (17 CFR 240.15Ba1-1 to 240.15Ba1-8) and 15Bc4-1 (17 CFR 240.15Bc4-1) under the Exchange Act; Forms MA, MA-I, MA-W, and MA-NR (17 CFR 249.1300, 1310, 1320, and 1330); and Rules 30-3a (17 CFR 200.30-3a) and 19d (17 CFR 200.19d) under the Commission's Rules of Organization and Program Management. The Commission is amending Rules 30-18 (17 CFR 200.30-18) and 19c (17 CFR 200.19c) under the Commission's Rules of Organization and Program Management.

Table of Contents

I. Executive Summary

II. Introduction

A. Background

1. Overview of Municipal Securities Market

a. Municipal Advisors

b. Municipal Entities and Municipal Financial Products

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

b. Municipal Advisors

B. Dodd-Frank Act and the Need for Oversight

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

D. Proposal To Establish a Registration Regime for Municipal Advisors

III. Discussion

A. Rules for the Registration of Municipal Advisors

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

a. Statutory Definition of “Municipal Advisor”

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

i. Advice Standard in General

ii. Municipal Entity

iii. Obligated Person

iv. Municipal Financial Products

v. Municipal Derivatives

vi. Guaranteed Investment Contracts

vii. Issuance of Municipal Securities

viii. Investment Strategies

ix. Pooled Investment Vehicles

x. Solicitation of a Municipal Entity or Obligated Person

c. Exclusions and Exemptions From the Definition of “Municipal Advisor”

i. Public Officials and Employees of Municipal Entities and Obligated Persons

ii. Responses to Requests for Proposals or Requests for Qualifications

iii. Municipal Entity or Obligated Person Represented by an Independent Municipal Advisor

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

v. Registered Investment Advisers

vi. Registered Commodity Trading Advisors; Swap Dealers

vii. Accountants, Attorneys, Engineers and Other Professionals

viii. Banks

2. Rule 15Ba1-2

a. Application for Municipal Advisor Registration

b. Information Requested in Form MA

c. Information Requested in Form MA-I

3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated With Registered Municipal Advisors From Registration

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

a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration

b. Form MA-W

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

6. Rule 15Ba1-6: Consent to Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors; and Form MA-NR

a. Rule 15Ba1-6: Consent to Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors

b. Form MA-NR

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

8. General Instructions and Glossary

9. Rule 15Bc4-1: Persons Associated With Municipal Advisors

B. Approval or Denial of Registration

C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by Municipal Advisors

IV. Designation of FINRA To Examine FINRA Member Municipal Advisors

V. Implementation and Compliance Dates

VI. Delegation of Authority

A. Delegation to the Director of the Office of Municipal Securities

B. Delegation to the Director of the Office of Compliance Inspections and Examinations

VII. Paperwork Reduction Act

VIII. Economic Analysis

IX. Final Regulatory Flexibility Analysis

X. Statutory Basis and Text of Amendments

I. Executive Summary

Section 975 of the Dodd-Frank Act creates a new class of regulated persons, “municipal advisors,” and requires these advisors to register with the Commission. This new registration requirement, which became effective on

October 1, 2010, makes it unlawful for any municipal advisor to provide certain advice to or on behalf of, or to solicit, municipal entities or certain other persons without registering with the Commission.

A person is deemed under the Exchange Act to have a statutory fiduciary duty to any municipal entity for whom such person acts as a municipal advisor.

See

15 U.S.C. 78

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

The new registration requirements and regulatory standards are intended to mitigate some of the problems observed with the conduct of some municipal advisors, including “pay to play” practices, undisclosed conflicts of interest, advice rendered by financial advisors without adequate training or qualifications, and failure to place the duty of loyalty to their clients ahead of their own interests.

According to a Senate Report related to the Dodd-Frank Act, “[t]he $3 trillion municipal securities market is subject to less supervision than corporate securities markets, and market participants generally have less information upon which to base investment decisions. During the [financial] crisis, a number of municipalities suffered losses from complex derivatives products that were marketed by unregulated financial intermediaries.”

Accordingly, in response to the financial crisis that began in 2008, the Dodd-Frank Act amended the Exchange Act to require “a range of municipal financial advisors to register with the [Commission] and comply with regulations issued by the [MSRB].”

See, e.g.,

Municipal Securities Rulemaking Board, Unregulated Municipal Market Participants—A Case for Reform, April 2009,

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

(“MSRB Study”).

See

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

See id.

In September 2010, the Commission adopted, and subsequently extended, an interim final temporary rule establishing a temporary means for municipal advisors to satisfy the registration requirement.

As of March 31, 2013, there were approximately 1,130 Form MA-T registrants, including approximately 330 registrants that are also registered investment advisers and/or broker-dealers. In December 2010, the Commission proposed a permanent registration regime to govern municipal advisor registration (“Proposal”).

The Commission has considered comments received in connection with both the 2010 interim final temporary rules, as well as the Proposal, and is today establishing a permanent registration regime for municipal advisors and imposing certain record-keeping requirements on such advisors. Further, the Commission today, in a separate release, is extending the expiration date of the temporary registration regime to December 31, 2014.

This extension will enable municipal advisors that are required to register with the Commission on or after the Effective Date but before the applicable compliance date to continue to register under the temporary registration regime.

See

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

See

Section II.D. below and Securities Exchange Act Release No. 63576 (December 20, 2010), 76 FR 824 (January 6, 2011) (“Proposal”).

See

Rule 15Ba2-6T and Securities Exchange Act Release No. 70468 (September 23, 2013) (“Form MA-T Extension Release”).

The statutory definition of a “municipal advisor” is broad and includes persons that may not have been considered to be municipal financial advisors prior to the enactment of the Dodd-Frank Act. Historically, municipal advisors have been largely unregulated.

The Commission believes that the information disclosed pursuant to the rules and forms established by the permanent registration regime for municipal advisors will enhance the Commission's oversight of municipal advisors and their activities in the municipal securities markets. The publicly-available online information provided pursuant to these rules and forms should also aid municipal entities and obligated persons in choosing municipal advisors and help provide greater transparency when engaging in transactions or investments with municipal advisors.

See, e.g.,

MSRB Study,

supra

note 2.

The Exchange Act defines the term “municipal advisor” to mean a person (who is not a municipal entity or an employee of a municipal entity) that: (1) Provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or (2) undertakes a solicitation of a municipal entity.

The definition of municipal advisor includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors that provide municipal advisory services, unless they are statutorily excluded.

See

15 U.S.C. 78

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

See

15 U.S.C. 78

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

The statutory definition of “municipal advisor” explicitly excludes: (1) A broker, dealer, or municipal securities dealer serving as an underwriter (as defined in Section 2(a)(11) of the Securities Act of 1933); (2) any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice; (3) any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps; (4) attorneys offering legal advice or providing services of a traditional legal nature; and (5) engineers providing engineering advice.

See

15 U.S.C. 78

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

The Exchange Act defines the term “municipal financial product” to mean municipal derivatives, guaranteed investment contracts, and investment strategies.

“Investment strategies” is defined to include plans or programs for the investment of proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments.

See

15 U.S.C. 78

-4(e)(5).

See

15 U.S.C. 78

-4(e)(3).

The Proposal reflected the Commission's preliminary interpretation of the new statutory requirements, based on its understanding at that time of Congressional objectives and intent in adopting Section 975 of the Dodd-Frank Act. The Commission requested comment generally on the Proposal and also requested comment on over 175 specific issues. The Commission received over 1,000 comment letters on the Proposal, representing a wide range of viewpoints, which are discussed throughout this release. Commenters included municipal advisors, municipal entities, broker-dealers, banks, accountants, lawyers, engineers, registered investment advisers, organizations representing industry participants, investors, the Municipal Securities Rulemaking Board, members of Congress, and others.

Commenters generally supported the goals of the Proposal, although many expressed concerns about its breadth and recommended that the Proposal be amended or clarified in certain respects. Major themes in the comments included: (1) Concerns about the proposed treatment of appointed board members and other public officials of municipal entities as advisors; (2)

concerns about the proposed application to advice on investments of all municipal funds (versus investments associated with proceeds of municipal securities); and (3) potential effects on securities activities of banks for which there are no statutory exclusions from the definition of “municipal advisor.” The Commission staff discussed many issues with other U.S. financial regulators, commenters, and interested market participants in devising a final rule that requires registration of parties engaging in municipal advisory activities without unnecessarily imposing additional regulation.

One theme reflected in the statutory exclusions to the definition of a municipal advisor and in the Commission's consideration of additional regulatory exemptions involves an approach that focuses and limits the scope of these exclusions and exemptions based on identified activities (“activities-based exemptions”) rather than on the basis of the status of particular categories of market participants (“status-based exemptions”). This approach aims to ensure that exemptions apply in targeted circumstances to appropriate identified activities. By comparison, a concern with status-based exemptions is that they could provide inappropriate competitive advantages to covered categories of market participants.

See infra

Sections VIII.D.5.b. (discussing alternatives to the exclusions from the definition of municipal advisor) and VIII.D.6.b. (discussing alternatives to the exemptions from the definition of municipal advisor).

In consideration of the views expressed, suggestions for alternatives, and other information provided by commenters, the Commission is adopting the rules with significant modifications from the Proposal to narrow the scope of the registration requirement, including through certain activity-based exemptions from the definition of municipal advisor, and to provide additional guidance to market participants about what constitutes municipal advice and who is required to register as a municipal advisor. Some of the more significant changes made in this adopting release are summarized as follows.

Broad Exemption for Public Officials and Employees of Municipal Entities and Obligated Persons

The Exchange Act excludes municipal entities and employees of municipal entities from the definition of municipal advisor.

The Proposal did not extend the exclusion for “employees of a municipal entity” to include appointed officials. The Commission received approximately 670 comment letters to the effect that the proposed exclusion for employees of municipal entities was unduly narrow and that it failed to provide sufficient coverage for appointed board members and other public officials associated with municipal entities. The final rule provides a broad exemption from municipal advisor registration for all employees, governing body members, and other officials of municipal entities and obligated persons, to the extent that they act within the scope of their employment or official capacity.

The Commission does not expect that the ordinary performance of the duties of an appointed member of a governing body of a municipal entity—such as voting, providing a statement or discussion of views, or asking questions at a public meeting—would cause that individual to be a municipal advisor with respect to the municipal entity on whose board he or she serves.

See

15 U.S.C. 78

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

See infra

Section III.A.1.c.i.

Limitation to Investments Related to Proceeds of Municipal Securities Instead of All Public Funds

The Exchange Act provides that the term “`investment strategies'

includes

plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments” (emphasis added).

In the Proposal, the Commission proposed to interpret the “investment strategies” definition broadly to cover not only the statutorily-identified matters but also plans, programs, or pools of assets that invest any funds held by or on behalf of a municipal entity.

See

15 U.S.C. 78

-4(e)(3).

The Commission received approximately 60 comment letters to the effect that the Proposal interpreted the “investment strategies” definition too broadly to cover advice to municipal entities regarding plans or programs for the investment of all public funds of municipal entities (rather than investments more narrowly associated with proceeds of municipal securities and the recommendation of and brokerage of municipal escrow arrangements). The Commission has determined to adopt the statutory definition of “investment strategies,” but is also adopting an exemption for certain persons that will result in a narrower application of “investment strategies” than originally proposed, limiting such strategies to matters relating to the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments, in lieu of all public funds of municipal entities.

This more circumscribed approach to “investment strategies” has a narrowing effect throughout the municipal advisor registration regime (

e.g.,

many investment advisers and a significant portion of the bank activities identified by commenters will not be subject to municipal advisor registration).

See infra

Section III.A.1.b.viii.

New Tailored Exemption for Banks

The Exchange Act does not exclude banks from the definition of municipal advisor. The Commission received approximately 300 comment letters to the effect that the Proposal did not provide needed exemptions for so-called “traditional banking” activities. Most of these comments regarding the impact on banks related to the proposed broad interpretation of the “investment strategies” definition. Many commercial banks and banking associations asserted that the Commission's interpretation of “investment strategies” was overly broad and would potentially cover traditional banking products and services, such as deposit accounts, cash management products, and loans to municipalities. As a result, according to commenters, banks or bank employees that provide advice regarding such products and services could be considered municipal advisors, adding “a new layer of regulation on bank products for no meaningful public purpose.”

See infra

note 876 and accompanying text (discussing comments regarding an exemption for banks from the municipal advisor registration rules).

The narrowing of the application of “investment strategies” in the final rule is designed to address the main concerns raised by these commenters.

In addition, the final rule provides a new tailored exemption from the definition of municipal advisor for a bank providing advice with respect to the following: (1) Any investments that are held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (2) any extension of credit by a bank to a municipal entity or obligated person, including the issuance of a letter of credit, the making of a direct loan, or the purchase of a municipal security by the bank for its own account; (3) any funds held in a sweep account; or (4) any investment made by a bank acting in the capacity of an indenture trustee

or similar capacity (

e.g.,

a bond indenture trustee, paying agent, or municipal escrow agent).

See infra

Section III.A.1.c.viii.

The final rule preserves the municipal advisor registration requirement for banks that engage in municipal advisory activities, such as banks that act as financial advisors to municipal entities in structuring issues of municipal securities. Also, the final rule preserves the municipal advisor registration requirement for banks that provide advice with respect to municipal derivatives.

