MSRB Expresses Concern Regarding Activities of Unregistered Municipal Advisors

Since October 1, 2010, firms and individuals providing certain types of advice to, or soliciting certain business from, municipal entities (such as state or local governments or public pension funds) and obligated persons are considered municipal advisors, and municipal advisor firms (including sole proprietors) are required to register with the Securities and Exchange Commission (“SEC”).  Municipal advisors may temporarily satisfy this registration requirement by filing SEC Form MA-T, available on the SEC’s website at http://www.sec.gov/info/municipal/form_ma-t.htm. 

In addition, since October 1, 2010 firms and individuals engaged in municipal advisory activities are subject to a new federal fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor under Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).[1]  Municipal advisor firms that have engaged in any municipal advisory activities on or after October 1, 2010 were required to register with the Municipal Securities Rulemaking Board (“MSRB”) by no later than December 31, 2010 in order to avoid violating MSRB rules adopted pursuant to the MSRB’s expanded regulatory authority under the Dodd-Frank Act.[2]  Municipal advisor registration instructions are available on the registration page of the MSRB’s website, at www.msrb.org.[3]  Prior to registering with the MSRB, all municipal advisor firms must first register with the Securities and Exchange Commission (“SEC”) as noted above.

The MSRB has become aware of municipal advisor firms engaging in municipal advisory activities without being registered with the SEC or MSRB in apparent violation of the Exchange Act and SEC and MSRB rules.  If the MSRB receives information indicating violations of these requirements, it intends to refer the matter to the appropriate regulatory authority for investigation and possible enforcement action.  While some municipal advisor firms are engaging in municipal advisory activities without registering with either the SEC or the MSRB, others have only registered with the SEC and not the MSRB.  Any municipal advisor firm that engaged in municipal advisory activities after December 31, 2010 without registering with both regulatory authorities is subject to possible discipline.  Such municipal advisors must register with both regulatory authorities at the earliest opportunity.  Those advisors should also inform the MSRB of the circumstances related to their delay in registration.

The MSRB is particularly concerned that a firm acting as a municipal advisor that fails to register as such with the SEC and/or the MSRB may not be aware of, or may not be giving sufficient consideration to the importance of, the federal fiduciary obligation owed by the firm and any individual associated with the firm to any municipal entity for whom such firm acts as a municipal advisor under the Dodd-Frank Act.  Moreover, municipal advisor firms and individuals may not be fully aware of the fair practice obligations under MSRB Rule G-17 or obligations under other MSRB rules that apply when they act as municipal advisors to a municipal entity or obligated person, or when they solicit certain types of business from municipal entities or obligated persons on behalf of third parties.  Failures by such firms and individuals to fully appreciate or fulfill their legal obligations may adversely affect the interests of the municipal entities or obligated persons, which the MSRB has a statutory obligation to protect.

Municipal entities and obligated persons that engage a firm to provide advice in connection with the range of activities covered by Section 975 of the Dodd-Frank Act can confirm whether or not such firm has registered as a municipal advisor with the MSRB on the MSRB’s Registered Advisor List[4] or with the SEC on the SEC’s website page for registered municipal advisors.  As noted above, registration with both the MSRB and SEC is required.  If a firm engaged to provide advice has not duly registered, municipal entities and obligated persons are advised to discuss with the firm’s representative their understanding of the obligations owed to the municipal entity or obligated person under applicable federal or state laws and the basis for such firm’s determination not to register as a municipal advisor.

On December 20, 2010, the SEC published a proposal to establish a permanent SEC registration regime under the Dodd-Frank Act that would, upon approval and implementation, replace the SEC’s temporary registration process, currently expected to occur on or before December 31, 2011 (the “SEC Proposal”).[5]  In the SEC Proposal, the SEC discusses a number of interpretive issues relevant in determining whether a market participant is considered a municipal advisor for purposes of the Dodd-Frank Act and therefore is subject to the registration and regulatory requirements of the SEC and the MSRB.  Any market participant that is uncertain about whether it is engaging in municipal advisory activities requiring registration with the SEC and the MSRB should review the SEC Proposal and contact the SEC for guidance. 

Questions about this Notice may be directed to Lawrence P. Sandor, Senior Associate General Counsel, at (703) 797-6600.

July 5, 2011

[2] Municipal advisors may register with the MSRB through the MSRB’s registration page on its website, www.msrb.org.  While entities, including sole proprietorships, conducting municipal advisory business must register with the SEC and MSRB, individuals associated with such firms need not register at this time.  For more details about the MSRB registration process for municipal advisors, see “Reminder to Municipal Advisors About January 1, 2011 Registration Deadline,” MSRB Notice 2010-55 (December 13, 2010); “MSRB Amends Registration Rules for Dealers and Municipal Advisors,” MSRB Notice 2010-49 (November 15, 2010); “MSRB Opens Municipal Advisor Registration System,” MSRB Notice 2010-50 (November 15, 2010).

[3] The MSRB reminds broker-dealers and bank dealers that any MSRB-registered dealer that acts as a municipal advisor is also required to register with the MSRB as a municipal advisor even if the dealer has previously registered with the MSRB as a dealer.

[4] As stated in footnote 3 above, a broker-dealer or bank dealer that acts as a municipal advisor is also required to register with the MSRB as a municipal advisor and should be listed on the MSRB’s Registered Advisor List.  Municipal entities should note that they may confirm whether broker-dealers or bank dealers engaged by them to underwrite, or to undertake a private placement of, their municipal securities are properly registered with the MSRB to engage in such underwriting activity on the MSRB’s Registered Dealer List.

[5] See “Registration of Municipal Advisors,” Exchange Act Release No. 63576 (December 20, 2010).