On September 18, 2013, the Securities and Exchange Commission (SEC) approved final rules requiring municipal advisors to permanently register with the SEC. The new rules become effective 60 days after publication in the Federal Register and will mandate that municipal advisors (as defined under the rules) register on a staggered basis beginning July 1, 2014. The temporary registration rules currently in effect will be extended to allow municipal advisors to remain temporarily registered during the transition period.

Prior to passage of the Dodd-Frank Act in July 2010, individuals and firms providing advice relating to the issuance of municipal securities were unregulated; they were not required to register with the SEC or otherwise comply with specifically tailored SEC rules. Citing concern that municipalities (and, indirectly, investors in municipal securities) should be able to rely on advisors who must comply with standards for training, qualification and conduct (including the treatment of conflicts of interest), Section 975 of the Dodd-Frank Act required the SEC to adopt rules that would require municipal advisors to register with the SEC and follow a regulatory regime overseen by the Municipal Securities Rulemaking Board (MSRB). The final rules (SEC Release No. 34-70462; available here), subject to public comment and SEC revision since December 2010, replace the temporary registration rules passed by the SEC under Section 975 of the Dodd-Frank Act in October 2010.

Under the new rules, a “municipal advisor” is a person who provides advice to a municipal entity or “obligated person” with respect to the issuance of municipal securities, about certain “investment strategies” or on municipal derivatives. The MSRB determines whether “advice” is being provided by examining all the surrounding facts and circumstances, including whether such counsel involves a “recommendation” to a municipal entity, is particularized to the specific needs of a municipal entity or relates to municipal financial products or the issuance of municipal securities.

Importantly, providing general information that does not involve a recommendation with respect to the structure, timing, terms and other similar matters relating to municipal financial products or municipal security issues is not considered “advice” that implicates registration. An “obligated person” is an entity, such as a non-profit organization, that borrows the proceeds of a municipal securities offering and is contractually or otherwise required to repay all or some of the funds borrowed. “Investment strategies” includes advice that relates to the investment of proceeds of municipal securities (including any pooled investment vehicles that contain such proceeds), the investment of municipal escrow funds or municipal derivatives, but does not include advice on the investment of all public funds of a municipal entity.

The SEC’s final rules include a number of specific exemptions from the definition of “municipal advisors” for certain activities (rather than particular market participants) the SEC believes do not need to be subject to the new municipal advisor regulations:

• Public Officials and Employees: Public officials and employees who are acting within the scope of their official capacity, including providing “internal” advice in their official roles, such as members of a city council, members of a board of trustees of a public or private non-profit university and regular employees of a municipality.

• Underwriters: Brokers, dealers and municipal securities dealers serving as underwriters, either as agents on a best-efforts basis or as principals on a firm commitment basis, who provide advice regarding the structure, timing and terms of a particular issue of municipal securities, but not advice regarding municipal derivatives or the investment of proceeds of municipal securities. The exemption applies during the period in which the underwriter is engaged for a particular offering.

• Registered Investment Advisors: Registered investment advisors who provide advice regarding the investment of the proceeds of municipal securities or municipal escrow investments.

• Registered Commodity Trading Advisors: Registered commodity trading advisors providing advice regarding swaps and who are already regulated by the Commodity Futures Trading Commission (CFTC).

• Attorneys: Attorneys who provide legal advice or traditional legal services (but not financial advice) with respect to municipal securities or municipal finance products.

• Engineers: Engineers who provide engineering advice, such as feasibility studies and cash flow analysis.

• Banks: Bank are exempt from the new SEC rules to the extent they provide identified banking products and services (such as loans and other extensions of credit, deposit accounts or trustee services), but not if they provide advisory services on the issuance of municipal securities or municipal derivatives.

• Accountants: Accountants do not have to register if they are providing accounting services such as audit or other attestation services, financial statement preparation or providing comfort letters to underwriters.

• Independent Registered Municipal Advisors: A firm or individual does not have to register if they provide advice to a municipality who has already engaged an independent municipal advisor with respect to the same matters, providing that certain requirements are met and certain disclosures are made so that all parties involved in a transaction understand that the firm or individual is not serving as an independent municipal advisor with a fiduciary duty to the municipality.

• Swap Dealers: Swap dealers who have already registered with the CFTC are not subject to the new SEC rules if they provide swap advice to a municipality who is already represented by an independent municipal advisor.

All firms who are considered by the MSRB to consist of one or more “municipal advisors” as defined above must register with the SEC by filing forms through the SEC’s EDGAR public online filing system, including Form MA to register as a municipal advisor and Form MA-1 for each individual associated with the firm who provides municipal advisory services, and all such registration information will be publically available. Although municipal advisor firms are required to register, they must furnish information on an individual basis, and the SEC is allowed to engage in enforcement actions against individual municipal advisors within a firm.