Advice Standard in General

For purposes of the municipal advisor definition, the Dodd-Frank Act did not specifically define or otherwise provide a general standard to determine what constitutes “advice” to a municipal entity or obligated person. The Commission received comments requesting clarification of “advice” and suggesting general parameters for defining advice that distinguish between providing general information to a municipal entity and recommending a specific action to a municipal entity. While the Commission believes that the determination of whether a person provides advice to or on behalf of a municipal entity or obligated person depends on all the relevant facts and circumstances, the Commission also believes that additional guidance on the advice standard for purposes of the municipal advisor definition will provide greater clarity regarding the applicability of the municipal advisor registration requirement. Accordingly, the adopted rules provide that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities (including with respect to the structure, timing, terms and other similar matters concerning such financial products or issues).

See infra

Section III.A.1.b.i.

Exemption for Certain Swap Dealers

The Exchange Act does not exclude swap dealers from the definition of municipal advisor. The Commission received comments suggesting that regulation of swap dealers under the municipal advisor registration regime should be coordinated with other regulatory programs. The Commission recognizes that swap dealers are also subject to the provisions of Title VII of the Dodd-Frank Act,

which provide the Commodity Futures Trading Commission (“CFTC”) with authority to register and implement business conduct standards for swap dealers with respect to their interactions with municipal entities and obligated persons that are “special entities,” as discussed further below in Section III.A.1.c.vi. The final rules exempt any registered swap dealer to the extent that such dealer recommends a municipal derivative or a trading strategy that involves a municipal derivative, so long as such dealer or associated person is not “acting as an advisor” to the municipal entity or obligated person, applying the standards applicable to the parties to such transactions under the existing regulatory regime of the CFTC.

See

Dodd-Frank Act sections 731

et seq.,

764

et seq.

See infra

Section III.A.1.c.vi. The Commission also received similar comments regarding security-based swap dealers. As discussed herein, although the Commission is not providing an exemption in the rules as adopted for security-based swap dealers, security-based swap dealers may be eligible for exemption pursuant to another exemption, such as when there is a separate registered municipal advisor, and the Commission may in the future consider whether to provide a comparable exemption by rule.

See id.

Exemption When There Is an Independent Registered Municipal Advisor

Several commenters suggested that a person providing advice with respect to municipal financial products or the issuance of municipal securities should not be regulated as a municipal advisor if the municipal entity or obligated person is otherwise represented by a municipal advisor. The Commission believes that if a municipal entity or obligated person is represented by a registered municipal advisor, parties to the municipal securities transaction and others who are not registered municipal advisors should be able to provide advice to such municipal entity or obligated person, so long as the responsibilities of each of the parties are clear.

Accordingly, the final rules exempt persons providing advice with respect to municipal financial products or the issuance of municipal securities from the definition of municipal advisor so long as: (1) An independent registered municipal advisor is providing advice with respect to the same aspects of the municipal financial product or issuance of municipal securities, is registered pursuant to Section 15B of the Exchange Act and the rules and regulations thereunder, and is not, and within at least the past two years was not, associated with the person seeking to rely on this exemption; (2) such person receives from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, an independent registered municipal advisor; and (3) such person provides written disclosure to the municipal entity or obligated person that such person is not a municipal advisor and, with respect to a municipal entity, is not subject to the statutory fiduciary duty applicable to municipal advisors under the Exchange Act, and such person provides a copy of such disclosure to the municipal entity's or the obligated person's independent registered municipal advisor.

See infra

Section III.A.1.c.iii.

Exclusion of Individuals From Registration

In the Proposal, the Commission proposed to require registration of all individuals associated with municipal advisory firms who engage in municipal advisory activities, as contrasted with limiting registration to the municipal advisory firms themselves. For reasons further discussed in Sections III.A.2.a. and III.A.3. of this adopting release, the Commission is limiting the registration requirement to municipal advisory firms and sole proprietors.

II. Introduction

A. Background

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

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.

See infra

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

See infra

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

See

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

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

1. Overview of Municipal Securities Market

a. Municipal Advisors

As discussed in the Proposal,

until the passage of the Dodd-Frank Act, the activities of municipal advisors were largely unregulated, and municipal advisors were generally not required to register with the Commission or any other federal, state, or self-regulatory entity with respect to their municipal advisory activities. As discussed below in this section and in the Proposal,

some entities that are now subject to registration as municipal advisors pursuant to Section 15B of the Exchange Act and rules or regulations promulgated thereunder currently are subject to regulation by various federal and state regulators in other capacities. These entities include brokers, dealers, municipal securities dealers, investment advisers, and banks. Such regulations, however, generally do not apply specifically to these entities' municipal advisory activities.

See

Proposal, 76 FR 825.

See id.

Municipal advisors, commonly referred to as “financial advisors,”

engage in municipal advisory activities in a variety of contexts. With respect to the issuance of municipal securities, municipal advisors (which may include entities registered as brokers, dealers, municipal securities dealers, or investment advisers acting as municipal advisors), among other things, may assist municipal entities in developing a financing plan, assist municipal entities in evaluating different financing options and structures, assist in the selection of other parties to the financing (such as bond counsel and underwriters), coordinate the rating process, ensure adequate disclosure, and/or evaluate and negotiate the financing terms.

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

of the municipal debt issued in 2008 was issued with the participation of municipal advisors.

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

A study that looked at historical involvement by “financial advisors” identified participation rates of approximately 50% in the period from 1984 to 2002.

See infra

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

See

Jayaraman Vijayakumar and Kenneth N. Daniels, 2006,

The Role and Impact of Financial Advisors in the Market for Municipal Bonds

(“Vijayakumar and Daniels”), Journal of Financial Services Research, 30:43, at 46.

See

MSRB Study,

supra

note 2, at 1.

See id.

(referring to municipal advisors as “financial advisors”). Approximately 43% of the $453 billion of municipal debt issued in 2008 (by par amount of bonds) (or 62% of the $315 billion of municipal debt issued with financial advisors) was issued with the assistance of “financial advisors” that were not part of dealer firms regulated by the MSRB.

See id.,

at 2.

See id.,

at 2.

See

Arthur Allen and Donna Dudney, May 2010,

Does the Quality of Financial Advice Affect Prices?

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

As discussed in the Proposal,

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

For example, as derivatives—which are municipal financial products—developed in the municipal securities market, some municipal advisory firms began marketing themselves as experts in derivatives. These municipal advisory firms are generally referred to as “swap advisors.”

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

See

Proposal, 76 FR 825.

See infra

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

See

MSRB Study,

supra

note 35.

Further, municipal advisors may provide advice to municipal entities concerning guaranteed investment contracts and investment strategies.

These advisory firms may assist in the investment of proceeds from bond offerings as well as manage other public monies. Such public monies include general and special funds of state and local governments, public pension plans, and other funds dedicated to public programs, such as public transportation, police and fire protection, public health, and public education. In addition, municipal advisors may help state and local governments find and evaluate other advisors that manage public funds and provide other types of services.

See infra

Sections III.A.1.b.vi. and III.A.1.b.viii. (discussing the terms “guaranteed investment contracts” and “investment strategies,” respectively).

See

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

Other persons that may be required to register as municipal advisors include those who solicit municipal entities on behalf of brokers, dealers, municipal securities dealers, municipal advisors, and investment advisers. Such solicitation activities are discussed herein.

See infra

Section III.A.1.b.x.

b. Municipal Entities and Municipal Financial Products

The municipal securities market consists of approximately 44,000 issuers,

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

Such constitutions, statutes, charters, and codes impose on municipal issuers 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, counties, and school districts, to authorities, agencies, and other special districts.

See

Commission Report on the Municipal Securities Market, 1 (July 31, 2012), available at

http://sec.gov/news/studies/2012/munireport073112.pdf

(“2012 Report on the Municipal Securities Market”).

See

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

See id.,

at 2.

See id.,

at 78.

Municipal securities are issued by government entities to pay for a variety of public projects, to obtain cash flow for other governmental needs, and to provide tax-exempt or taxable financing for non-governmental private projects by acting as a conduit on behalf of private organizations.

In 2011, there were over one million different municipal bonds outstanding, totaling $3.7 trillion in principal.

Also, there were 13,463 municipal issuances, totaling $355 billion of principal.

Further, in 2011, the average daily trading volume for the municipal bond market was $11.3 billion.

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

2012 Report on the Municipal Securities Market,

supra

note 45, at 5. In 2011, there were fewer than 50,000 different corporate bonds, totaling $11.5 trillion in principal (this figure includes foreign bonds).

See id.

There were also $22.5 trillion of corporate equities outstanding.

See id.

See id.,

at 6.

See id.,

at 21. Compare this to the corporate bond market, which in 2011 had an average daily trading volume of $20.6 billion.

See id.

Interests offered by college savings plans (“529 Savings Plans”) that comply with Section 529 of the Internal Revenue Code

are another type of

municipal security. 529 Savings Plans involve offerings of interests in state tuition programs and qualified savings plans that are public instrumentalities of the particular state, and provide tax advantages designed to encourage saving for future college costs.

529 Savings Plan assets have increased from approximately $9 billion in 2000 to approximately $190 billion in 2012, and the number of 529 Savings Plan accounts has increased from approximately 1.3 million in 2000 to approximately 11 million in 2012.

See

26 U.S.C. 529.

See

2012 Report on the Municipal Securities Market,

supra

note 45, at 8.

See

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

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

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

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

A person that sells interests in 529 Savings Plans generally must be registered as a broker, dealer, or municipal securities dealer and comply with applicable MSRB rules.

529 Savings Plans are also relevant in the context of municipal advisor regulation, because an issuance of interests in 529 Savings Plans is an issuance of municipal securities.

Further, 529 Savings Plans may engage in transactions involving municipal financial products and may also seek advice in connection with such products or issuances.

Moreover, third parties seeking to advise 529 Savings Plans may solicit such plans for that purpose.

See, e.g.,

MSRB Notice 2002-19 (May 14, 2002) (Application of Fair Practice and Advertising Rules to Municipal Fund Securities).

See

MSRB, 529 Plan Basics, available at

http://emma.msrb.org/EducationCenter/FAQs.aspx?topic=PlanBasics

and MSRB, Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market (January 18, 2001), available at

http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Definitional/Rule-D-12.aspx?tab=2#_4B905EF1-5F85-4D2E-B27C-6B94EF405F47

(citing Letter from Catherine McGuire, Chief Counsel, Division of Trading and Markets, Commission, to Diane G. Klinke, General Counsel, MSRB, dated February 26, 1999, in response to letter from Diane G. Klinke, General Counsel, MSRB, to Catherine McGuire, Chief Counsel, Division of Trading and Markets, Commission, dated June 2, 1998).

See

Political Contributions Final Rule,

supra

note 43, at 41044-46.

See id.,

at 41019.

Public pension plans may also engage in transactions in municipal financial products and seek advice in connection with such transactions. Third parties may solicit these public pension plans on behalf of firms seeking to provide advice to these plans.

According to the 2011 Census Bureau survey, there were 3,418 state- and locally-administered pension systems in 2011.

As of the first quarter of 2013, public pension plans had over $3 trillion of assets and represented approximately 30 percent of all U.S. pension assets.

See id.

See

U.S. Census Bureau,

Annual Survey of Public Pensions: State- and Locally-Administered Defined Benefit Data Summary Report: 2011

(August 2013), available at

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

See

Federal Reserve Board,

Financial Accounts of the United States—Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts,

Table L.117 (First Quarter 2013), available at

http://www.federalreserve.gov/releases/z1/current/z1.pdf

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

According to a 2009 article, 45 states have LGIPs with assets totaling more than $250 billion.

See

Jeff Pentages,

Local Government Investment Pools and the Financial Crisis: Lessons Learned,

October 2009, Government Finance Review 25. As of the first quarter of 2013, state and local governments had approximately $2.1 trillion dollars in total financial assets.

See

Federal Reserve Board,

Financial Accounts of the United States—Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts,

Table L.104 (First Quarter 2013), available at

http://www.federalreserve.gov/releases/z1/current/z1.pdf

Historically, the over-the-counter derivatives markets have been relatively opaque because of their privately negotiated, bilateral nature and the limited availability of transaction data such as prices and volumes.

Accordingly, there is currently no comprehensive data on how many municipal issuers are active in the $162 trillion interest-rate swap market,

although reported estimates of the size of the municipal derivatives market range from $100 billion to $300 billion annually in notional principal amount.

Further, estimates of the number of municipal issuers that have engaged in derivative transactions also vary. Some anecdotal evidence suggests a relatively wide use of municipal derivatives in recent years. For instance, a 2008 review of Pennsylvania Department of Community and Economic Development records indicated that 185 school districts, towns, and counties in Pennsylvania have entered into derivative transactions since 2003, when the state's law was explicitly changed to allow for such transactions.

Other estimates, however, have pointed to a less widespread use of derivatives among municipal issuers. For example, a 2007 study by Standard & Poor's identified 750 municipal issuers that engaged in interest rate swaps.

In addition, in October 2009, Moody's undertook a review of the state and local governments for which Moody's provides ratings and identified 500 entities with outstanding interest rate swaps.

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

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

The Dodd-Frank Act, however, will require more public reporting of derivative transactions in the future. For example, the CFTC has adopted rules to implement a framework for the real-time public reporting of swap transactions and pricing data for swap transactions.

