On September 18, 2013, the Securities and Exchange Commission (“SEC”) adopted its final rule on the permanent registration of municipal advisors (the “Final Rule”). The Final Rule replaces the current temporary registration scheme for municipal advisors with a permanent registration scheme, and provides extensive guidance concerning when a person or firm is acting as a municipal advisor.
This memorandum comprises Part I of a two-part series of client memoranda on the Final Rule. This Part I focuses on the entities that are subject to regulation and registration as municipal advisors. Part II (the “Part II Memo”), addresses in detail the mechanics and timing of registration under the permanent registration scheme.
The Final Rule and related guidance reflect significant changes from the SEC’s highly controversial 2010 proposed permanent registration rule (the “Proposed Rule”), including the following:
- narrowing the proposed scope of activities and types of advice that are required for registration, including limiting the extent of “investment strategies” as to which advice to a municipal entity or obligated person will trigger municipal advisor status to only those relating to plans or programs for the investment of the proceeds of municipal securities issuances or the recommendation of and brokerage of municipal escrow investments;
- clarifying what it means to provide “advice,” including: (i) specifying that even uncompensated advice may trigger municipal advisor status; (ii) providing an exemption for persons responding to requests for proposals (unless such persons receive direct or indirect compensation); and (iii) stating that general information that is not a “particularized” recommendation will not constitute advice;
- creating new, expanding or interpreting existing statutory exemptions for (i) investment advisers; (ii) banks and identified banking products; (iii) employees, appointed officials and board members of municipal entities; (iv) swap dealers; and (v) situations where the municipal entity has its own independent registered municipal advisor, subject to conditions;
- specifying that a solicitation of a municipal entity by a broker- dealer to invest in a private fund is not considered a solicitation on behalf of the fund’s investment adviser;
- indicating that functions similar to underwriting, such as private placement, remarketing and tender agents, would generally not trigger municipal advisor status;
- eliminating proposed requirements that individuals associated with a municipal advisor and engaged in municipal advisory activities on behalf of the municipal advisor must separately register and that the firm and individuals must complete compliance certifications;
- defining what funds constitute “proceeds” of municipal securities offerings, and indicating that such funds lose their character as “proceeds” once used to “carry out the authorized purposes of municipal securities”; and
- permitting registration of a separately identifiable division or department of a bank (“SID”) rather than the bank itself.
Importantly, the SEC rejected a number of significant comments that were advocated by industry participants. Specifically, the Final Rule and related guidance:
- clarify that the underwriter exemption does not extend to incidental advice concerning derivatives or the investment of proceeds from municipal securities offerings; and
- do not include blanket exemptions for regulated banks and similar entities.
The Final Rule becomes effective 60 days after publication in the Federal Register. Upon effectiveness of the Final Rule, persons who meet the new definition of “municipal advisor” (discussed in the full and original Davis Polk memo) and do not qualify for an exemption will (i) need to register with the SEC under its existing temporary registration regime and the Municipal Securities Rulemaking Board (“MSRB”), if they are not already registered, and (ii) be subject to a statutory fiduciary duty with respect to any municipal entity for whom they act as a municipal advisor and, upon MSRB registration, to MSRB rules. SEC registration under the permanent regime will be required on a phased- in basis starting on July 31, 2014.
The Final Rule prescribes permanent registration forms for municipal advisors (“Form MA” and additionally, for foreign firms, “Form MA-NR”) and forms to be submitted by registrants for individual associated persons (“Form MA-I”). These forms call for extensive information that may not in all cases currently be gathered by firms, and will likely require firms to implement new processes for capturing such information for purposes of initial registration and to support ongoing required updates (which must be made on an annual basis and when certain information on previous filings becomes outdated). The forms, registration process, timing and other practical considerations associated with the permanent registration regime are addressed the Part II Memo.
The full and original memo was published by Davis, Polk & Wardwell LLP on October 2, 2013 and is available here.