Nonprofit and for-profit corporations that borrow through the issuance of taxable or tax‑exempt municipal bonds would be dramatically and adversely affected if the Securities and Exchange Commission’s (SEC) proposed final regulations for the registration of municipal advisors (Proposed Rules) are approved in the form proposed. Under the Proposed Rules, members of boards of directors of “obligated persons” (which would include most, if not all, conduit borrowers), as well as financial officers and all other employees of obligated persons, who advise the obligated person concerning borrowings through the issuance of municipal bonds, must register with the SEC as a “municipal advisor” and be subject to the SEC’s scrutiny of their competence and extensive background information, in addition to paying any required filing fees, as described below.
The effect of the Proposed Rules on state and local government boards has been the topic of much discussion, debate and angst among municipal issuer groups and their advocates. But the uncertainty and vagueness of the Proposed Rules might cause them to have an even greater effect on conduit borrowers. The Proposed Rules must be approved in final form by the SEC before becoming effective.
Any person concerned about the Proposed Rules may file a comment with the SEC by February 22, 2011. The SEC has specifically requested comment on this and other aspects of the Proposed Rules. The full text of the Proposed Rules, as well as a link to submit comments directly to the SEC, can be found on the SEC’s website.
As stated in the Squire Sanders Public Finance Alert regarding the potential effects of the Proposed Rules on municipal issuers, the Proposed Rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Section 975 of Dodd-Frank makes it unlawful “for a municipal advisor to provide advice to or on behalf of a municipal entity or obligated person… with respect to municipal financial products or the issuance of municipal securities… unless the municipal advisor is registered in accordance with this subsection.’’
Dodd-Frank defines “municipal advisor” as “a person… who – (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products [such as swaps] 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…” (emphasis added). Under Dodd-Frank, municipal advisors include traditional financial advisors, guaranteed investment contract brokers, placement agents and swap advisors, but exclude broker-dealers (when acting in a capacity as an underwriter), employees of municipal entities and certain other persons.
While the legislation specifically excludes the municipal entity itself and its employees, no such exclusion for obligated persons is included in the SEC’s Proposed Rules. As written, the Proposed Rules would apply to financial officers and other employees of, and members of the boards of directors of, an obligated person, who “provide advice” to the obligated person related to the issuance of municipal bonds, or investment of bond proceeds or entry into swaps or other financial products.
The Proposed Rules do not define or interpret what activities would constitute “providing advice” to an obligated person. Financial officers and other employees of an obligated person are expected, as part of their normal responsibilities, to advise the obligated person (i.e., their employer) regarding financing structure alternatives, timing, etc., which is specifically identified in the Rule as the type of advice sought to be regulated. Did Congress really intend for the SEC to require employees and boards of obligated persons to register as municipal advisors before advising the obligated person about conduit borrowings?
Would the expression by a board member of an obligated person of views concerning the terms and desirability of a proposed conduit borrowing constitute “advice,” as used in the Proposed Rules? Would the evaluation of and recommendations by financial officers and other employees of an obligated person concerning a proposed conduit borrowing by the obligated person constitute “advice?” The answers are not clear under the Proposed Rules. This uncertainty has provoked sharp criticism in the financial press from organizations affected by the Proposed Rules.
In its announcement of the Proposed Rules, the SEC specifically asked whether employees, and other types of persons other than employees, of an obligated person should be excluded from the definition of a municipal advisor.
The SEC should be urged to provide in its final Rules that all employees and members of governing boards of obligated persons are excluded from the definition of municipal advisors when they are acting for, or advising, such obligated person in connection with the issuance of municipal securities or entry into municipal financial products.
Being required to register with the SEC as a municipal advisor has significant consequences – time, money and legal obligations, as well as being the subject of scrutiny by the SEC. The Proposed Rules also impose record keeping requirements and would subject otherwise private individual information to public inspection. Failing to comply with the final Rules could subject a person to civil fines and sanctions, as well as criminal penalties.
Lawyers in the Squire Sanders Public & Infrastructure Finance Practice Group are available to answer any questions about or further discuss the implications of the Proposed Rules. Comments to the SEC on the Proposed Rules can be submitted via the link included above.