See

77 FR 1182 (January 9, 2012). Moreover, the Dodd-Frank Act requires the Commission to adopt, and the Commission has proposed, rules to provide for the reporting of security-based swaps information to registered security-based swap data repositories or to the Commission and the public dissemination of security-based swap transaction, volume, and pricing information.

See

Securities Exchange Act Release No. 63346 (November 19, 2010), 75 FR 75208 (December 2, 2010).

See

2012 Report on the Municipal Securities Market,

supra

note 45, at 91.

See

MSRB Study,

supra

note 35, at 10.

See

Martin Z. Braun,

Deutsche Bank Swap Lures County as Budgets Crumble,

Bloomberg (Nov. 26, 2008), available at

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

See

Joe Mysak,

California Declares War on State Bond Short-Sellers,

Bloomberg (Apr. 27, 2010), available at

http://www.bloomberg.com/news/2010-04-28/california-declares-war-on-short-sellers-of-bonds-commentary-by-joe-mysak.html

See

Joe Mysak,

Swaps Nightmares Become Real for Amateur Financiers,

Bloomberg (Dec. 15, 2009), available at

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVCDZ6c1PYC0

See id.

See, e.g.,

William Selway,

Derivatives Sold to Governments Get Dodd-Frank Disclosure: One Year Later,

Bloomberg (Jul. 18, 2011), available at

http://www.bloomberg.com/news/2011-07-18/derivatives-sold-to-governments-get-dodd-frank-disclosure-one-year-later.html

; Michael McDonald,

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

Bloomberg (Nov. 10, 2010), available at

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

; Transcript of the U.S. Securities and Exchange Commission Birmingham Field Hearing on the State of the Municipal Securities Market, at 239-240 and 243.

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

As discussed in the Proposal,

the Securities Act of 1933 (“Securities

Act”)

and the Exchange Act

were both enacted with exemptions for municipal securities, except for the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

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.

See

Proposal, 76 FR 826.

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

See

The Bond Buyer's Municipal Finance Statistics, 1975 (June 1976). At the end of 1976, there were $323 billion of corporate bonds outstanding, which was about one third more than state and local government securities and about half as much as U.S. Treasury securities.

See

Federal Reserve Bank of New York, the Market for Corporate Bonds (Autumn 1977). As of the first quarter of 2013, there were approximately $3.7 trillion of municipal bonds outstanding, $13 trillion of corporate and foreign bonds outstanding, and $12 trillion of Treasury securities outstanding.

See

Federal Reserve Board,

Financial Accounts of the United States—Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts,

Tables L.209, 211 and 212, (First Quarter 2013), available at

http://www.federalreserve.gov/releases/z1/current/z1.pdf

See

Ann Judith Gellis,

Municipal Securities Market: Same Problems—No Solutions,

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

In 1975, Congress granted new authority to regulate intermediaries in the market for municipal securities. As part of the Securities Acts Amendments of 1975 (“1975 Amendments”), Congress created a limited regulatory scheme for the municipal securities market at the federal level.

That scheme included mandatory registration with the Commission for brokers, dealers, and municipal securities dealers involved in effecting municipal securities transactions,

and gave the Commission broad rulemaking and enforcement authority over such persons.

In addition, the 1975 Amendments authorized the creation of the MSRB and granted it authority to promulgate rules concerning transactions in municipal securities by brokers, dealers, and municipal securities dealers. The 1975 Amendments, however, did not create a regulatory scheme for, or impose any new requirements on, municipal issuers. Rather, the 1975 Amendments expressly prohibited the Commission and the MSRB from requiring municipal securities issuers, either directly or indirectly, to file any application, report, or document with the Commission or the MSRB prior to any sale by the issuer.

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)).

The Exchange Act defines a “municipal securities dealer” as any person (including a separately identifiable department or division of a bank) engaged in the business of buying and selling municipal securities for its own account other than in a fiduciary capacity, through a broker or otherwise.

See

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

See supra

note 78. Enforcement activities regarding municipal securities dealers must be coordinated by the Commission, the Financial Industry Regulatory Authority (“FINRA”), and the appropriate bank regulatory agency.

See

Exchange Act Sections 15B(c)(6)(A), 15B(c)(6)(B), and 17(c) (15 U.S.C. 78

-4(c)(6)(A), 78

-4(c)(6)(B), 78q(c)).

Section 15B(d)(1) of the Exchange Act (commonly known as the “Tower Amendment”) provides that “[n]either the Commission nor the Board is authorized under this title, by rule or regulation, to require any issuer of municipal securities, directly or indirectly through a purchaser or prospective purchaser of securities from the issuer, to file with the Commission or the Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities.” 15 U.S.C. 78

-4(d)(1).

As noted above and in the Proposal, pursuant to the 1975 Amendments, unless an exception or exemption applies, all brokers, dealers, and municipal securities dealers that underwrite or trade municipal securities are required to register with the Commission.

All brokers, dealers, and municipal securities dealers that engage in municipal securities transactions also must register with the MSRB and comply with its rules.

Furthermore, unless it is a bank, each broker, dealer, and municipal securities dealer that engages in municipal securities transactions must be a member of FINRA.

FINRA is required to examine brokers, dealers, and municipal securities dealers for compliance with the Exchange Act, rules and regulations thereunder, and MSRB rules.

Bank municipal securities dealers are examined by their appropriate regulatory agencies.

See

15 U.S.C. 78

-4(a)-(b).

See also

Proposal, 76 FR 827.

See

15 U.S.C. 78

-4(c)(1).

See also

MSRB, Registration Guidelines for Regulated Entities, available at

http://www.msrb.org/Rules-and-Interpretations/~/media/Files/User-Manuals/GuidelinesforRegistration.ashx

See

15 U.S.C. 78

(b)(8) and 78

-4(a).

See

15 U.S.C. 78

-4(c)(7).

The term “appropriate regulatory agency,” when used with respect to a municipal securities dealer, is defined in Section 3(a)(34)(A) of the Exchange Act. 15 U.S.C. 78c(a)(34)(A). The Commission also has the authority to examine all registered municipal securities dealers.

See

15 U.S.C. 78q(b)(1).

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

and credit enhancements. The variety of financing options has led municipal entities to increasingly rely on external advisors to assist them in deciding among the structural choices for their debt and to help them negotiate with a variety of specialized intermediaries.

For example, municipal bond insurance was first introduced in 1971.

The introduction of variable rate municipal bonds in the early 1980s increased the use of letter of credit-supported municipal bonds.

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

In addition, derivative products have been utilized by municipal securities issuers beginning generally with interest rate swap transactions in the mid-1980s. The derivatives utilized since then have become more complex.

Although it is helpful to think of municipal securities as either (1) general obligation bonds backed by the “full faith and credit,” or an unlimited taxing power of the issuing entity, or (2) revenue bonds, these general categories mask a broad range of diversity and complexity in the underlying security for municipal bonds.

See

Gary Gray and Patrick Cusatis, Municipal Derivative Securities—Uses and Valuation 21 (1995) (discussion of revenue bonds).

See also

Disclosure of Bond Counsel,

supra

note 46, at 54-55 (discussion of conduit bonds).

See

Vijayakumar and Daniels,

supra

note 34, at 43-44.

See

Gray and Cusatis,

supra

note 87, at 30-31.

See id.

As the Commission noted in the Proposal, although the use of letters of credit and bond insurance has declined since 2008, these forms of credit enhancement remain an option for municipal entities to consider when issuing municipal securities.

See

76 FR 827, note 48.

See also

2012 Report on the Municipal Securities Market,

supra

note 45, at 10-11.

See

Gray and Cusatis,

supra

note 87, at 41.

See id.,

at 49. Municipal derivatives must often be structured in accordance with the provisions of the tax code and other laws that apply to the issuance of tax-exempt financings.

See

David L. Taub,

Understanding Municipal Derivatives,

August 2005, Government Finance Review 21. The most common use for derivatives in the municipal securities market is the use of interest rate swaps for new, anticipated, or outstanding debt.

See id.

b. Municipal Advisors

As discussed above and in the Proposal,

many market participants advise municipal entities about the issuance of municipal securities and municipal financial products. Historically, however, these participants have been largely unregulated with respect to their municipal advisory activities. In addition, Commission staff has taken the position that financial advisors that limit their advisory activities solely to advising municipal issuers as to the structuring of their

financings may not need to register as investment advisers.

See

Proposal, 76 FR 827.

See

Division of Investment Management: Staff Legal Bulletin No. 11, Applicability of the Advisers Act to Financial Advisors of Municipal Securities Issuers (Sep. 19, 2000), available at

http://www.sec.gov/interps/legal/slbim11.htm

(“Staff Legal Bulletin No. 11”) (explaining staff's views as to the circumstances under which financial advisors (a) may be investment advisers, and (b) may give advice to issuers of municipal securities regarding the investment of offering proceeds without being deemed to be investment advisers).

Approximately fifteen states, however, as well as a number of municipalities, have rules relating to the conduct of some municipal advisors (generally, financial advisors and swap advisors). For example, these governmental entities have enacted pay-to-play prohibitions that range from broad proscriptions relating to all state and local contracts to narrowly defined rules that apply only to specific situations.

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 35, at 4.

See id.,

at 6.

B. Dodd-Frank Act and the Need for Oversight

As discussed in more detail below and in the Proposal,

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.

100

See, generally,

Proposal, 76 FR 824.

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).

100

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). The Commission notes that a number of commenters discussed the applicability of fiduciary duty to municipal advisors. This adopting release generally does not address those comments, as this release generally concerns the registration of municipal advisors. The Commission notes, however, that the fiduciary duty of a municipal advisor, as set forth in Exchange Act Section 15B(c)(1), extends only to its municipal entity clients. The Exchange Act does not impose a fiduciary duty with respect to advice to obligated persons.

See infra

note 202 and accompanying text (discussing the definition of the term “obligated person”).

The Commission believes that regulation of municipal advisors is in the public interest and will improve the protection of municipal entities, including the protection of municipal entities in their capacities as investors, and those who invest in municipal securities. As noted above,

101

according to a Senate Report related to the Dodd-Frank Act, “[t]he $3 trillion municipal securities market is subject to less supervision than corporate securities markets, and market participants generally have less information upon which to base investment decisions. During the [financial] crisis, a number of municipalities suffered losses from complex derivatives products that were marketed by unregulated financial intermediaries.”

102

103

101

See supra

notes 3-4 and accompanying text.

102

See

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

103

See id.

A number of actions brought by the Commission against municipal market participants also highlight the abuses in the municipal securities market. For example, the Commission brought a number of actions alleging payments by J.P. Morgan Securities Inc. (now J.P. Morgan Securities LLC) to local firms whose principals or employees were friends of public officials of Jefferson County, Alabama in connection with a $5 billion bond underwriting and interest rate swap agreement business.

104

In addition, the Commission has settled several actions against major financial institutions for their role in a series of complex, wide-ranging bid-rigging schemes involving derivatives utilized by municipalities and underlying obligors as reinvestment products.

105

Further, in August 2011, the Commission filed a civil injunctive action against Stifel, Nicolaus & Co., Inc. and its former Senior Vice President, David Noack, for allegedly violating federal securities laws in connection with a $200 million sale of highly leveraged and unsuitably risky derivatives to five Wisconsin school districts.

106

According to the complaint, Stifel and Noack misrepresented the risks of the investments and failed to disclose material facts to the school districts.

104

The Commission had alleged that J.P. Morgan Securities engaged in an improper payment scheme in connection with obtaining municipal securities underwriting and interest swap agreement business from Jefferson County, Alabama. The Commission had alleged that J.P. Morgan Securities incorporated certain of the costs of these payments into higher swap interest rates that it charged the County, directly increasing the swap transaction costs to the County and its taxpayers. J.P. Morgan Securities was censured, paid a $25 million civil penalty, made a $50 million payment to the County, and forfeited more than $647 million in claimed termination fees under the swaps.

See In the Matter of J.P. Morgan Securities Inc.,

Securities Exchange Act Release No. 60928 (Nov. 4, 2009) (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order).

See also

SEC

Larry P. Langford, et al.,

Litigation Release No. 20545 (Apr. 30, 2008) and

SEC

Charles E. LeCroy and Douglas W. MacFaddin,

Litigation Release No. 21280 (Nov. 4, 2009) (charging an Alabama local government official, a bond dealer and J.P. Morgan Securities employees with conducting undisclosed payment schemes in connection with awarding Jefferson County municipal bond and swap agreement business).

105

Collectively, the five financial institutions, Banc of America Securities LLC, UBS Financial Services Inc., J.P. Morgan Securities LLC, Wachovia Bank, N.A., and GE Funding Capital Market Services, Inc., paid $205 million to settle the Commission actions, all of which was distributed to hundreds of harmed municipal entities or borrowers, located in 47 states, the District of Columbia, Guam, and Puerto Rico, as well as an additional $540 million to settle parallel proceedings by other federal and state authorities for their misconduct.

See In the Matter of Banc of America Securities,

Securities Exchange Act Release No. 63451 (Dec. 7, 2010);

SEC

UBS Financial Services Inc.,

Civil Action No. 11-CV-2885 (D.N.J. May 4, 2011);

SEC

J.P. Morgan Securities LLC.,

Civil Action No. 11-CV-3877 (D.N.J. Jul. 7, 2011);

SEC

Wachovia Bank, N.A.,

Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. Dec. 8, 2011);

SEC

GE Funding Capital Market Services, Inc.,

Civil Action No. 2:11-cv-07465-WJM-MF (D.N.J. Dec. 23, 2011).

