Registration of Municipal Advisors

January 29, 2014

Effective October 1, 2010, the Securities Exchange Act of 1934 was amended to, among other things, do the following: (i) require “municipal advisors to register with the Securities Exchange Commission (“SEC”)”; (ii) establish a fiduciary duty between a municipal advisor and a municipal entity for which it is acting as a municipal advisor; and (iii) subject municipal advisors to an additional specific and anti-fraud provision.

The term “municipal advisor” is defined to mean:

“…a person (who is not a municipal entity or an employee of a municipal entity) that (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues; or (ii) undertakes a solicitation of a municipal entity.”

A municipal entity means any state, a political subdivision of a state, or any agency, authority or instrumentality of the state or political subdivision. The amendment does not contain a definition of the term “advice.” Recently, the SEC issued proposed final regulations implementing the amendments to the Act. In issuing these regulations, the SEC indicated it could not give a “bright line definition” of the term “advice.” Rather, the SEC was going to define that term broadly and as being dependent upon the facts and circumstances of the particular case. The final rules do provide a standard 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).” In issuing the foregoing definition, there was an accompanying press release, which basically indicates the more individually tailored information given to a specific municipal entity the more likely it will be a recommendation that constitutes “advice” under the municipal advisor definition.

One of the most important questions for those of us who provide professional services to municipal entities in Wisconsin is whether or not we will be a “municipal advisor.” Attorneys, as well as engineers, routinely provide advice to municipalities which could touch upon “municipal financial products” or the “issuance of municipal securities.” For example, a municipal attorney may advise a municipal entity it should issue a revenue obligation as a debt instrument rather than a general obligation. That is certainly “advice” on the issuance of a municipal security. Similarly, an engineer may put together a demographic analysis when a project is being planned; and that information could be used later to determine utility rates and revenues, which would be relevant for purposes of determining whether or not the debt service is sufficient to satisfy the income needs of the municipal borrowing.

From my own municipal experience, it would appear that attorneys and engineers may run perilously close to being considered municipal advisors. It is true the amendment to the 1934 Act specifically excluded from the term “municipal advisor” certain professions. One of them is “… attorneys offering legal advice or providing services that are of a traditional legal nature.” In issuing the final rules, the SEC commented about the exclusion applicable to attorneys. So long as attorneys are “offering legal advice or providing services that are of a traditional legal nature,” they will not constitute a municipal advisor. The term “traditional legal” advice includes:

  1. Preparation and delivery of the official statement or other disclosure document that describes the material terms and provisions of the municipal securities transaction;
  2. Advice and documentation with respect to post-closing policies and procedures that are necessary for compliance with federal and state law during the term of the municipal security; and
  3. Legal advice in determining the ongoing compliance of an issue of municipal securities with federal tax law requirements excess arbitrage earnings.

Again, these are examples of traditional legal advice. The exclusion does not apply if the attorney otherwise represents himself or herself as a financial advisor or a financial expert such that the attorney is providing advice that is primarily financial in nature.

Unfortunately, there is no express exemption for engineers. Nevertheless, many commentators believe engineers will be able to provide the same advice that they have traditionally provided within the purview of their engineering profession. Engineers will be subject to regulation as municipal advisors only if they act by providing advice to a municipal entity regarding municipal financial products or the issuance of municipal securities. At least one or possibly more trade associations for engineers have been meeting with the SEC to obtain clarification of the law as it affects municipal engineers. As of this date, no clarifying release has been issued.

Hopefully, engineering trade associations will be successful in obtaining clarification. As it stands right now, there is a significant “gray area.” The SEC appears to be concerned that, if engineers are providing an engineering analysis which draws conclusions concerning financing or makes recommendations concerning financing, then that may very well result in the engineer becoming a municipal advisor, which, in turn, requires registration with the SEC. My suggestion is that engineers keep in contact with their trade association to see how this plays out.

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For more information about "Registration of Municipal Advisors," contact Timothy D. Fenner at tfenner@axley.com or 608.283.6733.