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From Securities Regulation Daily, January 10, 2014

Office of Municipal Securities issues FAQ on municipal adviser registration

By Jacquelyn Lumb

The SEC’s Office of Municipal Securities has responded to frequently asked questions about the registration requirements for municipal advisers, added under the Dodd-Frank Act. The SEC adopted final rules for municipal adviser registration on September 20, 2013, that are effective on January 13, 2014. The final rules provide a phased-in compliance period beginning on July 1 and ending on October 31, 2014.

The FAQ addresses the general information exclusion for advice versus recommendations, noting that the term advice is not susceptible to a bright-line definition. Advice includes 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.

Advice excludes the provision of general information that does not involve a recommendation about municipal financial products or the issuance of municipal securities. The FAQ provides examples of the general information exclusion from advice and addresses potential implied recommendations.

Business promotional materials. The FAQ also discusses the treatment of promotional business materials provided by potential underwriters under the general information exclusion from advice. A broker-dealer may communicate with a municipal entity or an obligated person in an effort to obtain business. The communication may include business promotional materials that present factual information but do not involve a recommendation. The broker-dealer cannot provide advice on an issuance of municipal securities without registering as a municipal adviser.

The FAQ provides examples of information qualifying for the general information exclusion from advice, warning that the more individually tailored the information is to a specific municipal entity or obligated person or group of municipal entities the more likely it is to be considered a recommendation.

Requests for proposals. The FAQ addresses the request for proposals, or request for qualifications, exemption that provides a way for municipal entities and obligated persons to solicit ideas, including advice, from market participants about municipal financial products or the issuance of municipal securities in a competitive process. The FAQ outlines the general parameters that would be consistent with the exemption, noting that the staff does not believe that an RFP or an RFQ has to be part of a municipal entity’s formal procurement process to be consistent with the requirements of the exemption. The FAQ also explains some of the considerations with respect to the RFP exemption when soliciting ideas from pre-screened or pre-qualified market participants.

Independent registered municipal adviser exemption. The FAQ provides a summary of the requirements for the independent registered municipal adviser exemption that allows municipal entities to obtain advice from market participants. If the conditions are satisfied, the independent registered municipal adviser will be able to assist the municipal entity in the evaluation of any advice received from other market participants and to identify any potential conflicts of interest.

The independent municipal adviser exemption can apply in circumstances where a registered municipal adviser serves in a general capacity, as long as the adviser’s representation covers advice with respect to the same aspects of the issuance of securities or financial products as the person who is seeking to rely on the exemption and all other requirements of the exemption are met.

Required representations. A municipal entity may provide its required representations in any reasonable manner, according to the FAQ. This includes a single written disclosure to multiple transaction participants showing that it is represented by, and will rely on the advice of, its independent registered municipal adviser. The representations also may be posted on the entity’s official website with a statement that it is intended for market participants to use for purposes of the independent registered municipal adviser exemption.

The staff advised that an underwriter may discuss issues relating to a planned issuance of municipal securities with the municipal entity if the independent registered municipal adviser is not present and as long as the municipal entity does not object.

Investment adviser exclusion. The FAQ also discusses the registered investment adviser exclusion from the definition of a municipal adviser. The staff will not object if SEC-registered investment advisers providing advice on municipal derivatives in an investment portfolio for clients that are municipal entities or obligated persons do not register as municipal advisers.

Underwriter exclusion. The FAQ addresses how a broker-dealer can demonstrate a municipal entity has engaged it to serve as the underwriter for a particular issuance of securities, allowing the broker-dealer to meet the underwriter exclusion under the final rules. This may be accomplished through a writing, such as an engagement letter. The FAQ outlines the particular features that an engagement letter should contain.

An important basic component of the underwriter exclusion involves a decision by the municipal entity to select a broker-dealer to serve as an underwriter on a particular issuance of securities that is affirmative in nature and is informed by the full disclosure about the role of the underwriter as required by MSRB Rule G-17.

A broker-dealer that is also a registered municipal adviser may not serve as the adviser to a municipal entity in the early stages of a financing transaction, later switching roles to serve as the underwriter when the entity decides to proceed with the issuance of the securities. The broker-dealer owes a fiduciary duty to the municipal entity with respect to that issue and must not take any actions that are inconsistent with that duty. MSRB Rule G-23 prohibits persons from switching from the role of financial adviser to that of underwriter with respect to the same issuance of municipal securities.

Post-offering discoveries. After an issuance of municipal securities for which a broker-dealer served as an underwriter has closed and the underwriting period has terminated, the broker-dealer may continue to rely on the underwriter exclusion if it discovers a material omission in the offering document and advises the municipal entity that a supplement should be prepared.

If a broker-dealer discovers that a municipal entity failed during the past five years to comply with a continuing disclosure agreement it had entered into in connection with an outstanding issuance of municipal securities, the broker-dealer may rely on the underwriter exclusion to advise the municipal entity to take corrective actions. In the staff’s view, this action would promote compliance with the anti-fraud provisions and allow a broker-dealer to fulfill its obligation under the federal securities laws.

The FAQ assures that the final rules do not impede public discourse. Citizens may provide comments and opinions in a public forum without being required to register as municipal advisers.

The FAQ also provides information about the effective date of the final rules and the compliance period for using the final registration forms.

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