106

See SEC

Stifel, Nicolaus & Co., Inc. and David W. Noack,

Civil Action No. 2:11-cv-00755-AEG (E.D. Wisc. Aug. 10, 2011). The Commission also charged, and settled with, RBC Capital Markets, LLC for their involvement in these sales. According to the order instituting administrative and cease-and-desist proceedings, RBC negligently recommended and sold these investments, despite significant internal concerns about the suitability of the investments for municipalities like the school districts. Moreover, RBC's marketing materials failed to explain adequately the risks associated with the investments.

See In the Matter of RBC Capital Markets, LLC,

Securities Exchange Act Release No. 65404 (Sept. 27, 2011).

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

The registration requirement for municipal advisors established by the Dodd-Frank Act became effective on October 1, 2010.

107

To enable municipal advisors to temporarily satisfy the registration requirement, and to make relevant information available to the public and municipal entities, the Commission adopted interim final temporary Rule 15Ba2-6T

108

on September 1, 2010.

109

Pursuant to Rule 15Ba2-6T, a municipal advisor may temporarily satisfy the statutory registration requirement by submitting certain information electronically

through the Commission's public Web site on Form MA-T.

110

107

See

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

108

17 CFR 240.15Ba2-6T.

109

See

Temporary Registration Rule Release,

supra

note 5.

110

17 CFR 249.1300T. A municipal advisor that completes the temporary registration form and receives confirmation from the Commission that the form was filed is temporarily registered for purposes of Section 15B. As of March 31, 2013, there were approximately 1,130 Form MA-T registrants.

Form MA-T requires a municipal advisor to indicate the purpose for which it is submitting the form (

i.e.,

initial application, amendment, or withdrawal), provide certain basic identifying and contact information concerning its business, indicate the nature of its activities, and supply information about its disciplinary history and the disciplinary history of its associated municipal advisor professionals.

111

See

Temporary Registration Rule Release,

supra

note 5, for a full description of the requirements of Form MA-T.

As originally adopted, the interim final temporary rule provided that, unless rescinded, a municipal advisor's temporary registration by means of Form MA-T would expire on the earlier of: (1) The date that the municipal advisor's registration is approved or disapproved by the Commission pursuant to a final rule establishing a permanent registration regime; (2) the date on which the municipal advisor's temporary registration is rescinded by the Commission; or (3) December 31, 2011.

112

The temporary registration procedure was developed as a transitional step toward the implementation of a permanent registration regime, which, as discussed below, the Commission is adopting today. On December 21, 2011, the Commission extended the expiration date of the temporary registration regime to September 30, 2012, in order to continue to provide a method for municipal advisors to temporarily satisfy the statutory registration requirement.

113

On September 21, 2012, the Commission further extended the expiration date of the temporary registration regime to September 30, 2013.

114

Today, in a separate release, the Commission is extending the expiration date of the temporary registration regime to December 31, 2014.

115

112

See

Temporary Registration Rule Release, 75 FR 54471.

113

See

Securities Exchange Act Release No. 66020 (December 21, 2012), 76 FR 80733 (December 27, 2011).

114

See

Securities Exchange Act Release No. 67901 (September 21, 2012), 77 FR 59061 (September 26, 2012). As extended, all temporary municipal advisor registrations will expire on the earlier of: (1) The date that the municipal advisor's registration is approved or disapproved by the Commission pursuant to a final rule adopted by the Commission establishing another manner of registration of municipal advisors and prescribing a form for such purpose; (2) the date on which the municipal advisor's temporary registration is rescinded by the Commission; or (3) on September 30, 2013.

See

17 CFR 240.15Ba2-6T(e).

115

See

Rule 15Ba2-6T and Form MA-T Extension Release,

supra

note 7.

D. Proposal To Establish a Registration Regime for Municipal Advisors

In light of the requirements of Section 975 of the Dodd-Frank Act, and in anticipation of the expiration of Rule 15Ba2-6T, on December 20, 2010, the Commission proposed Rules 15Ba1-1 to 15Ba1-7 under the Exchange Act and Forms MA, MA-I, MA-W, and MA-NR to establish a permanent registration regime for all persons meeting the definition of municipal advisor, including those persons currently registered on Form MA-T.

116

The Proposal was published for comment in the

Federal Register

on January 6, 2011.

117

116

See

Proposal, 76 FR 824.

117

See id.

In response to the Proposal, the Commission received over 1,000 unique comment letters from broker-dealers, investment advisers, individuals, banks, municipal entities, attorneys, engineers, and other market participants.

118

In general, commenters supported the Proposal's overarching goal to establish a permanent registration regime for municipal advisors. As discussed further below, however, many commenters recommended that the Proposal be modified or clarified in certain respects.

118

See

http://www.sec.gov/comments/s7-45-10/s74510.shtml

. The Commission has also considered the comment letters that were submitted in response to the publication of the Temporary Registration Rule Release.

See

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

(comments received on the Temporary Registration Rule Release).

The Commission has carefully considered these comments and is adopting Rules 15Ba1-1 to 15Ba1-8 and 15Bc4-1 under the Exchange Act and Forms MA, MA-I, MA-W, and MA-NR, with revisions as appropriate. In discussing these rules and forms, the Commission highlights and addresses below commenters' main issues, concerns, and suggestions.

The Commission believes that the information required to be disclosed pursuant to the new rules and forms will enhance the Commission's oversight of municipal advisors and their activities in the municipal securities market. Moreover, the Commission believes the information provided pursuant to these rules and forms will aid municipal entities and obligated persons in choosing municipal advisors and engaging in transactions or investments with municipal advisors.

III. Discussion

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

119

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

120

Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank Act, provides that a municipal advisor may be registered by filing with the Commission an application for registration in such form and containing such information and documents concerning the municipal advisor and any person associated with the municipal advisor as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

121

119

See infra

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

120

See

15 U.S.C. 78

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

see infra

Section III.A.1.b.

121

See

15 U.S.C. 78

-4(a)(2).

Consistent with the requirements of the Dodd-Frank Act, as discussed in detail below, the Commission is adopting new rules and forms that establish a Commission registration regime for municipal advisors, which the Commission believes is necessary and appropriate in the public interest and will improve the protection of municipal entities and investors in municipal securities.

A. Rules for the Registration of Municipal Advisors

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

a. Statutory Definition of “Municipal Advisor”

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

122

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

123

or an employee of

a municipal entity

124

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

125

with respect to municipal financial products

126

or the issuance of municipal securities,

127

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

128

As discussed in the Proposal,

129

the statutory definition of municipal advisor is broad and includes persons that traditionally have not been considered to be municipal financial advisors. Specifically, the definition of a municipal advisor includes “financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors”

130

that engage in municipal advisory activities.

131

122

15 U.S.C. 78

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

123

See infra

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

124

See infra

Section III.A.1.c.i. (discussing the Commission's interpretation of the exclusion for employees of a municipal entity from the definition of the term “municipal advisor” and a parallel exemption for employees of obligated persons).

125

See infra

Section III.A.1.b.iii. (discussing the term “obligated person”).

126

See infra

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

127

See infra

Section III.A.1.b.vii. (discussing the term “issuance of municipal securities”).

128

See infra

Section III.A.1.b.x. (discussing the term “solicitation of a municipal entity or obligated person”).

129

See

Proposal, 76 FR 828.

130

See

15 U.S.C. 78

-4(e)(4).

131

See infra

note 143 and accompanying text (discussing the definition of “municipal advisory activities”).

The statutory definition of municipal advisor includes distinct groups of professionals that offer different services and compete in distinct markets. As noted in the Proposal, the three principal types of municipal advisors are: (1) financial advisors, including, but not limited to, brokers, dealers, and municipal securities dealers already registered with the Commission, that provide advice to municipal entities with respect to their issuance of municipal securities and their use of municipal financial products;

132

(2) investment advisers that advise municipal entities on the investment of public monies, including the proceeds of municipal securities;

133

and (3) third-party marketers and solicitors.

132

See

Proposal, 76 FR 829. For clarity, the Commission notes that financial advisors as referred to herein also include swap advisors, including some that are registered with the CFTC or the SEC in other capacities, that provide advice to municipal entities on their use of municipal financial products.

133

See infra

Section III.A.1.b.iv. (discussing the term “proceeds of municipal securities”).

Relevant exclusions from the definition of a municipal advisor also limit the scope of the three types of municipal advisors. The statutory definition of municipal advisor explicitly excludes “a broker, dealer, or municipal securities dealer serving as an underwriter . . ., attorneys offering legal advice or providing services that are of a traditional legal nature, [and] engineers providing engineering advice[.]”

134

Further, the statutory definition of municipal advisor excludes “any investment adviser registered under the Investment Advisers Act of 1940 [(“Investment Advisers Act”)], or persons associated with such investment advisers who are providing investment advice” and “any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps[.]”

135

As discussed more fully below in Section III.A.1.c., the Commission also proposed Rule 15Ba1-1(d)(2), and is adopting with modifications as Rules 15Ba1-1(d)(2) and 15Ba1-1(d)(3) a definition of “municipal advisor” that interprets those exclusions and provides other activity-based (but not status-based) exemptions.

134

See

15 U.S.C. 78

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

135

See

15 U.S.C. 78

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

The Commission also noted in the Proposal that, in defining the term municipal advisor in Exchange Act Section 15B(e)(4), Congress did not distinguish between persons who are compensated for providing advice and those who are not. Accordingly, as explained in the Proposal, the Commission believes compensation for providing advice with respect to municipal financial products or the issuance of municipal securities should not factor into the determination of whether a person must register with the Commission as a municipal advisor.

136

However, as clarified in this release, whether or not a person would have to register as a municipal advisor in connection with solicitation of a municipal entity or obligated person would depend upon whether such person receives compensation (direct or indirect).

137

136

See

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

137

See infra

note 409 and accompanying text.

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

As noted above, Exchange Act Section 15B(e)(4) defines the term “municipal advisor” to mean, in part, a person (who is not a municipal entity or an employee of a municipal entity) that (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or (ii) undertakes a solicitation of a municipal entity or obligated person.

138

The Commission discusses below the terms “municipal entity,” “obligated person,” “municipal financial products,” and “solicitation of a municipal entity or obligated person” as well as other terms relating to the definition of municipal advisor.

139

Rule 15Ba1-1(d), as proposed

140

and adopted, provides that the term “municipal advisor” has the same meaning as in Exchange Act Section 15B(e)(4),

141

and, as discussed in Section III.A.1.c., provides certain exclusions and exemptions. For the purposes of clarity, however, Rule 15Ba1-1(d) as adopted also includes several non-substantive and organizational changes. For example, it: (1) incorporates in Rule 15Ba1-1(d)(1) the language of the statutory definition, rather than cross referencing the statute; (2) sets forth in Rule 15Ba1-1(d)(2) the statutory exclusions from the definition, as interpreted by the Commission; and (3) sets forth in Rule 15Ba1-1(d)(3) certain exemptions.

142

138

See

15 U.S.C. 78

-4(e)(4). As noted in the Proposal, the Commission interprets the definition of “municipal advisor” to include the solicitation of a municipal entity or obligated person, because, as noted in the Proposal, the definition of municipal advisor under Exchange Act Section 15B(e)(4)(A) means, in part, a person that “undertakes a solicitation of a municipal entity,” and in defining the phrase “solicitation of a municipal entity,” Exchange Act Section 15B includes within that phrase, “or obligated person.” Also, Exchange Act Section 15B(a)(1)(B) includes solicitations of obligated persons.

See

Proposal, 76 FR 831, note 102 and accompanying text.

See also

Rule 15Ba1-1(d)(1)(i), which makes clear in the definition of “municipal advisor” that the Commission interprets the term “municipal advisor” to include persons that undertake solicitation of a municipal entity

obligated person.

139

The Commission discusses the statutory exclusion for “an employee of a municipal entity,” along with other exclusions and exemptions from the definition of “municipal advisor,” in Section III.A.1.c. below.

140

See

proposed Rule 15Ba1-1(d)(1).

141

15 U.S.C. 78

-4(e)(4).

142

See

Rule 15Ba1-1(d). To the extent the Commission's exemptions or interpretations of the exclusions differ substantively from the Proposal, those differences are discussed in detail below.

In certain of the rules and forms that the Commission is adopting with respect to the registration of municipal advisors, the Commission uses the term “municipal advisory activities” to refer to the activities that would generally require a person to register as a municipal advisor. In this regard, the Commission is adopting, substantially as proposed, a definition of the term “municipal advisory activities” with minor clarifying modifications. As

adopted, “municipal advisory activities” means “(1) [p]roviding advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or (2) [s]olicitation of a municipal entity or obligated person.”

143

The Commission notes, for example, that advice to a municipal entity about whether to issue municipal securities would be “municipal advisor activity.”

143

In the Proposal, the Commission proposed to give “municipal advisory activities” the same meaning as the term “municipal advisory services” in Rule 15Ba2-6T (the temporary rule for the registration of municipal advisors). Thus, in proposed Rule 15Ba1-1(e), the Commission proposed to define “municipal advisory activities” to mean “advice to or on behalf of a municipal entity (as defined in Section 15B(e)(8) of the Securities Exchange Act of 1934 (15 U.S.C. 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.”

