Municipal Advisors include financial advisors, swap advisors, GIC brokers and others. The rule also regulates banks and broker dealers acting as Municipal Advisors. Under the law, the SEC is charged with defining Municipal Advisor and establishing the scope of who is required to register and the MSRB is charged with writing rules governing Municipal Advisor behavior, activities and any other related matters. A number of MSRB rules also govern the conduct of Municipal Advisors.
On September 20, 2013 the SEC approved a rule establishing the definition of Municipal Advisor and establishing a permanent process for them to register with the SEC. The rule imposes a fiduciary duty upon municipal advisors that give advice to municipal entities. The Municipal Advisor rule became effective as of July 1, 2014.
The SEC has issued general interpretive guidance, in the form of FAQs, on certain aspects of the final rule.
The SEC's general definition of "advice" according to the rule states that "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." Under this definition, many services provided by public finance bankers and many communications between bankers and their issuer clients would be treated as "advice" for the purpose of the rule.
Exemptions from Municipal Advisor Treatment
The SEC Municipal Advisor rule provides three narrowly-defined exemptions for dealers from treatment as Advisors.
- The rule provides that if a firm is contractually engaged to serve as underwriter on a specific transaction, advice provided under that engagement does not trigger Municipal Advisor treatment.
- Dealers are exempt from Municipal Advisor treatment if the issuer has engaged an "independent registered municipal advisor."
- Dealers are exempt from Municipal Advisor treatment when responding to issuers' requests for proposals (RFPs).
There is no way for issuers to "opt out" of the Municipal Advisors rule outside the narrowly targeted dealer exemptions.
The municipal dealer industry generally supported this provision of Dodd-Frank on the basis that regulating non-dealer Municipal Advisors would help protect issuers and would level the playing field between dealers who provide Municipal Advisor services and whose activities were previously regulated and non-dealer advisors, who were wholly unregulated before Dodd-Frank. However, the SEC’s final rule has fundamentally inhibited the way issuers interact with public finance bankers. Many issuers depend on deal ideas, analysis, suggestions and related services they receive from bankers and dealer firms outside of a formal underwriter engagement or RFP submission. Nor may an issuer have the budget or desire to hire an “independent registered municipal advisor”. This rule has limited the ability of bankers to provide ideas, suggestions, analysis, assistance or other services to issuer clients in many circumstances. Because triggering the definition of MA carries with it a fiduciary duty, the rule effectively prohibits dealers who provide tailored ideas or analysis from underwriting any bond transactions that arise from that communication.
SIFMA developed a suite of model documents jointly with the Government Finance Officers Association (GFOA), to assist dealers' compliance with the rule.
See also: Model documents for compliance with Municipal Advisor Rule