See

Proposal, 76 FR 829, note 77 and proposed Rule 15Ba1-1(e).

While the Commission received a few comments that certain activities should not be “municipal advisory activities,” these comments were in the context of whether certain persons should be subject to registration as “municipal advisors” and are addressed below in the context of the various exemptions and exclusions from the definition of “municipal advisor.”

See, e.g.,

notes 780, 807, 835 and accompanying text (citing the Gilmore & Bell Letter, the Rose Letter, and the Brinckerhoff Letter, in the context of exclusions or exemptions for accountants, attorneys, and engineers, respectively). These comments are addressed in Section III.A.1.c.vii.

The Commission is adopting the definition of “municipal advisory activities” substantially as proposed, but with minor non-substantive modifications to provide greater clarity and consistency with other organizational changes the Commission is making to the definitions. Specifically, the Commission is defining “municipal advisory activities” to mean “the following activities specified in section 15B(e)(4)(A) of the Act (15 U.S.C. 78

-4(e)(4)(A)) and paragraph (d)(1) of this section that, absent the availability of an exclusion under paragraph (d)(2) of this section or an exemption under paragraph (d)(3) of this section, would cause a person to be a municipal advisor: (1) [P]roviding advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or (2) [s]olicitation of a municipal entity or obligated person.”

See

Rule 15Ba1-1(e).

Additionally, as discussed more fully below, in response to comments received on the Proposal and to provide additional clarity, the Commission is adopting rule text to provide guidance on the term “advice.” The Commission also notes, as mentioned above and explained in more detail below, that the definitions of “municipal advisor” and related terms that it is adopting today include several non-substantive, clarifying changes designed to reorganize and simplify the rule, including using defined terms, where possible, and providing greater clarity as to which statutory standards are being incorporated into the Commission's rules, the Commission's interpretation of such standards, and any exemptions the Commission is providing with these rules.

i. Advice Standard in General

In the Proposal and as noted above, the Commission defined the term “municipal advisory activities,” which includes certain advice to or on behalf of a municipal entity or obligated person,

144

and addressed the scope of activities that would require a person to register as a municipal advisor. The Commission discussed the scope of such activities through its proposed interpretation of the definition of “municipal advisor,” which included guidance on the particular statutory exclusions and exemptions therefrom.

145

144

See

Proposal, 76 FR 829, note 77.

See also

supra

note 143 and accompanying text (discussing the term “municipal advisory activities”).

145

See, e.g.,

Proposal 76 FR 832, text accompanying note 113 (discussing whether compensation for providing advice factors into the determination of whether a person must register as a municipal advisor), 833, note 118 and accompanying text (discussing the provision of certain kinds of advice by investment advisers), 833 (discussing whether a commodity trading advisor would be required to register as a municipal advisor if the advisor provides certain kinds of advice), and 833-834 (discussing with respect to accountants, attorneys and engineers whether certain kinds of advice and activities are “advice” within the meaning of the Exchange Act or would otherwise cause such persons to meet the definition of “municipal advisor”).

In the Proposal, the Commission requested comment on its interpretation of the definition of “municipal advisor” and related terms, and particularly sought comment on whether any of its interpretations should be in any way modified or clarified.

146

The Commission also requested comment on whether its interpretation of certain exclusions from the definition of “municipal advisor” should be narrowed or expanded to exclude or include various activities.

147

More specifically, the Commission requested comment on whether it should exclude the following persons from the definition of municipal advisor: (1) An entity that provides to clients investment advice, such as research information and generic trade ideas or commentary that does not purport to meet the needs or objectives of specific clients, and is provided to a municipal entity as part of its ongoing ordinary communications; and (2) a broker-dealer that provides to a municipal entity a list of securities meeting specified criteria that are readily available in the marketplace, but without making a recommendation as to the merits of any investment particularized to the municipal entity's specific circumstances or investment objectives.

148

146

See

Proposal, 76 FR 835.

147

See id.,

at 836-838 (requesting comment on, among other things: whether there are other services or activities engaged in by accountants, engineers, attorneys or other professionals that should qualify such persons for exclusion from the definition of “municipal advisor;” and whether there are other specific types of persons that should be excluded and the circumstances under which they should be excluded).

148

See

Proposal, 76 FR 838.

In response to these requests for comment, commenters recommended additional guidance on the meaning and scope of the term “advice” both in general and, as addressed in more detail in subsequent sections on particular exclusions and exemptions, in the context of specific activities. A number of commenters requested that the Commission clarify the meaning of providing “advice to a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities.”

149

One commenter noted that “the concept of `advice' is central to the application

of Section 975,”

150

while another commenter stated that “[a]bsent a clear understanding of the scope of `advice,' there will be substantial uncertainty as to which communications with municipal entity clients would be deemed `advice.'”

151

The Commission also received comments suggesting general parameters for defining advice. For example, one commenter suggested that the Commission “distinguish between situations in which

information

is provided to a municipal entity or obligated person as opposed to a

recommendation

as to a specific course of action.”

152

Similarly, another commenter suggested that “advice” is generally understood to contain a recommendation component as distinguished from the mere giving of factual, objectively-determinable information.

153

149

See, e.g.,

letters from Raymond J. Dorado, Executive Vice President, Deputy General Counsel, Bank of New York Mellon Corporation, dated February 23, 2011 (“BNY Letter”); Wayne A. Abernathy, Executive Vice President, Financial Institutions Policy and Regulatory Affairs, American Bankers Association, Cecelia A. Calaby, Executive Director and General Counsel, ABA Securities Association, and Eli K. Peterson, Vice President and Regulatory Counsel, The Clearing House Association LLC, dated February 22, 2011 (“American Bankers Association Letter I”); Richard M. Whiting, Executive Director and General Counsel, Financial Services Roundtable, dated February 22, 2011 (“Financial Services Roundtable Letter”); John M. McNally, President, National Association of Bond Lawyers, dated February 25, 2011 (“NABL Letter”); Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated February 22, 2011 (“SIFMA Letter I”); Alexandra M. MacLennan, Chair, Disclosure Group, and D. Bruce Gabriel, Practice Group Leader, Public and Infrastructure Finance Group, Squire, Sanders & Dempsey (US) LLP, dated February 22, 2011 (“Squire Sanders & Dempsey Letter”); Adella M. Heard, Senior Vice President and Assistant General Counsel, First Tennessee Bank National Association, dated February 18, 2011 (“First Tennessee Bank Letter”); Dale E. Brown, President and Chief Executive Officer, Financial Services Institute, dated April 28, 2011 (“Financial Services Institute Letter”); Sandra K-H Werner, Chief Executive Officer, First National Bank and Trust, dated February 18, 2011 (“First National Bank and Trust Letter”).

150

BNY Letter.

151

Financial Services Roundtable Letter.

152

NABL Letter (emphasis in original).

153

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

Regarding the provision of general information, commenters made general and specific suggestions regarding the types of information that should not require registration as a municipal advisor. For example, one commenter suggested that the provision of general information should not be defined, in any instance, as municipal advisory activities that would give rise to a fiduciary duty.

154

More specifically, other commenters suggested that broker-dealers be permitted to provide general market, transactional or financial information,

155

attorneys be permitted to provide general educational information to clients and non-clients,

156

and insurance companies be permitted to provide certain general information of an educational nature regarding retirement plans without being required to register as a municipal advisor.

157

With respect to municipal derivatives, one commenter asked for clarification that the following activities do not constitute advice for purposes of the municipal advisor definition: (i) The provision of research, general market information, and product information that is not specific to a particular client and is provided to the bank's customers as part of its ordinary communications with clients or the public; and (ii) the provision of information describing product alternatives that may meet the needs of a client without giving a recommendation that the client engage in any specific transaction.

158

154

See

letter from Anthony A. Kuznik, Vice President and General Counsel, Honeywell Building Solutions, Honeywell International Inc., dated February 22, 2011 (“Honeywell Letter”).

155

See

letter from Brad Winges, Head of Fixed Income Sales and Trading, Piper Jaffray & Co. and Rebecca S. Lawrence, Assistant General Counsel, Principal, Piper Jaffray & Co., dated March 18, 2011 (“Piper Jaffray Letter”).

156

See

letter from Sherman & Howard L.L.C., dated February 22, 2011 (“Sherman & Howard Letter”).

157

See

letter from Jeffrey W. Rubin, Chair of the Committee on Federal Regulation of Securities, Business Law Section, American Bar Association, dated March 1, 2011 (“ABA Letter”).

158

See

BNY Letter.

Additionally, several commenters recommended that advice be defined in accordance with its commonly understood meaning—a recommendation to act.

159

One of these commenters further recommended that the Commission clarify that a communication constitutes advice only when “it is provided with respect to and directly relates to an enumerated municipal financial product or the issuance of municipal securities, and it is a recommendation that is particularized to the needs and circumstances of the recipient such that, under the prevailing facts and circumstances, a municipal entity or obligated person would reasonably expect that it could rely and take action, without further input, based upon such communication.”

160

Another commenter suggested that registration be required only if a communication constitutes a recommendation that the municipal entity take an action and the recommendation is particularized to the entity's needs and is distinct from normal sales efforts.

161

159

See, e.g.,

BNY Letter; American Bankers Association Letter I; and SIFMA Letter I.

See also

Kutak Rock Letter.

160

SIFMA Letter I.

161

See

American Bankers Association Letter I.

The Commission agrees with commenters that clarifying guidance on what constitutes advice solely for the purposes of the municipal advisor definition will provide greater clarity regarding the applicability of the municipal advisor registration requirement. The Commission does not however believe that the term “advice” is susceptible to a bright-line definition. Instead, the Commission believes that “advice” can be construed broadly and that, therefore, the determination of whether a person provides advice to or on behalf of a municipal entity or an obligated person regarding municipal financial products or the issuance of municipal securities depends on all the relevant facts and circumstances.

162

Accordingly, to address comments, the Commission is adopting Rule 15Ba1-1(d)(1)(ii), which provides that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues.

163

162

In contexts outside of the municipal advisor definition, whether certain activities constitute advice also is dependent on the facts and circumstances.

For example, in the context of broker-dealer regulation, Commission staff has described that, although not a bright-line test, “[t]he more individually tailored the communication is to a particular customer or targeted group of customers, the more likely it will be viewed as a recommendation.” Study on Investment Advisers and Broker-Dealers (January 2011), available at

http://www.sec.gov/news/studies/2011/913studyfinal.pdf

(“Study on Investment Advisers and Broker-Dealers”) at 124.

In the context of investment adviser regulation, the determination of whether a particular communication rises to the level of investment advice depends on the facts and circumstances and is construed broadly. For example, Commission staff has interpreted the definition of investment adviser to include persons who advise clients concerning the relative advantages and disadvantages of investing in securities in general as compared to other investments.

See, e.g.,

Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (October 8, 1987).

The Commission discusses below, with respect to its interpretation of the term “municipal advisor” and the various exclusions and exemptions therefrom, whether certain activities would be advice in the context of the municipal advisor registration regime.

163

The Commission is providing this clarifying guidance regarding “advice” only with respect to municipal advisors and solely for purposes of the municipal advisor definition. The Commission further notes that, by establishing certain parameters for advice, Rule 15Ba1-1(d)(1)(ii) clarifies not only the type of information or communications that may constitute advice, but also the persons who may be subject to the municipal advisor definition in Section 15B(e)(4) of the Exchange Act (15 U.S.C. 78

-4(e)(4)). For example, the Commission believes that an individual performing by contract clerical or ministerial services for a municipal entity or obligated person as part of performing these services would generally not be providing advice, as defined in adopted Rule 15Ba1-1(d)(1)(ii). Accordingly, such person would not be required to register as a municipal advisor.

The Commission agrees with commenters that the provision of certain general information does not constitute advice for purposes of the municipal advisor definition. For example, the Commission believes that advice does not include provision of the following general information:

• Information of a factual nature without subjective assumptions, opinions, or views;

• Information that is not particularized to a specific municipal entity or type of municipal entity;

• Information that is widely disseminated for use by the public,

clients, or market participants other than municipal entities or obligated persons; or

• General information in the nature of educational materials.

The Commission believes that educational materials constitute general information if the content is limited to instructional or explanatory information, such as materials that describe the general nature of financial products or strategies, do not include past or projected performance figures (including annualized rate of return), do not include a recommendation to purchase or sell any product or utilize any particular strategy, and to the extent additional disclosure is available about a product (such as a prospectus), the materials contain information about how to obtain such additional information.

164

The Commission has similarly interpreted “educational materials” in other contexts.

See, e.g.,

Securities Act Release No. 6426 (September 16, 1982), 47 FR 41950 (September 23, 1982) (adopting Rule 134a under the Securities Act to permit the preparation and dissemination of certain educational materials concerning options and options trading without deeming such materials to be a prospectus).

Conversely, the definition of advice under Rule 15Ba1-1(d)(1)(ii), as adopted, does not exclude information that involves a recommendation

165

regarding municipal financial products or the issuance of municipal securities. Further and more precisely, the Commission believes that, for purposes of the municipal advisor definition, advice includes, without limitation, a recommendation that is particularized to the specific needs, objectives, or circumstances of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, based on all the facts and circumstances. As discussed above and consistent with the FINRA approach to what constitutes a recommendation, for purposes of the municipal advisor definition, the Commission believes that the determination of whether a recommendation has been made is an objective rather than a subjective inquiry.

166

An important factor in this inquiry is whether, considering its content, context and manner of presentation, the information communicated to the municipal entity or obligated person reasonably would be viewed as a suggestion that the municipal entity or obligated person take action or refrain from taking action regarding municipal financial products or the issuance of municipal securities.

167

165

Whether a “recommendation” has taken place is not susceptible to a bright line definition, but turns on the facts and circumstances of the particular situation.

See

Securities Exchange Act Release No. 64766 (June 29, 2011), 76 FR 42396, 42415 (July 18, 2011) (“Business Conduct Standards Proposal for Security-Based Swaps”). “This is consistent with the FINRA approach to what constitutes a recommendation. In the context of the FINRA suitability standard, factors considered in determining whether a recommendation has taken place include whether the communication `reasonably could be viewed as a `call to action' ' and `reasonably would influence an investor to trade a particular security or group of securities.' The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a `recommendation.' ” Business Conduct Standards Proposal for Security-Based Swaps, 76 FR 42415, note 133 and accompanying text (citing FINRA Notice to Members 01-23 (March 19, 2001), and Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated FINRA Rulebook, Securities Exchange Act Release No. 62718A (August 20, 2010), 75 FR 52562 (August 26, 2010)).

FINRA suitability guidance has long provided that the determination of whether a “recommendation” has been made is an objective rather subjective inquiry.

See

FINRA Notice to Members 01-23 (March 19, 2001). In guidance relating to FINRA rules 2090 and 2011, FINRA reiterated this prior guidance, stating that an important factor in this inquiry “is whether—given its content, context and manner of presentation—a particular communication from a firm or associated person to a customer reasonably would be viewed as a suggestion that the customer take action or refrain from taking action regarding a security or investment strategy.”

See

FINRA Regulatory Notice 11-02 (Know Your Customer and Suitability), January 2011, available at

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122778.pdf

The MSRB has provided similar guidance for dealers in connection with MSRB Rule G-19.

See http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-19.aspx?tab=2

166

See supra

note 165.

See also

Michael Frederick Siegel

Securities and Exchange Commission,

592 F.3d 147, 156 (D.C. Cir. 2010) (in sustaining the Commission's finding that Siegel, a broker, recommended an “investment” within the meaning of NASD rule 2310, the court held that the SEC properly considered the “content, context and presentation” of the communications and whether, as an “objective matter,” the communication could reasonably have been viewed as a “call to action” and reasonably would influence an investor to trade a particular security or group of securities).

167

See supra

note 165.

While the determination of whether a person provides advice depends on all the relevant facts and circumstances, the more individually tailored the information to a specific municipal entity or obligated person or a targeted group of municipal entities or obligated persons that share common characteristics, such as school districts or hospitals, with respect to municipal financial products or the issuance of municipal securities, the more likely it will be a recommendation that constitutes advice under the municipal advisor definition, which would require registration as a municipal advisor, absent the application of an exemption or exclusion from registration.

168

For example, whether information describing municipal financial product alternatives constitutes advice under the municipal advisor definition generally depends on how individually tailored the information is to a particular municipal entity, obligated person, or targeted group of municipal entities or obligated persons that share common characteristics, as well as the content, context, and manner of presentation of the information communicated.

168

See supra

notes 162 and 165.

ii. Municipal Entity

Exchange Act Section 15B(e)(8) provides that the term “municipal entity” means “any State, political subdivision of a State, or municipal corporate instrumentality of a State, including—(A) any agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and (C) any other issuer of municipal securities.”

169

In the Proposal, the Commission proposed to clarify that, with respect to clause (B) of the definition of “municipal entity,” the definition includes, but is not limited to, public pension funds, LGIPs, and other state and local governmental entities or funds, as well as participant-directed investment programs or plans such as 529, 403(b), and 457 plans.

170

169

15 U.S.C. 78

-4(e)(8).

170

See infra

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

In the Proposal, the Commission requested comment on whether the proposed interpretation of municipal entity for purposes of the proposed definition of municipal advisor is appropriate, and whether additional clarification is necessary.

171

The Commission received approximately 20 comment letters regarding the scope of the Commission's interpretation of the term “municipal entity.” Based on consideration of the comments received, as further discussed below, the Commission is making one change to its interpretation.

171

See

Proposal, 76 FR 835.

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

172

because the

phrase “any

other

issuer of municipal securities” in Section 15B(e)(8)(C) would otherwise be unnecessary.

173

In connection with these comments, one commenter stated that the text and legislative history of the Dodd-Frank Act “are devoid of any indication that its provisions addressing municipal securities were intended to grant the [Commission] general prudential authority over State and local fiscal matters.”

174

This commenter further stated that the “Dodd-Frank Act references to municipal securities were intended to address securities (primarily municipal bonds) issued by `municipal entities' to the class of nongovernmental investors that the [Commission] is charged with protecting.”

175

Another commenter, however, suggested that the definition, as proposed, should extend to public pension funds, LGIPs, other government asset pools, and investor-directed governmental plans only to the extent that they are political subdivisions of a state, or corporate instrumentalities of a state, that issue municipal securities in the public market.

176

This commenter also stated that LGIPs, tax-sheltered annuities, and deferred compensation plans should not be deemed to be municipal entities, because they do not issue securities in the public municipal securities market.

177

Finally, another commenter suggested that the definition of municipal entity should include obligated persons, because the definition includes issuers of municipal securities, and obligated persons can be issuers of municipal securities pursuant to other provisions of the federal securities laws.

178

172

See

NABL Letter; letters from Hon. Kelly Schmidt, President, National Association of State

Treasurers, dated February 16, 2011 (“National Association of State Treasurers Letter”); Gail Schubert, Chair, Alaska Retirement Management Board, dated February 18, 2011 (“Alaska Retirement Management Board Letter”).

173

See, e.g.,

NABL Letter; National Association of State Treasurers Letter; Alaska Retirement Management Board Letter.

174

National Association of State Treasurers Letter.

See also

NABL Letter (stating that Section 975 was not intended to address advice to an entity based on a mere possibility that it would become an issuer of municipal securities in the public market place, and that it was not intended to address advice concerning a municipal entity's fiscal affairs generally, except to the extent that such affairs relate directly to its issuance or administration of municipal securities).

175

National Association of State Treasurers Letter.

176

See

NABL Letter.

177

See id.

178

According to this commenter, “municipal entity” is defined under the Dodd-Frank Act to include “any other issuer of municipal securities,” and “issuer of municipal securities” is defined under Exchange Act Rule 15c2-12 to mean “the governmental issuer specified in section 3(a)(29) of the Act and the issuer of any separate security.”

See

letter from Chapman and Cutler, dated February 22, 2011 (“Chapman and Cutler Letter”). Further, this commenter stated that “municipal securities” is defined in the Exchange Act to include both governmental bonds and tax-exempt “industrial development bonds.” This commenter stated that, since the Commission has interpreted the term “obligated person” to have the same meaning as in Exchange Act Rule 15c2-12, conduit borrowers under tax exempt bond issues would be “issuers of separate securities” that are also “issuers of municipal securities.” As a result, the commenter suggested that obligated persons under tax-exempt bond issues are “municipal entities.”

The Commission does not agree. Although the Commission believes that the definition of obligated person for purposes of municipal advisor registration should be consistent with the definition of obligated person for purposes of Rule 15c2-12, the Commission is not applying the definition of “issuer of municipal securities” in Rule 15c2-12 for purposes of interpreting the definition of “municipal entity” in Exchange Act Section 15B(e)(8). The Commission does not believe that the definition of “municipal entity” should be interpreted to include obligated persons, because the Dodd-Frank Act amended Exchange Act Section 15B to separately define “municipal entity” (15 U.S.C. 78

-4(e)(8)) and “obligated person” (15 U.S.C. 78

-4(e)(10)).

One commenter stated that, although Congress specifically referred to states, counties, cities, and other political subdivisions, Congress did not refer to their pension or retirement plans when it enacted Section 975 of the Dodd-Frank Act. This commenter further argued that governmental retirement plans are separate legal entities from the municipal entities and are not ordinarily funded by, or involved in, the types of transactions contemplated by Section 975 or the proposed rules.

179

Another commenter questioned whether a public retirement system would be a municipal entity, a municipal financial product, or both.

180

179

See

letter from Daniel J. Wintz, Fraser Stryker, dated February 21, 2011 (“Fraser Stryker Letter”). For example, this commenter stated that assets of plans qualified under Internal Revenue Code Section 401(a) must be held in trust for the benefit of employees and their beneficiaries, and qualified plan trusts maintained by governmental employers are prohibited from engaging in transactions such as self-dealing with the plan sponsor. The commenter also provided that 403(b) plans are typically funded with employee and employer contributions, which are used to purchase annuity contracts or are deposited in custodial accounts, the assets of which are invested in mutual funds. Finally, the commenter stated that 457 plans allow employees of political subdivisions to defer compensation. All amounts deferred under the plan, all property and rights purchased with the amounts, and all income attributable to such amounts, property, or rights, must be held in trust for the exclusive benefit of the participants and their beneficiaries.

See also

letter from Clifford E. Kirsch, Michael B. Koffler, and Susan S. Krawczyk, Sutherland Asbill & Brennan LLP, for the Committee of Annuity Insurers, dated February 22, 2011 (“Committee of Annuity Insurers Letter I”).

180

See

letter from Richard K. Matta, Groom Law Group, on behalf of the State Board of Administration of Florida, dated February 28, 2011 (“State Board of Administration of Florida Letter”). This commenter expressed this concern, because it is unsure as to how the employee exclusion from the definition of municipal advisor would apply to public retirement systems.

Other commenters suggested that the definition of municipal entity should exclude public pension plans or participant-directed plans.

181

One commenter stated that these plans have nothing to do with raising funds for a municipal entity or investing proceeds from an offering of municipal securities.

182

This commenter also stated that once the funds are contributed to a governmental retirement plan, they are no longer the property or held for the benefit of the municipal entity that established the plan.

183

Further, this commenter stated that the definition of municipal entity should not include individual participants in a governmental retirement plan.

184

181

See, e.g.,

Alaska Retirement Management Board Letter; Committee of Annuity Insurers Letter I; Fraser Stryker Letter.

182

See

Committee of Annuity Insurers Letter I. This commenter stated that, if the Commission were to modify the definition of “municipal entity” so it did not include 457 plans and 403(b) plans, its concerns regarding the impact of the proposed rules on separate accounts, broker-dealers and investment advisers for insurance contracts would be mooted.

See infra

notes 386 and 405 and accompanying text.

183

See

Committee of Annuity Insurers Letter I.

184

See id.

As such, this commenter asked the Commission to clarify that the municipal advisor registration regime does not apply to persons providing investment advice to individual plan participants or investment education provided to plan participants.

One commenter stated that the Commission should clarify that municipal entity only includes entities that are controlled by, or established for the benefit and enjoyment of, a state or any of its constituent political subdivisions or municipal corporations.

185

This commenter noted that some public pension plans, “sponsored or established” by states or their political subdivisions or municipal corporations, are not controlled by the sponsoring governmental unit but are instead controlled by trustees with plenary authority.

186

This commenter also suggested that private pension funds, mutual funds, and insurance companies recognized under state law as such entities as a result of a filing with a state official and issuance of a certificate of formation should not be included within clause (B) of the definition of municipal entity as a “plan, program or pool of assets sponsored or established by the State. . . .”

187

185

See

NABL Letter.

186

See id.

187

See id.

The commenter expressed concern that the Commission's proposed interpretation that the definition of municipal entity includes “participant-directed investment programs or pools” could be interpreted to include private plans established by an entity chartered by a state.

The Commission has carefully evaluated comments received on its proposed definition of “municipal entity” and continues to believe that the definition of “municipal entity” should not be limited to issuers of municipal securities.

188

The Commission believes that the phrase “any other issuer of municipal securities” does not limit clauses (A) and (B) of the definition to entities that can issue municipal securities. Many of the plans, programs and pools of assets included in clause (B) of Section 15B(e)(8) do

not

issue municipal securities. Further, the definition of municipal entity does not otherwise limit itself to those entities that issue municipal securities. To limit the entities listed in clause (A) and (B) of Section 15B(e)(8) to issuers of municipal securities would also limit the definitions of “municipal financial products” (and therefore “municipal derivatives”) and “solicitation of a municipal entity” to encompass only those entities that issue municipal securities. Under such a limited definition, advice with respect to municipal derivatives, for example, would not subject advisors to registration unless the municipal entity entering into a swap

189

was also an issuer of municipal securities. This limited definition would also allow third parties to solicit various public pension funds and LGIPs on behalf of brokers, dealers, investment advisers, and municipal advisors without registering as municipal advisors. The Commission believes that such entities should have the protections provided by municipal advisor registration.

190

188

See supra

notes 173-176 and accompanying text.

189

Unless the context otherwise requires, for purposes of the discussion in this release, swap refers to swaps and security-based swaps.

190

The Commission notes that Section 15B(b) of the Exchange Act, as amended by the Dodd-Frank Act, requires, among other things, that the MSRB adopt rules to effect the purposes of the Exchange Act with respect to, among other things, “advice provided to or on behalf of municipal entities or obligated persons by . . . municipal advisors with respect to municipal financial products, the issuance of municipal securities, and solicitations of municipal entities or obligated persons undertaken by brokers, dealers, municipal securities dealers, and municipal advisors.”

See

Section 15B(b)(2) of the Exchange Act. At a minimum, the rules of the MSRB, with respect to municipal advisors, must, among other things: “(i) Prescribe means reasonably designed to prevent acts, practices, and courses of business as are not consistent with a municipal advisor's fiduciary duty to its clients; (ii) provide continuing education requirements for municipal advisors; [and] (iii) provide professional standards.”

See

Section 15B(b)(2)(L) of the Exchange Act.

The Commission believes public employee retirement systems and public employee benefit plans or public pension plans (including participant-directed plans, 403(b), and 457 plans)

191

fall within the statutory definition of municipal entity. The Commission believes that each of these plans constitutes a “plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof.”

192

191

In this release, the Commission uses the term “public employee benefit plan” to refer to a “pension plan” that is a “governmental plan” (as such terms are described below). Such plans include “participant-directed plans,” “403(b) plans,” and “457 plans” (as such terms are described below), and may be plans, funds, or programs (also described below). The Commission also uses the term “public employee retirement system.” As described below, a public employee retirement system is a special purpose government, and therefore, a public employee pension plan or a public employee retirement system may itself be a municipal entity. The Commission uses the term “private employee benefit plan” to refer to a pension plan that is not a governmental plan.

The term “governmental plan” includes a plan established or maintained for its employees by the Government of the United States, by the government of any state or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.

See

Section 3(32) of ERISA, 29 U.S.C. 1002(32).

The term “employee benefit plan” or “plan” means an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan.

See

Section 3(3) of ERISA, 29 U.S.C. 1002(3).

The terms “employee pension benefit plan” and “pension plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program—(i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.

See

Section 3(2) of ERISA, 29 U.S.C. 1002(2).

Pursuant to the Governmental Accounting Standards Board (“GASB”), “public employee retirement system” means a special-purpose government that administers one or more pension plans. Public employee retirement systems also may administer other types of employee benefit plans, including postemployment healthcare plans and deferred compensation plans.

See

GASB Statement No. 28: Accounting and Financial Reporting for Pensions.

A “participant-directed plan” is a plan that provides for the allocation of investment responsibilities to participants or beneficiaries.

See

U.S. Department of Labor, Fact Sheet: Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans (February 2012), available at

http://www.dol.gov/ebsa/pdf/fsparticipantfeerule.pdf

A “403(b) plan” is a tax-sheltered retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations.

See

Internal Revenue Service, IRC 403(b) Tax-Sheltered Annuity Plans, available at

http://www.irs.gov/Retirement-Plans/IRC-403(b)-Tax-Sheltered-Annuity-Plans

A “457 plan” is a deferred compensation plan as described in IRC section 457, which is available for certain state and local governments and non-governmental entities tax exempt under IRC section 501.

See

Internal Revenue Service, IRC 457(b) Deferred Compensation Plans, available at

http://www.irs.gov/retirement/article/0,,id=172437,00.html

192

15 U.S.C. 78

-4(e)(8) (defining “municipal entity”).

Further, the Commission believes that such plans should be afforded the protection granted to municipal entities by the statute. The Commission notes that the solicitation of public pension plans

193

in connection with investment advisory services has been subject to multiple Commission enforcement actions. For example, in 2009, the Commission charged a former New York State official and top political advisor with allegedly defrauding the New York State Common Retirement Fund by causing the fund to invest billions of dollars with private equity funds and hedge fund managers who paid millions of dollars in the form of sham “finder” or “placement agent” fees.

194

193

See infra

Section III.A.1.b.x. (discussing “solicitation of a municipal entity or obligated person”).

194

See SEC

Henry Morris,

Litigation Release No. 20963 (March 19, 2009).

As another example, the Commission charged the former CEO of the California Public Employees' Retirement System and his close personal friend with allegedly scheming to defraud an investment firm into paying $20 million in fees to the friend's placement agent firms.

See

SEC Charges Former CalPERS CEO and Friend With Falsifying Letters in $20 Million Placement Agent Fee Scheme, available at

http://www.sec.gov/news/press/2012/2012-73.htm

The Commission notes, however, that individual natural person participants in a public employee benefit plan do not fall within the definition of municipal entity, because such persons would not be a state, political subdivision of a state, or municipal corporate instrumentality. Similarly, private employee benefit plans, mutual funds, and insurance companies that are not sponsored or established by a state, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof, do not fall within the statutory definition of municipal entity.

195

Such funds and entities are not “established or sponsored by” a state merely because they file with a state official or are issued a certificate of formation by a state.

195

See supra

note 187 and accompanying text.

As noted above, three commenters

196

stated that funds contributed to a governmental plan are no longer the property of, or held for the benefit of or

controlled by, the municipal entity that established the plan, and that such plans are not ordinarily funded by or involved in the types of transactions contemplated by Congress. These commenters argued that, as a result, these plans should be excluded from the definition of municipal entity. The Commission does not agree. Such a plan is “sponsored or established” by the municipal entity and, therefore, falls within the statutory definition of municipal entity.

196

See

Fraser Stryker Letter and Committee of Annuity Insurers Letter I.

See also

NABL Letter (making a similar argument that the term “municipal entity” should only include entities that are controlled by or established for the benefit and enjoyment of a state or any of its political subdivisions or municipal corporations).

One commenter suggested that the phrase “any State, political subdivision of a State, or municipal corporate instrumentality of a State” in the interpretation of the definition of “municipal entity” would be clearer if it were revised to read “any State, political subdivision of a State, or municipal corporate instrumentality of a State

or of a political subdivision of a State

.”

197

The commenter noted, for example, that a charter school may be organized as an “instrumentality of a political subdivision of a State.”

197

NABL Letter.

Because states delegate powers to their political subdivisions and one of the powers that may be delegated to political subdivisions is the ability of political subdivisions to create corporate instrumentalities,

198

the Commission believes that a municipal entity organized as a municipal corporate instrumentality of a political subdivision of a state is properly considered a municipal corporate instrumentality of a state. Accordingly, the Commission is adopting Rule 15Ba1-1(g) to reflect such interpretation and define municipal entity to include municipal corporate instrumentalities of political subdivisions of states.

199

198

See, e.g.,

MCL 117.4o:

http://www.legislature.mi.gov/(S(p3jhrzzb5hbiew45wy2fmz45))/mileg.aspx?page=getobject&objectname=mcl-117-4o

(authorizing cities in the state of Michigan to form nonprofit corporations under that state's nonprofit corporation act if they are organized for valid public purposes).

199

See

Rule 15Ba1-1(g), which defines municipal entity to mean “any State, political subdivision of a State, or municipal corporate instrumentality of a State or of a political subdivision of a State, including: (1) [A]ny agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (2) [a]ny plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and (3) [a]ny other issuer of municipal securities.”

iii. Obligated Person

Exchange Act Section 15B(e)(10) provides that the term “obligated person” means “any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.”

200

In the Proposal, in response to a commenter's request for clarification,

201

the Commission stated its belief that the definition of obligated person for purposes of the definition of municipal advisor should be consistent with the definition of obligated person for purposes of Rule 15c2-12.

202

The Commission therefore proposed to exempt from the definition of obligated person providers of municipal bond insurance, letters of credit, or other liquidity facilities.

203

In the Proposal, the Commission stated its belief that this interpretation would not conflict with the goals of the Dodd-Frank Act to provide further protections for certain entities that participate in borrowings in the municipal securities market and would help ensure uniformity among rules relating to such market, including uniformity relating to the definition of obligated persons.

204

The Commission noted that providers of municipal bond insurance, letters of credit, or other liquidity facilities are generally non-governmental providers of credit enhancements.

205

As providers of credit enhancements, these entities are not borrowing funds through a municipal entity. Therefore, the Commission stated in the Proposal its belief that they do not require the type of protection that should be provided to those who, in municipal securities transactions, borrow funds through municipal entities.

200

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.

201

See

Proposal, 76 FR 829, note 88 and accompanying text.

202

Rule 15c2-12 defines the term “obligated person” to mean “any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the obligations on the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities).”

See

17 CFR 240.15c2-12(f)(10). “Offering” as used in this definition is defined in Rule 15c2-12(a).

See

17 CFR 240.15c2-12(a).

See also

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

203

See

proposed Rule 15Ba1-1(i) and 17 CFR 240.15c2-12(f)(10).

204

See

Proposal, 76 FR 830.

205

See id.

The Commission received approximately ten comment letters with regard to the definition of “obligated person” and the application of the proposed rules to such persons.

Definition of “Obligated Person”

Generally, most commenters agreed that the definition of “obligated person” should be consistent with the definition of that term in Rule 15c2-12,

206

or otherwise expressed support for the proposed definition of obligated person.

207

Consequently, the Commission is adopting the definition substantially as proposed, but with modifications for general consistency with the application of the term in Rule 15c2-12

208

and certain clarifying modifications to address concerns raised by commenters. Specifically, Rule 15Ba1-1(k) provides that obligated person “has the same meaning as in section 15B(e)(10) of the Act (15 U.S.C. 78

-4(e)(10));

provided, however,

the term

obligated person

shall not include: (1) A person who provides municipal bond insurance, letters of credit, or other liquidity facilities; (2) a person whose financial information or operating data is not material to a municipal securities offering, without reference to any municipal bond insurance, letter of credit, liquidity facility, or other credit enhancement; or (3) the federal government.”

206

See, e.g.,

Kutak Rock Letter; NABL Letter.

See also

ABA Letter; BNY Letter.

207

See

letter from Michael G. Bartolotta, Chairman, MSRB, dated February 22, 2011 (“MSRB Letter I”).

208

See

Rule 15Ba1-1(k).

See also

supra note 202.

The Commission believes that there is no reason to differentiate the definition of obligated person for purposes of municipal advisor registration from the definition of obligated person for other Exchange Act purposes. As discussed in the Proposal and herein, the Commission believes that such definition will provide further protections for certain entities that participate in borrowings in, and help ensure uniformity among rules relating to, the municipal securities market. The continued use of a consistent definition will also provide clearer guidance to market participants.

Although most commenters supported the proposed definition, some commenters asked for clarification. One commenter suggested that the definition should exclude persons who might otherwise be deemed to be an obligated person solely on the basis of a commitment to support payment of the underlying assets that secure such issue, other than a borrower, lessee, or installment purchaser who is contractually responsible for payments that exceed a specified and substantial materiality standard, or a guarantor of

such a payment obligation, who is not otherwise excluded from the definition of obligated person.

209

One commenter specifically stated that guaranty agencies for loans under the Federal Family Education Loan Program (“FFELP”) should not be deemed obligated persons.

210

Another commenter stated that companies registered under the Exchange Act, the federal government and its instrumentalities, foreign governments and their instrumentalities, religious organizations, and entities already subject to substantial oversight and regulation, such as banks, credit unions, regulated investment companies, and insurance companies, should be exempt from the definition of obligated person.

211

209

See

NABL Letter. The commenter stated that the interpretive guidance with respect to Rule 15c2-12 leaves open the possibility that some persons who are not directly committed to support payment of a municipal securities issue may nonetheless be deemed to be obligated persons by reason of their commitment to support payment of the underlying assets securing the issue, based upon a factual analysis of their relationship to the issue.

See id.

See also

letter from Brett E. Lief, President, National Council of Higher Education Loan Programs, dated February 16, 2011 (“National Council of Higher Education Loan Programs Letter”). Another commenter stated that, according to the proposed rules, while some of its members would fall within the definition of obligated person in each of its capital market financings, under the materiality standard of Rule 15c2-12 under the Exchange Act, the commenter only designates as obligated persons those members participating in the projects being financed that have a significant percentage of the financial obligation that supports the debt service on the commenter's bonds.

See

letter from Robert W. Trippe, Senior Vice President and Chief Financial Officer, American Municipal Power, Inc., dated February 21, 2011 (“American Municipal Power Letter”).

210

See

National Council of Higher Education Loan Programs Letter.

211

See

Kutak Rock Letter.

The Commission has carefully considered these comments. The Commission continues to believe that there is no reason to differentiate the definition of obligated person for purposes of municipal advisor registration from the definition of obligated person for purposes of Rule 15c2-12. The Commission, however, is modifying the rule text of Rule 15Ba1-1(k) to clarify that the definition of obligated person excludes persons whose financial information or operating data is not material to a municipal securities offering, without reference to any municipal bond insurance, letter of credit, liquidity facility, or other credit enhancement.

The continuing disclosure requirements of Rule 15c2-12 exclude certain obligated persons whose financial information or operating data is not material to the issuance of municipal securities.

212

Therefore, consistent with Rule 15c2-12, the Commission is clarifying that an entity whose financial information or operating data is not material to an issuance of municipal securities would not be an obligated person under Rule 15Ba1-1(k). Any advisor to such entity would not be required to register as a municipal advisor, because such person would not be a municipal advisor within the meaning of Rule 15Ba1-1(d).

213

In addition to promoting consistency, the Commission believes that the materiality standard for secondary market disclosure in Rule 15c2-12 also serves as an appropriate standard to identify those obligated persons that should have the protections afforded by Section 15B of the Exchange Act. Using a similar approach ensures uniformity, provides municipal market participants with existing guidance about how the rules should be applied, and limits the application of the definition to only those persons whose financial information or operating data is material to a municipal securities offering and for whom registration provides significant benefits to the municipal marketplace.

212

For example, Rule 15c2-12 requires a written agreement or contract to provide ongoing information (1) with respect to any obligated person for whom financial information or operating data is presented in the final official statement or (2) for each obligated person meeting the objective criteria specified in the undertaking and used to select the obligated persons for whom financial information or operating data is presented in the final official statement, except that in the case of pooled obligations the undertaking shall specify such objective criteria.

See

Rule 15c2-12(b)(5)(i)(A). The issuer and the other participants determine at the time of preparation of the official statement which obligated persons are material to the offering.

See

Securities Exchange Act Release No. 34961 (November 10, 1994), 59 FR 59590, 59596 (November 17, 1994).

213

A person advising a guarantor that is a municipal entity (such as a state credit enhancer) must separately determine whether its advice to that municipal entity would trigger the municipal advisor registration requirement.

While the definition of obligated person in the Proposal excluded only providers of municipal bond insurance, letters of credit, or other liquidity facilities, the Commission understands that credit enhancement for municipal securities is not necessarily limited to those three categories and that many municipal securities may be credit enhanced indirectly. Prior guidance from Commission staff provides that “[e]ntities that insure or guarantee performance of assets that have been pledged to secure the repayment of the municipal obligation may fall within the definition of `obligated person' . . . unless such insurance or guarantee has been obtained prior to and not in contemplation of any offering of municipal securities, the insurance or guarantee relates only to the individual pledged assets, and the insurance or guarantee exists independent of the existence of a municipal obligation.”

214

Consistent with this prior guidance from Commission staff, the Commission is adopting a definition of “obligated person” for purposes of Rule 15Ba1-1(k), which provides that the ultimate determination as to whether an insurer or guarantor is an obligated person under Rule 15c2-12 depends on the relationship to the financing itself, which is a factual analysis.

215

Similarly, a determination of whether a guarantor or insurer falls within the exclusion from the definition of obligated person for the purposes of the municipal advisor registration regime also depends on the particular facts and circumstances.

216

214

Response to Question 9 in letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, Commission to John S. Overdorff, Chair, Securities Law and Disclosure Committee, NABL, dated September 19, 1995.

215

See id.

216

See id.

In addition, the Commission notes that although the federal government and its instrumentalities, as providers of credit enhancement, could fall within the definition of obligated person under Rule 15c2-12, the federal government does not require the type of protection that should be applicable generally to those who borrow funds through municipal entities in municipal securities transactions.

217

Accordingly, for purposes of the municipal advisor registration regime, the Commission is interpreting the definition of obligated person to exclude the federal government. Therefore, advisors to the federal government and its instrumentalities providing credit enhancements in connection with issuances of municipal securities are not required to register as municipal advisors.

217

The federal government, as a credit enhancer, would not be borrowing any funds through a municipal entity, and would therefore be in a position similar to that of providers of municipal bond insurance, letters of credit, or other liquidity facilities that are excluded from the definition of “obligated person” in Rule 15c2-12. In addition—unlike for the definition of special entity—Congress did not include the federal government in the definition of municipal entity.

See infra

note 275 (noting differences in the two definitions).

Another commenter stated that buyers of municipal securities rely on the letter of credit and the credit rating of the lender issuing the bonds rather than the “ultimate borrower,” and the security or collateral provided by a borrower goes to the lender or letter of credit issuer,

not bondholders.

218

The commenter stated that the real borrower-lender relationship is between the borrower and the bank issuing the letter of credit.

219

This commenter noted that these and other factors distance conduit borrowers

220

from direct obligations to bondholders, but they nonetheless would be obligated persons under the Proposal.

218

See

letter from Andrew S. Rose, dated April 10, 2011 (“Rose Letter”).

219

See id.

220

Many commenters used the term “conduit borrower” in their letters. Although the term “conduit borrower” and “obligated person” do not have identical meanings, for purposes of this release, the Commission is treating the comments regarding “conduit borrowers” as applying to “obligated persons.”

The Commission understands this commenter to be suggesting that such conduit borrowers should not be considered obligated persons, such that their advisors would not have to register as municipal advisors. The Commission, however, has taken the position that, regardless of whether an obligated person obtains a letter of credit from a bank to guarantee the payment of municipal securities, an obligated person has an obligation to investors.

221

The Commission has long been of the view that the presence of credit enhancements generally would not be a substitute for material disclosure concerning the primary obligor on municipal bonds.

222

Thus, an advisor to an obligated person that has obtained a letter of credit from a bank to guarantee the payment of municipal securities should not be treated differently from an advisor to an obligated person that has not obtained such credit enhancements, and would therefore have to register as a municipal advisor.

223

221

See

Securities Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799, note 89 (July 10, 1989).

See also

Securities Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33107 (June 10, 2010) (stating: “As noted in [Securities Exchange Act Release No. 60332 (July 17, 2009), 74 FR 36831 (July 24, 2009)], the Commission believes that information regarding conduit borrowers is material to investors in credit enhanced offerings and therefore should be included in the official statements”).

222

See

Securities Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799, 28812 (July 10, 1989).

223

The text of Rule 15Ba1-1(k) has also been clarified to provide that the definition of obligated person excludes persons whose financial information or operating data is not material to a municipal securities offering, without reference to any municipal bond insurance, letter of credit, liquidity facility, or other credit enhancement.

Application of Rules to Advisors to Obligated Persons

One commenter suggested generally that the proposed rules should be more strictly applied to advisors dealing with municipal entities than to advisors dealing with obligated persons. The commenter asserted that there is less public interest in regulating advice to private entities, and such regulation is better handled outside of municipal markets regulation.

224

As stated above, obligated persons assume the same role as municipal entities in an issuance of municipal securities, because obligated persons are committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities. Further, defaults by private entity obligated persons with respect to municipal securities can have negative consequences for municipal entities.

225

Section 15B of Exchange Act (as amended by the Dodd-Frank Act), moreover, provides for the protection of both municipal entities and obligated persons.

226

Accordingly, the Commission believes that the municipal advisor registration regime should generally apply in the same manner to advisors of obligated persons as to advisors of municipal entities.

227

224

See

letter from Kendra York, Public Finance Director, State of Indiana, dated February 22, 2011 (“State of Indiana Letter”). This commenter stated that it is unrealistic to expect board members, attorneys, and accountants of obligated persons to be aware that their activities would be subject to Commission regulation. The commenter stated that it seems more appropriate to regulate improvident and risky usage of derivatives by unsophisticated borrowers by focusing on suitability rules applicable to the providers of these services, rather than focusing on their use in the municipal market.

225

According to a Standard and Poor's study of municipal bond defaults in the 1990s, bonds for the three major types of conduit bond issues (healthcare, multi-family housing, and industrial development) accounted for more than 70% of defaulted principal. More recent reports have also indicated that non-governmental conduit borrowers account for more than 70% of municipal bond defaults. For example, a 2011 report stated that the largest share of modern era defaults consists of industrial development revenue bonds, followed by bonds supporting healthcare and housing. The report states that these three sectors accounted for 67% of all defaulting issues during the period of 1980 to 2011.

See

2012 Report on the Municipal Securities Market,

supra

note 45, at 24.

226

See

15 U.S.C. 78

-4(b)(2)(C).

227

The Commission notes, however, that the Exchange Act, as amended by the Dodd-Frank Act, imposes a fiduciary duty on municipal advisors when advising municipal entities.

See

15 U.S.C. 78

-4(c)(1). The statute does not impose a fiduciary duty with respect to advice to obligated persons.

See also

supra

note 100.

As described more fully below, however, the Commission is providing an exemption from the definition of municipal advisor for persons providing advice with respect to certain “investment strategies,” which will narrow the range of activities that would cause an advisor to an obligated person to meet the definition of municipal advisor.

228

Also as described more fully below, the Commission is limiting the scope of its definition of the term “municipal derivative” and its interpretation of the term “solicitation of a municipal entity or obligated person” as each applies to obligated persons, such that an obligated person must be acting in its capacity as such and the relevant activity is in connection with municipal securities (or, in the case of a solicitation, municipal financial products).

229

228

See infra

Section III.A.1.b.viii.

229

See infra

note 236 and accompanying text.

When does a person become an obligated person?

One commenter asked when a client would become an obligated person.

230

Specifically, the commenter asked whether it would be rendering advice as a municipal advisor if it was engaged to consider a client's options regarding conventional versus conduit financing, but the client subsequently chose not to engage in conduit financing.

231

In addition, the commenter asked whether only registered municipal advisors can solicit clients that are eligible to use conduit financing.

232

Lastly, the same commenter asked whether a financial advisor would be required to register as a municipal advisor if a client is examining its debt alternatives, among which is conduit financing.

233

230

See

letter from Jonathan Roberts, Principal, Roberts Consulting, LLC, dated February 18, 2011 (“Roberts Consulting Letter”).

231

See id.

232

See id.

233

See id.

Whether a financial advisor that advises clients about conduit financing or other financing options would be required to register as a municipal advisor would depend on the facts and circumstances. A person will not be a municipal advisor to an obligated person until the obligated person has begun the process of applying to, or negotiating with, a municipal entity to issue conduit bonds on behalf of the obligated person. Activity that never results in solicitation of or actual contact with a municipal entity does not have a sufficient nexus to municipal financial products or the issuance of municipal securities to require registration as municipal advisor. Merely advising a client on debt financing alternatives that include conduit financing is not a municipal advisory activity, because the client would not be sufficiently close to being an obligated person with respect to an issuance of municipal securities.

234

If a

client is only considering conduit financing, the client is not an obligated person. However, if the client applies to, or negotiates with, the municipal entity to issue conduit bonds, the person advising the conduit borrower would be required to be registered as a municipal advisor, regardless of whether or not the financing successfully closes.

234

Conversely, providing advice to a client who is a municipal entity regarding debt financing alternatives would constitute a municipal advisory activity.

One commenter argued that a person that is an obligated person does not remain an obligated person indefinitely and is not an obligated person with respect to unrelated matters.

235

The Commission agrees and has limited the scope of the rules as applied to advice concerning municipal financial products used by, and third-party solicitations of, obligated persons as described herein.

236

235

See

SIFMA Letter I.

236

See infra

Section III.A.1.b.v. (discussing the definition of “municipal derivatives” and its scope with respect to obligated persons) and Section III.A.1.b.x. (discussing the definition of “solicitation of a municipal entity or obligated person” and its scope with respect to obligated persons).

The same commenter also argued that a person should not be deemed an obligated person if it is not the initial obligor, but rather comes to support the payment of obligations on municipal securities after the offering, through an assumption or other arrangement, and asked the Commission to clarify that any relationship between an obligated person and its advisor will only be considered a municipal advisory relationship to the extent that it directly involves a transaction in which the person is an obligated person.

237

The Commission does not agree. It is the Commission's view that such a person would be an obligated person if the municipal securities remain outstanding after the substitution of the obligated person, and such a person is an obligated person for purposes of Rule 15c2-12. The obligated person's responsibilities and need for protection would be similar regardless of whether it was an initial obligor or a subsequent obligor. The Commission notes that, as discussed, a person is only a municipal advisor to an obligated person if it provides advice to, or on behalf of, the obligated person “with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues” or that meets the definition for “solicitation” of such obligated person.

238

The Commission also notes that Exchange Act Section 15B(e)(10) defines obligated person to mean, among other things, “any person . . . who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.”

239

237

See

SIFMA Letter I. Further, another commenter stated that if an entity related to a borrower agrees to guarantee, or be jointly obligated, on a borrowing, it should be treated as the primary borrower and not as a municipal advisor.

See

letter from Kasey Kesselring, President, South Lake County Hospital District, dated February 16, 2011 (“South Lake County Hospital Letter”). The Commission notes that such an entity is not acting as an advisor to its affiliated borrower merely by agreeing to guarantee or be jointly obligated on a borrowing.

238

See

15 U.S.C. 78

-4(e)(4).

239

See

15 U.S.C. 78

-4(e)(10).

Charter Schools

In the Proposal, the Commission noted that a charter school would generally fall under the definition of municipal entity, but may, in certain circumstances, fall under the definition of obligated person.

240

With respect to municipal financial products or the issuance of municipal securities, the Commission asked in what circumstances should charter schools be considered municipal entities or obligated persons.

241

Further, the Commission asked how the treatment of charter schools under different state laws affects their classification as municipal entities or obligated persons.

242

240

15 U.S.C. 78

-4(e)(8).

See also

infra

note 241.

241

See

Proposal, 76 FR 835.

In the Proposal, the Commission clarified, in response to a commenter, that charter schools are considered to be public schools and generally derive their charter from a political subdivision of a state (for example, local school boards, state universities, community colleges, or state boards of education) and, therefore, would fall under the definition of municipal entity.

See id.,

at 829, notes 83-85 and accompanying text.

Charter schools, or persons that operate charter schools, such as charter school management organizations that are organized as non-profit corporations, may issue municipal securities through a municipal entity for capital needs, such as facilities that are not provided for by state funding. In that instance, the charter school, or charter school management organization, would be an obligated person with respect to the issuance of municipal securities and any related municipal financial products.

See id.,

at 829, note 85.

242

See id.,

at 835.

One commenter stated that charter schools that have bonds issued on their

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